Problems and solutions
Historically, the cross-border payments market has been dominated by banks, spearheaded by some predominant global correspondent banks with minimal competition. This entailed long settlement periods, lack of transparency, limited accessibility and high transaction costs, both for businesses and private consumers.
With the global lending landscape turning more competitive and fragmented, players focus on diverse payments, transaction sizes and regions. As per EY’s estimate in 2021, cross-border payment flows worldwide were slated to touch $156 trillion in 2022, growing at a CAGR of about 5%. Naturally, this trillion-dollar market is being swamped by new players promising to resolve enduring pain points. Consequently, legacy banks and money transfer operators (MTOs) should evaluate the effects of such changes on their future strategies.
The advent of digitally-enabled MTOs and backend networks as specialists using innovative business models must be viewed seriously. By building partner networks through direct connections with banks and APMs (alternative payment models) in liquid and illiquid markets, backend networks facilitate interoperability for cross-border payments.
Characteristically, backend networks deploy an aggregator model as an aggregation of payments curbs costs since most cross-border charges come from fixed fees per transaction. For real-time payment confirmations, backend service providers generally need prefunding of sending partners as collateral. Thanks to prefunding, backend providers can credit the accounts of recipients in real-time aer the transactions are initiated.
Advantage of transparency
As is evident, transparency in fintech deals is indispensable for promoting better business outcomes. Going by a 2021 consumer survey on data privacy and usage of financial apps, 73% of fintech app users were confident their information was secure and private. But 80% of users remained mostly unaware of apps using third-party providers to garner their financial data. Moreover, consumers had minimal knowledge about the data collected or how it was stored and shared, mainly because such information is buried within lengthy terms and conditions, which most app users (77%) failed to read. Worse, those who read the terms didn’t understand what they read.
Once informed, however, consumers became less confident about security and privacy issues, thereby seeking more transparency and control. Thereaer, 59% wanted transparent disclosures of the data third parties could access. Such statistics highlight the significance of transparency.
Benefits of Interoperability
The other salient feature is interoperability, which has multiple benefits. Whether it is enhanced efficiency and usage as well as cost savings via shared infrastructure, innovation and economies of scale, banks, technology and telecom companies all stand to benefit. End-users also benefit from the increased market competition, lower transaction fees and network effects. The World Bank reveals that Brazil saved 0.7% of its GDP annually because of efficiency via interoperability.
Undoubtedly, interoperability boosts customer convenience by allowing them to make payments and transact easily with others, irrespective of their service providers.
Collaboration is another tool that benefits everyone, including competitors. Realizing the advantage of collaboration over competition, fintech's and banks are adopting a collaborative approach. This not only benefits these players but also underserved customers and small businesses that need easier and greater access to credit. By joining hands, fintechs and banks can leverage complementary core competencies, helping them work together in creating a larger market pie rather than vying for pieces of the conventional pie
A New York University analysis revealed that Black-run enterprises found it difficult to procure PPP loans from legacy banks. Yet, they had 12% more chances of approval from fintech lenders for such loans.
Nonetheless, some fintechs may face credibility concerns with customers. But partnerships with banks can overcome such hurdles. There is no doubt that the future lies in integrated payment services since financial institutions can augment digital capabilities in meeting the demand of tech-savvy consumers.
That is how relationships could begin on a better note through collaboration and cooperation, rather than competition – acting as a winning proposition for both payment providers and customers.