Trends Reshaping Cross-Border Payments

Tazapay
Nov 23, 2021
5 minutes of read

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The onset of international payments has been a constant in the financial sector, aiding commerce and trade. Whether it’s sending money back home or international business contracts, today’s bustling global commerce can be correlated to the growing volume of international payments.

According to research done by EY, by 2022, the cross-border payment flow globally is set to touch US$ 156 trillion. Though it is a significantly growing and valued sector, it is characterised by multiple pain points such as delays, no real-time updates, high transaction fees, and lack of visibility. Having said that, this sector is set to witness a paradigm shift due to certain trends in the recent past and the solutions being promised by new entrants.

The future strategy devised by MTOs (money transfer operators) and incumbent banks will have to take into consideration the impact of the changes these new entrants will induce.

Cross Border Payment Market: Ready For Disruption

When people and businesses transact across borders from different countries, it is known as a cross-border payment. The buyer typically selects a bank or MTO to start the payment, and the seller receives the funds via the medium chosen by the sender. Though traditionally, cross-border payments move through the correspondent banking network (CBN) used by front-end providers to settle the payment, recent years have witnessed the emergence of back-end networks to optimize B2C and B2B cross border payments enabling interoperability between multiple payment methods and offering payers increased possibilities to reach the payee.

The cross-border payments market has revolved around a few dominant global correspondent banks with almost negligible competition resulting in various shortcomings. The pain points impact both the private consumers as well as the businesses due to the long settlement periods, lack of transparency, restricted accessibility, and high transaction costs. While these worked just fine in liquid currency transactions ( USD and EURO), they were more prevalent in exotic currency cross-border transactions. Depending on the transaction value, the settlement could take about a week, and even then, there would be no intimation of the transaction’s success.

Such conditions have made this sector suitable for disruption and the recent past has seen multiple new players enter this market to address pain points. This market is becoming increasingly fragmented with a growing competition focusing on different transaction sizes, geographies, and payment segments. The size of the market adds to the enticement this segment exudes. With a growth rate of 5% CAGR annually, the B2B cross-border payment market is expected to have the largest share at US $150 trillion, only being trailed by C2B transactions such as cross-border e-commerce at US $2.8 tn.

Cross border payments are witnessing a 5% CAGR YoY & are expected to $156 Tn by 2022, Source: ey.com

While the aim of these new entrants is to change intrinsic dynamics and the nature of the cross-border payments market, the focus of many is on the underserved area of low-value transactions in the C2C, B2C, and B2B segments. This low-value segment offers the highest potential for the disruption which is being led by changing consumer behaviour, growing business with emerging markets, and higher financial inclusion.

Changing Demands of the Consumer

A prime trend that is fuelling the pace of change in the cross-border payments market is the rapid change of consumer demands. Consumers are not keen on paying increased amounts for banking services and expect services to be intuitive and fast. The increased smartphone penetration and dependency on digitization have created new demands that traditional banks are struggling to fulfil. Alternative solution providers such as Tazapay, with their transparency, limited transaction fees, and secure offering for B2B cross-border payments are gaining a competitive advantage over the outdated forms of fund transfer.

Growing Trade with Emerging Markets

Another trend that is playing a key role in revamping the cross-border payments sector is the growing emphasis on the emerging markets in Asia, Latin America, and Africa. The global cross-border trade is projected to grow at a CAGR of 5% and a significant portion of this growth can be attributed to the growth in emerging markets which is estimated at 11% (CAGR).

The Convenience of E-Payments and Mobile Phones

Due to the rise in mobile phone ownership across the globe, people have banking access and e-payment solutions at their fingertips. A growing number of merchants support and are open to the idea of including various mobile payment options. These include mobile apps for online purchases, mobile wallets, and mobile payments at POS. With increased smartphone penetration and the ease and convenience, it brings will act as a catalyst in reshaping this segment.

The rise of new entrants with innovative business models

Another key trend that is revamping cross-border payments is the rise of new entrants that are expected to witness a paradigm shift by addressing pain points and making the entire process seamless and transparent. Their solutions address high transaction fees, delays, and lack of visibility. Two entrants that have emerged as specialists are digitally-enabled money transfer operators and back-end networks.

The digitally-enabled money transfer operators transact directly with the buyers and sellers and provide digitized cross-border payments as their fundamental proposition. A prime example of a digitally enabled MTO is Tazapay’s Escrow payment provider. Tazapay addresses the above-mentioned issues by charging a limited transaction fee of 1.8% capped at $250, being backed by regulators of the countries they operate out of, and providing protection and transparency throughout the transaction. Since setting up accounts can be challenging in other countries and the payment choices are extremely fragmented, these operators partner with back-end networks in the countries but offer a seamless experience to the merchants involved.

Back-end networks are entities that are not directly in contact with the buyer or the seller but partner with the escrow accounts, wallet providers, or banks of these parties. These networks focus on a particular set of countries or areas due to the highly fragmented global payment market and varying regulatory requirements. A digitally enabled money transfer operator will have to tie up with multiple back-end networks to provide a truly global solution to their clients.

The major chunk of the trillion-dollar cross-border payments segment comprises of B2B cross-border payments; new players such as Tazapay are set to challenge the traditional incumbents to team up and develop speedier, ground-breaking, and transparent B2B cross-border payment solutions. This segment is ready to imbibe innovative strategies to address the pain points of speed, lack of visibility, rising costs, and lack of real-time updates. The changing customer demands, increasing trade with emerging market growth, and need for financial inclusion require new competitive tactics that are being brought in via collaboration and acquisition by the new entrants.
To know more about international B2B payments and trends, read this article.

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