In the past, the idea of sending money between countries electronically was an impossible notion. Now though, in the digital age, money can be sent quickly and securely between different currencies and countries in a flash—all from the comfort of a smartphone, if desired.
As technology advances and the desire for everything to happen faster rises, cross-border payments have become more mainstream in recent years and can now be made by anyone with a bank account and access to the internet.
What are cross-border payments?
Cross-border payments, simply put, are monetary transactions where the payer and payee are in different countries. Foreign exchange often takes place as part of the transaction. This will have an impact on the payer depending on exchange rates. Payments can be defined as retail or wholesale payments, and remittances.
The accessibility to make cross-border payments has increased over the years and now there are more payment companies providing these services. As a result, there are a plethora of ways to make transfers; international bank transfers, credit/debit card payments, newer payment methods like e-wallets, and mobile payments.
How do cross-border payments work?
If money is withdrawn from an account in cash, that money is backed up by something tangible and of value. Usually, money is backed up by gold reserves. The cross-border payment architecture flips this practice on its head. When money is sent from one account to another, the backup doesn’t take place. At least not initially. The money is credited into the receiving account in another country or jurisdiction.
International banks and cross-border payment companies facilitate this service to ensure the process is seamless and meets all regulations.
What is driving the demand for cross-border payments?
As technology advances, a business’s potential customer base increases. Given that businesses are no longer land-locked, they can acquire customers from anywhere in the world with greater ease. New payment methods are needed to facilitate the purchase of goods produced across the globe. Let’s have a look at some of the factors driving the demand for cross-border payments.
Remittances. In the past, these payments were only possible with physical money. Now it can and is done electronically. Each year, more people migrate to other countries, which influences the number of remittances sent.
Supply chain expansion has also contributed to the need for fast and convenient payment methods. Manufactures and suppliers continue to look to cross-border payments as more of their business is found abroad.
E-commerce’s accessibility and convenience has also contributed to an increase in cross-border payments. The added traffic to online shopping sites throughout the pandemic has bolstered e-commerce’s relationship with cross-border payments further still.
What are the effects of cross-border payments on E-commerce?
The global e-commerce market was valued (in 2020) at 4.2 trillion dollars. A figure that is expected to rise to almost 5 trillion by then end of 2021. Less than seven years ago, the market was valued at 1.4 trillion dollars. The increase in its market value is, in part, due to cross-border payments.
As cross-border payments continue to affect e-commerce, regulation is changing all the time to make things clearer for the customer, the banks, and the Fintech companies involved. New processes and procedures come into effect on an almost annual basis as policies are reviewed and regulation changes. The experience for the customer will likely remain the same, but providers of the payments will need to stay up to date and adapt to regulation changes.
How do cross-border payments affect local communities?
For people in rural communities around the world, remittances are a necessity. Remittances help support economies, contribute to people’s vital expenses, and can help people escape poverty by providing them with the extra funds they need to start a business. As cross-border payments become easier to make, so do remittances. Mobile wallets continue to grow year on year, with experts predicting that US$1 trillion will be processed annually by 2023. This figure is achievable considering that roughly US$2 billion is processed daily. This is a great example of how cross-border payments, via remittances, will continue to shape the lives of people in places like Africa.
What the future holds for cross-border payments
So, it’s clear that cross-border payments play an important role in our everyday lives and it’s likely that the number of transactions will continue to rise based on current trends.
We are sure to see banks collaborating more with Fintechs to create solutions together and tackle the hurdles that they are facing as demand grows.
Competition is fierce out there for each provider vying for the attention of would-be customers and in the end that can only be good news. When supply is high it’s the customer that benefits.