Keeping Cross-Border Payments Frictionless

Blog / Keeping Cross-Border Payments Frictionless

Users want payments to be rapid, trackable, and predictable in today's market, but there are still numerous areas of friction in cross-border payments that may diminish efficiency and negatively affect the customer experience. At this stage, friction can be reduced using AML Transaction Monitoring.

Understanding the Challenges of Cross-Border Payments

  • Diverse Currency Exchange Rates: Cross-border payments involve converting currencies, and varying exchange rates can create challenges in accurately determining the amount to be transferred and received.
  • Lengthy Settlement Times: Traditional cross-border payment systems often suffer from slow settlement times due to intermediaries involved in the process. This can lead to delays and increased costs for businesses and individuals.
  • High Transaction Costs: Cross-border transactions typically incur fees at multiple stages, including currency conversion, intermediary fees, and correspondent bank charges. These costs can be significant, especially for small businesses and individuals.
  • Regulatory Compliance and Anti-Money Laundering (AML) Measures: Different countries have varying regulations and compliance requirements for cross-border payments, including AML and Know Your Customer (KYC) regulations. Ensuring compliance can be complex and time-consuming.
  • Limited Accessibility to Financial Services: In some regions, individuals and businesses may face challenges accessing reliable banking services or digital payment platforms, limiting their ability to participate in cross-border transactions.
  • Lack of Transparency and Traceability: Traditional cross-border payment systems often lack transparency, making it difficult for parties involved to track and verify the status of transactions. This can lead to disputes and potential fraud risks.
  • Security Risks: Cross-border transactions can be vulnerable to security breaches, including hacking, identity theft, and fraud. Protecting sensitive financial information and ensuring secure transactions is crucial.
  • Unpredictable Market Volatility: Fluctuations in exchange rates and economic conditions can impact the value of cross-border transactions. Businesses and individuals must consider market volatility when conducting international payments.
  • Lack of Standardized Payment Systems: The absence of standardized cross-border payment systems and interoperability among different platforms can create inefficiencies and compatibility issues, hindering seamless transactions.

Understanding these challenges is crucial for developing strategies and adopting innovative solutions to make cross-border payments more efficient, cost-effective, and secure.

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Cross-Border Payment Categories

Cross-border payment types are listed below:

  • Money transfers: Migrant employees living in different countries can send money to their relatives. For this, they can prefer services such as Western Union or PayPal. This method consists of freelancers and remote workers working for businesses in any shadow of the world.
  • High-value foreign transactions include real estate purchases and payments for large-scale assets such as art, jewelry, or luxury products like vehicles.
  • Card-present transactions: To make card-present overseas payments, travelers must utilize their physical credit and debit cards. Tourists, ex-pats working overseas, and business travelers are examples of these travelers.
  • CNP transactions: Persons making international e-commerce shopping from member merchants in other countries and commercial payment companies established in other countries fall into this category. Business-to-business transactions, such as retailers purchasing products from overseas suppliers, are examples.

Cross-Border Payment Pain

Vaccine applications continue in many parts of the world. It allows many people to return to their pre-pandemic lifestyles. This tendency will only worsen as more vaccinations are delivered over the world. The problem with attempting to restart these activities is that some consumers will undoubtedly face false positives while making payments at restaurants or bars. It is because certain financial institutions will evaluate earlier data and flag payments made to corporations as risky. That only applies to payments made within the United States. Many financial institutions will be even more risk cautious when it comes to cross-border transactions. Cross-border payments were already seen as a higher risk before the epidemic. 

They'll be considerably more challenging to deal with in light of the past 18 months' historical data.

Consider going to another country for the first time since the pandemic began. When you make your first transaction after arriving, your card will be declined because the purchase will be made outside your local domestic area. If the card is locked, an alternative payment method is used. If customers have a terrible travel experience, they will hold banking institutions accountable.

How to Streamline Cross-Border Payments

Here's what banks can do to ensure smooth and secure cross-border transfers:

  • Look for trust: Looking for the components of faith is as vital as assessing the danger. Many other factors can help financial intermediaries build trust in transactions. In a money transfer, it's critical to look at the money transfer agent's track record. But don't forget to think about the country of origin and the country of destination. The transaction is most likely authentic if a representative stands by their recent transfer and performs in-person verification.
  • Don't stop keeping in touch with consumers: This is one of the most successful strategies for eliminating friction and building strong customer loyalty. Financial institutions need to create an effective communication strategy. They should also encourage consumers to inform about any overseas travel plans. Checking in with customers via a tool like SMS makes cross-border payments secure. At the same time, many consumers are satisfied with the communication efforts of the institutions, especially when traveling overseas to a new country.
  • Move away from domestic models first: Moving to a global buyer model that allows for additional foreign services can help alleviate some friction associated with the trader and the transaction. One way to do this is to model non-domestic behavior and fraud separately. Because modeling at the aggregate level will invariably result in domestic bias, create a clear and independent international strategy by assessing the top five countries outside the home area for appropriateness and differences from local restrictions.

Organizations in the payment industry create AML programs to protect themselves from financial crime threats.

Why does friction matter?

In his keynote speech, MD Thomas Halpin, HSBC's Global Head of Payments Products, said that system friction costs financial institutions a lot of money every year. In his speech, he said the missed opportunities are the impact it creates in terms of greater risk in the system and the unpredictability consumers want.

As Citi Senior Product Manager Vikram Paranjpe pointed out during the session, another critical factor is that consumer expectations are changing. For example, consumers increasingly expect a speedier, more intuitive banking service and payment experience, thanks to digital payments, instant payment systems, and mobile wallets. Moreover, the exact expectations are extended to cross-border payments.

According to Isabel Schmidt, Head of Direct Clearing and Asset Account Services Products at BNY Mellon, payments are not the company's core goal for consumers. People, he says, want to run their businesses, and money should flow freely to help them achieve their goals.

Future of Cross-Border Payments

Since the future of payments is digital and tokenized, stablecoins have grown in popularity. Bitcoin and other cryptocurrencies aim to tie their value to some external reference, such as actual money or a commodity, to avoid the significant volatility of these cryptocurrencies.

Aside from stablecoins, the usage of blockchain in cross-border payments will help solve some of the key issues with using correspondent bank transfers for international transactions. Banks that adopt blockchain technology early will be able to attract and retain customers by offering low-cost, real-time international money transfers that are more secure and reliable.

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