Historically, banks have been the main source for international payments and transfers. With little to no competition, they gained the carte-blanche in managing and handling all the administrative issues for their own profit. However, with the emergence of the new technologies and neobanks, it became feasible to solve main customers' pain points related to remittance: high costs and exchange rates, transaction time, and the lack of transparency.
Despite the dominance of financial institutions in the money-transfer market, new Fintechs and MTOs (money transfer operators) attract most of the customers that move smaller amounts of money, as well as SMEs. By implementing cutting-edge technologies and making apps intuitive and user-friendly, they offer better rates, time, and services. Thus, Fintechs finally met all the consumers' demands. Wise (formerly Transferwise) claims it saves its users $1 billion a year in transaction fees compared to the use of legacy bank cross-border payment methods. To make it happen Fintechs either rely on alternative cross-border payment rails independent from traditional bank networks or allow users to connect to legacy banks more easily.
The market size and its growth is still appealing to the newcomers. With the compound annual growth rate (CAGR) of 5% per year, the global cross-border payment flow is expected to top $156t by 2022. According to our market review, 66.6% of industry experts expect remittances and international payments to be one of the most growing Fintech sectors in the upcoming years. Thus, there is still a place for both the newcomers that are able to occupy the niche and the incumbents willing to modernize and adapt.
So, let's dive into the changes technology brings to the cross-border transfer industry.
Independence From Banks
Until the very last decade of the 20th century, international transfer services were completely reliant on the legacy systems used by traditional financial institutions. This allowed them to have a monopoly over remittances and, thus, to charge high exchange rates and fees since there weren't many options available otherwise. With the advent of fintechs that made it possible to minimize the banks' influence on remittances, people gained the alternative to transfer money with more attractive terms. That is where it all started.
Costs Are Getting Lower
Costs including exchange rates and fees for transactions have been gradually falling as a result of healthier competition imposed by new MTOs. There is also a role to play for the pressure from the global policy objective of getting remittance fees to 3 percent by 2030. These bodies pay particular attention and effort to these services due to their popularity with low-wage workers and the role remittances play in economic development in emerging markets.
According to The World Bank, the global average cost of sending $200 was 6.5% in the fourth quarter of 2020 compared to about 9% in Q1 2011. Mobile money transfers today offer the best cost for a $200 transfer - 4.36%, which is a nearly 12% drop from Q4 2018 4.93%. During the same period, the cost of debit/credit-funded remittances experienced a 21% reduction.
Being the most expensive remittance providers, incumbent banks are experiencing the highest pressure from this movement to reduce fees. Their long-ago established structure and processes significantly complicate their modernization and digitalization journey. In the meantime, next-gen technologies, such as Big Data automation and cloud computing, lower the costs of the money transfer processing infrastructure which positively impacts the cost of transactions of modern money transfer solutions even further.
Real-Time Cross-Border Transfers
Normally international transfers take two to five business days to clear. The timeframe is dependent on the currencies, countries, and the number of correspondent banks in between. International payments obviously take longer to be processed than domestic payments due to the involvement of more parties and compliance procedures. The good news is the goal of real-time cross-border payments is almost within reach.
Money transfer fintechs see the transaction time as one of the key success factors in remittance. Thus, many of them look for ways to achieve the fastest possible payment processing time. Wise succeeded by cutting off intermediaries and creating its own money transfer ecosystem. The company claims it usually takes one working day for the transfer to arrive in the recipient's bank account and conversion can take up to two working days. WorldRemit says 95% of its transfers are ready in minutes. Another service facilitating real-time cross-border payments is Visa Direct, via which international transfers can reach the recipient's account in as little as 30 minutes.
Transparency
For a long time people, both sending and receiving money were craving for transparency within remittances: from understanding the precise costs to monitoring transfer statuses. Finally, new entrants offered this transparency to users. It has become one of the key differentiator factors for challenger MTOs and helped them confidently get a foothold on the market and win users' favor.
Today, banks acknowledge the importance of transparency and seek to implement it as well. For example, the Citi bank has built client-facing tools that are used for cross-border transactions, including Citi Payment Insights, which includes status updates through a visual tracker; and Citi Service Insights, which allows clients to communicate with the bank about payments and track inquiry statuses.
