Author: Aditi Somayajula, Graphics: Bella Aharonian
The BRB Bottomline:
Transferring currency across international borders is often met with various hurdles, especially for individuals in emerging markets. However, this experience is becoming increasingly streamlined as fintech companies improve the cross-border payment process.
For centuries, transferring currency across international borders has incurred both significant risk and expense. Today, many of the challenges that once posed a barrier against individuals trying to conduct international financial transactions continue to exist. Although the digitization of finance has become the lifeblood of global markets, surges in cross-border finance traffic have caused the constraints of the system to rapidly surface, impeding the daily transfer of over $4 billion across international borders. Those constraints, mostly set by geography and bureaucracy, make many aspects of cross-border payments complex and inefficient.
The Challenges of Cross-Border Finance
Cross-border payments are transfers of currency between individuals, businesses, or banks located in different countries. Generally, the sender of the money selects a bank or a money transfer operator (MTO), such as PayPal or Western Union, to initiate the transaction. The recipient of the money then receives the payment via the conduit specified by the sender. The internals and logistics of payment transfers are traditionally handled by correspondent banking networks (CBNs), systems of global banks authorized to perform financial services in countries outside their origin. But this form of management results in various friction points, including long settlement periods, high transaction fees, and a general lack of transparency.
For those living in the United States or the Eurozone, these pain points might not be obvious. In recent years, a new generation of fintech companies has begun to dismantle the stranglehold that large banks have had on the flow of payments, streamlining various aspects of money transfers in Europe and the United States. As a result, fees have fallen. For a sender and a recipient both in G7 countries, the cost of a wire transfer is less than 2% of the total transaction. But issues still remain for those in emerging markets, particularly when either a consumer or a business intends to send or receive payments in an illiquid currency—and for both businesses and everyday people, the implications are considerable.
A Focus on Emerging Markets
As an example, if Amazon wanted to pay a small business owner in South America, a functional payment solution would entail navigating a myriad of financial, bureaucratic, and tax-related hurdles in order to legally convert dollars to the local currency. For business owners elsewhere in the world, even in neighboring countries, this payment solution would likely not translate due to entirely different geographies and bureaucracies.
That difficulty is most strongly felt by independent sellers and everyday people conducting private transactions. For merchants in emerging markets, growing levels of internet penetration and improving delivery infrastructure open up potential customer bases across the world. But if expanding overseas entails having to deal with notably high transaction fees, clunky tax compliance, regulation policies, and payment processing times of up to one week, the idea of expansion seems much less attractive.
In addition, for those that send money back home to their families, cross-border payments are essential. In 2020, remittances to developing countries reached $550 billion, a number explained by the financial insecurity of the COVID-19 pandemic. But, the costs of doing so are notably steep. For example, the World Bank estimates that for cross-border payments in Africa, transaction fees may total 25%—a substantial amount for those reliant on remittances.
Redefining Cross-Border Payments
Across developed and emerging markets, demand is growing for technological solutions that seamlessly facilitate international payments. In recent years, various companies have entered the industry to meet this demand, each targeting different transaction volumes, payment segments, and parts of the world. Stripe, dLocal, and Remitly are three notable examples.
Stripe
Stripe is an online payments gateway and software platform that is headquartered in Ireland. The company’s software platform helps businesses process transactions while forgoing the need for various middlemen—for instance, large banks or card operators. In return, Stripe levies a small fee of 2.9%.
In the past year, Stripe has grown beyond payment processing software and application programming interfaces (APIs). The company recently launched a point-of-sale (POS) device known as Terminal, allowing merchants to manage in-person and in-store payments. Additionally, Stripe has recently expanded to include lending, card issuing, and risk management services. Venturing into the global market, Stripe has also invested heavily in the international payments arena—notably, the company has financially backed startups and neobanks across Africa, Asia, and South America. Today, Stripe has a valuation of $95 billion, and its services are used by some of the world’s largest megacorporations, including Amazon, Google, and Instacart.
dLocal
Based in Uruguay, dLocal is a payment solutions company that became the country’s first unicorn startup after obtaining a $9 billion valuation in its NASDAQ debut. The essence of dLocal’s service lies in helping large multinational corporations process cross-border transactions in emerging markets. Specifically, the company allows consumers in developing countries to pay via their own local funding sources when conducting business with e-commerce corporations in developed countries.
In Latin America, where only 20% of consumers have an international credit card, dLocal’s services provide immense benefits to megaretailers such as Amazon and Microsoft, allowing them to reach a massive customer base. As such, these companies are today two of dLocal’s largest customers.
Remitly
Seattle-based Remitly is a fintech company that facilitates remittances between users in over 135 countries. The main product of the company, a mobile application that allows customers to conduct international money transfers, utilizes a machine-learning algorithm to reduce fees incurred in cross-border transactions. Remitly’s application is actively used by 2.4 million people, most of whom are immigrants in the United States that send remittances to their country of origin.
Still in its early stages, Remitly remains on the path to profitability, primarily investing in its long-term growth strategy. The company aspires to eventually become a full-service online bank. Having secured roughly 1% of the global remittance market, Remitly possesses great potential for future opportunities and looks forward to further growth.
Looking Ahead
Composed of entrenched players and legacy systems, the payments ecosystem is among those known to be notoriously rigid. But as fintech companies continue to reconcile the inefficiencies of cross-border payments with new technologies, the payments landscape is bound to continue in its evolution. And for those in both developed and emerging markets, such innovations are necessary to meet the demands of an increasingly digitized finance world. For many, it is a lifeline.
Take-Home Points
- Cross-border payments, or the transfer of currency across international borders, are often met by various friction points, including long settlement periods, high transaction fees, and a general lack of transparency.
- Although fintech solutions have facilitated cross-border payments for those in the United States and the Eurozone, both consumers and businesses in emerging markets are faced with considerable challenges.
- These challenges are mostly due to overcoming the unique financial, bureaucratic, and tax-related hurdles in order to legally convert between illiquid currencies.
- In recent years, several companies across the world have entered the market to streamline various aspects of cross-border payments.
Cross-border payments have always been a struggle. The transaction fees really make it challenging. The new companies that facilitate International Payments will hopefully be beneficial and expedite this process.
Sounds like an interesting topic! I’m also excited to see how the introduction of CBDCs and digital assets further ease cross-border payments.