There has been a real drive towards ‘frictionless’ banking in Western countries, giving rise to the question: why aren’t cross-border payments equally frictionless? Especially for those in emerging markets, who have everything to lose and much to contribute.
Richard Shearer, CEO of Tintra, explores the importance of frictionless banking technology for cross-border transactions.
At the height of the pandemic’s first wave, the BBC ran an article on the struggle for migrants to move money from one country to another in lockdown conditions. The story of Liberian national Arthur Beare was striking. He said that it was almost impossible to receive remittances from other countries because he couldn’t access banks or transfer shops: either the banks “ask you to leave” or else it takes five hours to get inside. Many people in emerging markets depend heavily on cross-border payments to survive, so Arthur’s lack of access was a life-or-death situation. This kind of financial exclusion needs to change.
On the other side of the coin, there are stories like those of Chandra Ceeka, an IT consultant living in Britain who sends money home to India. Although he can make payments online, he “doesn’t get the deals he used to” from local transfer shops, costing his family vital funds at a dangerous time. Of course, if Chandra only wanted to make a domestic payment within the UK, there would have been no such issue. There has been a real drive towards ‘frictionless’ banking – ways of making transactions as quickly, easily, and cheaply as possible – in Western countries. And, with the arrival of the pandemic and its social restrictions, this drive has been sped up considerably. This gives rise to the question: why aren’t cross-border payments equally frictionless? Especially for those in emerging markets, who have everything to lose and much to contribute.
Navigating “a devil’s obstacle course”
The inefficient state of cross-border banking is certainly not due to a lack of enthusiasm. Let’s put aside the 800 million migrants who send money home (according to the UN): even then, we are left with emerging markets who are very happy to embrace the digitisation and technological advances that fuel frictionless banking. These regions have young populations who are digital natives, hungry for speed and convenience.
The fact remains, however, that people in these countries – from the 800 million who rely on cross-border remittances to large multinationals who drive emerging markets’ growth – still have to deal with what research analyst Sam Klebanov calls the “devil’s obstacle course” when transferring money. This is reinforced by the fact the fees alone for cross-border payments cost a frankly exploitative 11%, and they can take several days to clear.
“This is an unacceptable state of affairs, and it is those from emerging markets who suffer the most from such exorbitant costs – individuals and large corporates alike.”
This kind of practice has no place in the modern world. If domestic bank transfers can happen with no payment barriers and at the tap of a smartphone, then we need similar technology for cross-border payments too.
Cross-Border Technological Innovations
What kinds of technological solutions are on the horizon for frictionless cross-border transactions? Naturally, given the digital nature of such solutions, cryptocurrency may well have a part to play. According to Stan Cole, Head of Financial Institutions at Inpay, there is promise in using blockchain to offer customers “cheap, real-time international money transfers that are more reliable and secure.” Crucially, this system avoids the “devil’s obstacle course” and high prices that cause problems for people like Arthur and Chandra.
Alternatively, recent white papers published by technology integration specialists Banking Circle point to the use of “decoupled architecture” – a system in which “commoditised services – like payments and cross-border transactions – can be delivered by specialist providers.” This kind of system allows banks to streamline international transactions by outsourcing them to cloud-based service companies. As Banking Circle notes, this may be an appealing move for banks who need the latest technological advances but don’t want to invest directly in infrastructure which may become swiftly outdated. It’s encouraging to see these kinds of developments for established banks since their fees are far higher than those of third parties in cross-border transactions.
Cross-border futures for the global economy
Obviously, the stakes for this kind of financial inclusion are high: for many individuals in emerging markets, easier cross-border payments reduce poverty and, according to the Centre For Global Development, enable investment in sanitation, education, and healthcare. But there’s another side to this story: it is a mistake to generalise emerging markets as merely ‘victims.’
“Emerging markets and the powerful multinationals based within them need to be considered in terms of their substantial and vital contribution to international trade.”
Emerging markets have huge potential as drivers of the global economy: cross-border trade from parts of Africa, Latin America, and Asia is expected to grow by as much as 11% between 2018 and 2022 according to EY. By contrast, developed markets with protectionist policies are marked by slow and uninspiring growth and do not come close to hitting the lucrative heights of emerging markets’ outward-looking engagement with international trade.
From a national to an individual level, then, the need for frictionless cross-border banking is a tale of two halves. For individuals like Arthur and Chandra, ensuring that they or their families in emerging markets receive as much remittance as possible with as little fuss as possible allows for investment in a personal future. For large multinationals and financial institutions based in emerging markets, there is clearly much to gain from lowering exclusionary barriers within the cross-border payments sector, as such markets lead the way in cross-border transactions. A mixture of tech innovation and inclusive sentiments will allow emerging markets to usher in new levels of growth, development, and prosperity on the global stage.