Blockchain-Based Cross-Border Payments
There is an immense market potential for blockchain technology in cross-border payments. Being at the beginning of a disruptive change, it is already possible to visualize how people's lives can improve by having the opportunity to get international remittances processed in a matter of seconds and being fully traceable, faster and less taxed.
Blockchain technology enables the tokenization of assets by using smart contracts to define the features, rules, and permissions over those digital assets called tokens. Stable coins are created pegged to each currency participating in transfers within one system.
Blockchain-based solutions, among other use cases, have the potential to enable more efficient remittance corridors worldwide which without a doubt will improve the state of the global economy. There are, however, many challenges yet to be addressed in order for this technology to become the first option for the majority of large financial institutions and be used by people on a daily basis.
In order for blockchain cross-border apps to be worth it, there must be an all-encompassing ecosystem where digital tokens are accepted as a payment method. Otherwise, tokenization and de-tokenization are required for each transaction. So, the transfer time is not shorter, and fees are not lower as compared to traditional remittance facilities. To create such an ecosystem the involvement is required from players in different industries of all types of entities, from governments to startups. In fact, LACChain is working in several countries from Latin America and the Caribbean to develop these ecosystems.
Meanwhile, Ripple already works with banks and business clients to offer blockchain-based cross-border payment solutions. According to the company, its blockchain payment network RippleNet allows users to send cross-border payments in 3 seconds, with less than 1% cost to the sender.
Big Data and AI
Firstly, Big Data gives financial companies the ability to create thorough customer profiles and accurate segmentation strategies. They can establish a digital trail of a customer's financial behavior, spot possible problems, give consistent assistance, and propose the most relevant services depending on the clients' specific habits and needs. All these bring customer experience to a previously untapped level where the company prevents problems and anticipates the needs of users before they even acknowledge them. Companies like Xoom have already onboarded experts that analyze the Big Data generated in each transaction.
Apart from that, Big Data can be used for developing accurate fraud detection algorithms, more robust security protocols, and impenetrable payment systems to withstand hacking attacks and fraud attempts. Using Big Data analytics tools is helpful to spot glitches and out-of-normal occurrences. In 2011, Xoom detected an anomaly that wouldn't have been possible without Big Data. A criminal group was trying to defraud the company by bombarding a high number of Discover Card transactions. Without big data analysis, they may well have passed off as being legitimate.
Finally, chatbots and RPA (robotic process automation) use artificial intelligence to enable interaction with customers 24/7. By allowing bots to undertake routine tasks, it not only reduces mistakes but is also capable of ensuring outstanding customer experience and continuous support.
Multi-Currency Accounts
Some fintech companies like Wise, WorldFist, and OFX started offering multi currency accounts in which the user gets account details from various countries in multiple currencies. With such an account, users don't worry about the exchange rates as they receive payments in the matching currencies. There is a significant market opportunity for these product offerings being designed specifically to serve freelancers, online sellers, SMEs which operate globally.
Driving Sustainable Development
The remittances industry moves over $600 billion around the world, with $466 billion being sent to low-and-middle-income countries. As the first financial product used by many people in emerging markets, remittances often act as a stepping stone to accessing a broader range of financial services. It was noticed, there is a positive correlation between increased remittances and enhanced formal deposits and credits which are the drivers of the economy. As such, remittances are a cornerstone of financial inclusion and health.
Key measures to boost further growth of remittances in developing countries may include: strengthening domestic payment systems infrastructure, removing legal and regulatory barriers that prevent full digitalization of remittance services, educating and protecting the consumers.
Future of International Remittance
Fintech has become a game-changer for the remittance market and redefined the way cross-border payments are made worldwide. This made once costly service available to everyone and gave a boost to sustainable development by bringing the transformative impact to many developing economies: better healthcare, education, and even a better standard of living.
In the near future, Fintechs will continue to drive innovation in international payments. And banks can still win in this game if they rethink and transform their services and processes to address modern customer needs.
