Cross Border Payments: The Evolution

The arrival of game-changing payment methods like UPI, the domestic fintech space has undergone transformation over the past few years. It has resulted in a massive jump in the number of cashless transactions as it enables real-time payments without knowing the payee’s account information. We now believe that there is an imminent need for a “UPI” in cross-border payment space as well. Cross-border payments are those payments where the payer and the payee are located in 2 different countries. This transaction may or may not involve converting one currency to another.

According to RBI’s data, India receives the highest amount of inbound cross-border remittances in the world. It accounts for almost 15% of the global share in inbound cross-border transactions in 2019. Some of the major factors that have caused this spur in cross border transactions include

1. Globalization of Value Chains
2. Growth in Smartphone users
3. Boom in the global eCommerce business
4. Increase in international travel for education, business, and pleasure

Unlike domestic payment methods which have a well-designed clearing system and networks, like the RTGS, NEFT, and IMPS, there is no single payment rail that enables cross-border clearing and settlement. As a result, usually, there are 2 legs to every cross border transaction, Money Transfer and currency conversion

The different types of cross border transactions that can occur include

• Consumer to consumer cross border transactions – P2P transfers
• Consumer to Corporate: Ecommerce, Subscription, Collection
• Corporate to Consumer: Insurance, Payroll, refunds, dividends
• Corporate to Corporate: Supplier/ trade payments

Today, the Cross Border payments space is undergoing a fundamental change, both in terms of the technology involved and the regulations governing it. This may be one of the reasons for the RBI to choose “Cross-border Payments” as the theme for its second cohort of startups in its Regulatory Sandbox.

Methods of Cross-Border Transfer

There are several methods to do cross-border payments. As there is no single payment infrastructure that payment institutions use for cross-border remittances, banks often rely on correspondent banks to act as an intermediary for inter-country transactions. They also use financial messaging systems like Swift and Ripple to enable better visibility in cross-border payments.

Disadvantage of Traditional Cross Border Transactions

• Time: Due to the different time-zones and banking hours in different countries, traditional cross border transactions are not real-time and can often take 4-8 Business days
• Manual Processes: Some of the processes associated with cross-border transactions, traditionally occur manually. Any delay in these processes could affect the timeline of the entire transaction.
• Lack of Visibility: The number of fees being charged by the different players involved in the transaction may not be visible to the Payer.
• Uncertainty in Currency Conversion: Due to the time taken for transactions and the different players involved, it is impossible for the payer to know at which point the conversion of currency is taking place, and the conversion rate applied.

The P2P cross-border remittance space is highly regulated by the central banks in each country. This is to ensure that in case of any mishap, the payers’ funds are not put at risk. The regulations ensure that proper precautions are taken against Money laundering and Terrorism funding according to the FATF (Financial Action Task Force) guidelines. Cross-border payments also have certain transaction limits imposed upon them in each country, as unrestricted money flow across the border can have a huge impact on the economic stability of a country.

In India, the guidelines put in place to regulate cross-border payments include The Foreign Exchange Management Act, Prevention of Money Laundering Agreement, Rupee Drawing Arrangement, the granting of AD-I and AD-II licenses to certain banks, and financial institutions, etc.

The Role of Fintechs in Cross Border Remittances

The Arrival of Fintechs has been a major game-changer in the area of international transactions. They have made inter-country transactions, 100% Digital, compliant to regulations, fast, cost-effective, and transparent. This has been possible only through the help of cutting-edge technology like Swift GPI, the availability of the right APIs, and innovative business models.

In order to enable real-time international transactions, Fintechs usually create Nostro accounts in the Payee’s resident country. This account is often pre-funded with foreign currency.  Once a transaction initiates – by the payer from his home country, a message is passes on to the fintech with the payee details and transaction amount visa financial messaging systems like SWIFT. The Fintech then moves the equivalent amount in foreign currency to the payee’s account from its Nostro account. This mechanism enables real-time cross-border transactions to take place.

In order for fintech to enable transactions between 2 countries, they must possess the respective cross-border licenses of both countries. They must also ensure that they follow the proper KYC, AML, and CFT guidelines of the countries.

A few Examples of Fintechs that have taken over the Cross Border Remittance Space

1. Ripple: uses blockchain to process and secure their RippleNet payment network. With RippleNet, customers have access to a network of more than 200 banks (including American Express, BMO, and PNC), and they can make cross-border payments instantaneously. The company’s blockchain helps to encrypt each payment and allows for each money transfer to be easily traceable.
2. TRULIOO: is a Regtech company that provides global identity verification mechanisms which enable companies to do KYC in cross-border transactions. Trulioo enables AML/KYC identity verification requirements by providing secure access to over 5 billion identities worldwide.
3. Flywire: Flywire helps craft personalized fintech payment platforms for a variety of international industries, including travel, education, and healthcare. It can sometimes be difficult to keep track of payments, especially when dealing with international entities and different currencies. Flywire’s global collection network fully reconciles global payments, and allows refunding, while keeping all involved parties up-to-date in real-time.
4. Remitly: Remitly is a fintech company that aims to simplify international money transfers and payments. Through its thousands of global bank and cash-pickup partners, recipients can have money sent directly to a bank account or collect it in cash.
5. NIUM: NIUM is a global payments platform enabling customers and businesses to perform cross-border transactions. The platform offers a wide range of payments services grouped into three categories: Send, Spend and Receive.

   It currently operates in over 90 countries, 65 in real-time, and in 63 currencies. Formerly known as InstaReM, the company rebranded into Nium in October 2019

   Conclusion

As innovative fintechs enter the space of international payments, the boundaries between countries are becoming more and more blurred. The advent of new technology will ensure that the transactions in this space become cheaper, faster, safer, and more transparent.  With catalysts like the rise of global eCommerce, driving this transformation, the arrival of the “UPI” of cross-border payments does not seem to be too far from reality.