The United Nations Conference on Trade and Development recently reported that the value of global trade reached a record USD 7.7 trillion in Q1 2022. Despite some slowdowns, the world’s total trade volumes are expected to continue increasing yearly.
This continuous rise in global trade value is, in large part, due to the increasingly internationalized nature of supply chains. Even SMEs and micro-enterprises today have vital supply chain components located throughout the globe, leveraging the comparative advantages of different geographic regions. These businesses all require innovative and efficient cross-border payment processing solutions.
Traditional banks and financial institutions (FIs) used to dominate the international payments market. However, they have recently seen increased competition from fintech firms, credit card companies, and cryptocurrencies. The convenience of these alternatives has caused many FIs to lose some market share in international payments to these relative newcomers.
As a result, banks and other FIs are investing heavily in technologies and expertise to overcome various challenges in delivering fast and convenient international payments. Here are some of these challenges banks are hoping to surmount with their new tech and labor investments:
1.) International Standards
Over the past several decades, a number of international banking standards have been set up to provide FIs with a secure and transparent way of dealing with each other. Any bank that wishes to regularly facilitate large international transfers has to comply with widely accepted international banking standards, such as ISO 20022, SWIFT, and the Basel Standards, to name but a few.
There are also a few important country-specific standards such as CIPS (used by the People’s Republic of China and approximately 100 trade partners) and SFMS (used by the Republic of India). The FIs’ payment solutions should also account for local customs, such as in regions where Islamic banking and finance standards apply.
In addition, the specifics of these standards tend to change on a regular basis. This means an FI’s cross-border payment solutions should be able to accommodate these changes.
2.) Legal Compliance
Cross-border payment solutions used by FIs should also comply with the various laws of the different economies and economic blocs involved in cash transfers. Failure to account for compliance issues can be very costly for FIs, as fines and regulatory fees can quickly add to the cost of transactions and damage an their reputation, resulting in lost market share.
Modern payment processing solutions typically allow banks and other FIs to easily comply with different regulations, bringing down transaction costs and making cross-border payment processes more convenient for clients.
3.) Security
Wire fraud, money laundering, and other financial crimes affect everyone. Financial institutions have to be proactive in ensuring that their cross-border payment systems put up sufficient barriers to prevent their use in sanctions evasion and funding criminal activities.
Because international criminals and rogue states possess considerable resources, they inevitably find new ways to circumvent conventional safeguards. These malicious actors also rely on the extremely high volumes of international trade to prevent detection.
Given this, FIs have to invest in payment solutions that can sift through billions of data points easily while also uncovering new potential patterns of fraud. Thankfully, newer systems with advanced artificial intelligence and machine learning modules can now close globally, meaningsecurity gaps faster than ever before.
4.) Transaction Costs
International transfers typically need to go through several intermediaries, with each of these adding to the total transaction cost. Unpredictable forex movements can also add to the cost of sending cash abroad. Additionally, all the previously mentioned challenges increase transaction costs, potentially reducing the appeal of traditional FIs as an international payment solution.
Current cross-border payment solutions promise to reduce this burden by automatically choosing the courses of action that incur the lowest facilitation costs. These newer AI-enabled solutions may become key in permitting traditional FIs to compete more effectively with alternative financing solutions on a cost basis.
5.) Process Bottlenecks
No one wants to have to wait several days for their remittances to clear. Due to competition from alternative financing businesses, FIs are now under pressure to facilitate cash transfers in as close to real time as possible.
For this to happen in a regulation-heavy finance landscape, banks and other FIs need to invest in solutions that automate as much of the payment process as possible without sacrificing accuracy or security. Newer iterations of bank software help alleviate these issues, enabling FIs to achieve near real-time transfers without skipping any important safeguards.
When Should FIs Upgrade Their Cross-Border Payments Programs?
Banks and other FIs that hope to become indispensable to current ways of doing business should update their international payment systems as soon as possible. Businesses of all sizes are already thinking in global terms, which means they will all need cross-border payment systems that help rather than hinder their international expansion.
By choosing payment technology investments carefully, financial institutions can surmount the biggest issues currently hindering international payments. Successfully transitioning to better payment systems may also enable FIs to remain relevant in light of the challenges presented by emerging fintech businesses.
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