The frictionless future
of global payments

What are the challenges?

Cross-border payments are usually hindered by expensive and slower processes, with lesser access and transparency. They can take up to a few weeks to reconcile and cost up to 10 times more than a domestic payment.

1. High funding costs

Depending on the payment type and the currencies involved, prefunding is a prerequisite. One may need to access the relevant currencies or foreign currency markets to even initiate a payment. That means putting aside capital to cover expected payment flows, needless to say, these funds are strictly meant for one purpose

2. Payment fees

The more entities involved in a cross-border payment, the higher the cost. This is because of bank fees applied at each stage. This fee is often absorbed into the merchant bank fees and accounts, but from time to time they’re passed through to consumers or the originating payee. For example, credit card companies often charge cardholders a payment fee in a foreign currency for purchases made outside of their country. This rate can vary between 3-6%, so it’s hard to know the exact fee for every payment

3. Currency exchange rates

Exchange rates fluctuate all the time, affecting both the payee and the recipients. Recipients could end up with a deficit if the rate decreases between the time the payment was initiated, processed, and settled. On the other hand, payees may end up spending more if the rate is higher at the time of the initiation. To avoid this, many merchants offer the ability to purchase in a local currency and use a third-party provider to find the best exchange rate for the merchant automatically. Consumers save money when spending, and merchants save during the payment and settlement processes

4. Long payment rails

A payment rail is the number of entities involved in a payment. Domestic payments in local currency tend to have shorter chains. Multi-currency global payments tend to have longer ones. The correspondent bank model allows entities to offer cross-border payments, but it can lengthen the payment rails at the same time. Each additional player on this rail increases the timeline, funding needs, fees, validation checks, and the potential for data to be corrupted as it is transmitted

5. Complex compliance checks

Cross-border payments tend to face broader and more stringent compliance checks against fraud, sanctions, and financial crimes. Each check takes time and may happen multiple times during the payment’s journey. Each bank or payment gateway may use different rules, guidelines, and compliance rules when checking payments, leading to incorrect flagging or declines. For example, if a customer has a similar name to one in financial crime databases, they may be declined automatically

6. Tax and legal implications

Taxes and local laws can also prove to be challenging for global payments. There are implications for individual countries involved in the payment and any tax-related treaties between their governments. Sales tax is the most obvious example of tax implications for global payments and how it’s applied to different payment types depends on the countries involved. For example, it may apply to goods over a certain threshold in one country, and under that threshold in another. It may not apply to services at all in most countries and apply to all services in another, but at different rates depending on the recipient entity’s location, making the process a complicated and unpredictable one

7. Limited operating hours

Digital payments can happen at any hour of the day, but balances and settlements often depend on the bankers’ hours of operation for updates. That means that reconciliation and settlements can only happen during the hours banks are open in the payee and recipient entity’s location. This can create long delays and bottlenecks in clearing and settling global payments, especially across large time differences.

The impact is that payment fees may fluctuate since foreign exchange rates may change during this time. Banks, entities, and recipients often must hold enough balance to cover unknown costs of the eventual foreign exchange rate, driving up overall payment costs.

8. Fragmented and truncated data formats

Financial payments contain sufficient information to confirm the identity of those involved in the payment and confirm its legitimacy. However, data standards and formats can vary significantly across countries, systems, message networks, and financial jurisdictions. This variation results in data fragmentation or loss as systems are not set up to handle unfamiliar data. Data may need to be translated and could lead to slight changes in spellings or formats, making it difficult to set up automated processes, increasing delays and decreasing payment success rates.

9. Legacy technology platforms

Traditional financial institutions are infamous for using legacy technologies that may not work well with newer technologies. These legacy processes and technologies may have fundamental limitations that cause settlement delays and create processing bottlenecks, such as relying on batch processing, no real-time monitoring, and low data processing capacity. These systems may not be able to handle the ebb and flow of financial payments in real-time. Legacy technology may be a significant barrier for emerging business models and cross-border payment technologies that want to enter a new market.