ISO 20022: Transforming Cross-Border Payments Messaging
What is meant by ISO 20022?
Banks and financial institutions around the world are preparing to transition their payment systems away from SWIFT messages and towards the new, properly structured, and data-rich ISO 20022 financial messaging standard that enables interoperability among financial institutions, market infrastructures, and bank customers.
The IS0 20022 standard encourages the inclusion of better-structured transaction data in payment messages, with the goal of improving the customer experience by allowing for less manual intervention, more accurate compliance processes, higher resilience, and better fraud prevention measures.
By 2025, it will be the universal standard for all reserve currency high-value payments systems, supporting 80% of transaction volumes and 87% of transaction value globally. SWIFT and the European Central Bank have set November 2022 as the standard’s go-live date in Europe.
ISO 20022 and cross-border payments
The ISO 20022 standard will shift how banks communicate cross-border payment instructions. To continue processing payments, all banks must be prepared to handle this new standard, and customers must also be prepared for changes. Some banks have already started to prepare. Others are still falling behind.
Cross-border payments usually involve one bank sending a message to another bank, which then passes the message on to the next bank in the chain – as a result, all banks must be equipped to receive, process, and pass the full ISO 20022 payment data from one counterparty to the next. Otherwise, the chain will be broken, potentially resulting in the loss of vital information. If one bank is perceived as a weak link, others that are better positioned to support a new message format may be bypassed.
The ability of the ISO 20022 standards to enable the provision of additional remittance information, which is critical for reconciliation, as well as improving transparency and traceability, which is a crucial component for automation – something desperately needed in the cross-border payments process, is a critical component of the ISO 20022 standards within cross-border settlements. Adoption of these standards has the potential to revolutionise several real-time payment schemes, including UPI, SEPA (Single Euro Payments Area) Instant Credit Transfer, and the Real-time Payments Network.
Why these ISO 20022 standards are important for Cross Border Payments?
When it comes to initiating financial transactions and reporting financial activity, adhering to the standards, and regulations are critical. An international standard is a method of facilitating seamless integration between service providers and customers, as well as enabling the efficient, consistent, and secure exchange of information.
Large global financial institutions have traditionally developed, approved, and implemented standards without obtaining feedback from other organisations. This has resulted in inconsistency and a lack of customisation, leaving overburdened IT departments to handle on-boarding, testing, and ongoing partner relationships.
The ISO 20022 financial messaging standard was intended to address this by providing a flexible framework that supplies a universally accepted business message syntax, allowing user organisations and developers to exchange transaction information globally using the same message structure, form, and meaning.
Once ISO 20022 standard is put in place, banks can begin utilising the rich data embedded in the ISO 20022 payment message format and sharing this additional information with their customers to provide added insight into each transaction.
The data could also be used to automate KYC (Know Your Customer) and AML (Anti Money Laundering) activities more seamlessly, lowering the risk of fraud. Corporates will undoubtedly expect their banks to be fully prepared from the start, so banks should strive to comply with ISO 20022 payment messages as soon as possible to remain competitive.
What are the benefits of ISO 20022 standards?
- Corporates will be able to reconcile their cross-border transactions more easily by attaching richer data to the payment itself. More data can be analysed and used to improve customer experience.
- Greater interoperability among various payment systems and interfaces because of a common language.
- Cost savings because of setting up consistent, compatible messaging between countries, financial institutions, and individuals.
- Faster payment speeds by cutting holdups, bottlenecks, and uncertainty when making global payments.
- Improved transparency and visibility: Improved visibility and real-time perception of liquidity flows will allow for better forecasting.
- Improved integration and compliance: Improved analytics will result in a tighter compliance process, enhanced security, and fraud prevention.
- Improving STP (Straight Through Processing) rates: By setting up an identical processing format at all stages of the chain, ISO 20022 significantly improves STP rates and lowers maintenance costs for all formats.
- Regulatory and security enhancements: The increased level of detail needed, as well as the implementation of identical standards, protocols, and formats, enable better regulatory reporting, more safe payment information, and customer data to notify business strategy, and streamline security procedures.
- Developing new revenue streams: It enhances liquidity management by enabling new levels of financial communication. It enables the adoption of data analysis solutions and added value services, such as Request to Pay and e-invoicing, that could supply customer insights and generate new revenue streams for banks.
- Standardising non-Latin alphabets: A crucial factor is that the standard will allow for longer non-Latin alphabet references, with a character set ten times larger than MT messages and carrying significantly more information. This is a feature that has received a lot of attention in China.
What do banks need to do - and quickly?
When transitioning to MX message types, banks should concentrate on two key areas. The foremost thing is to equip itself to handle structured party information. The second one is the ability to use all the other information shared via ISO 20022 payment messages, such as invoice details, tax data, supplier information, and so on.
Most banks, particularly those that rely on legacy systems to process cross-border payments, are simply not prepared to support the new structured message formats and associated third-party information. They will be unable to pass on the benefits to their customers unless they modernise their infrastructure.
The legacy systems of banks were designed to store data such as customer addresses in an unstructured manner. Changing this can be extremely difficult. Because ISO 20022 requires the processing of much larger data volumes than traditional legacy formats, bank systems and databases must be capable of processing these larger volumes at a higher velocity for real-time payments, daily cash flow management, compliance checks, and fraud detection and prevention. As per ISO 20022 standard, all parts of the address must be stored in separate fields.
Hence banks must extend all relevant payment-related IT systems and create a more structured version in their Core Banking System and other data sources. This was originally one of the intended requirements of Target2, but the industry-backed away from it because many believed it was too difficult to achieve.
Banks must inform their corporate customers about the other data that may become available and how it will be used. Furthermore, those customers should be sufficiently briefed and included in the end-to-end testing process.
Banks should have the possibility of using the SWIFT translation service. This effectively converts messages from the old format to an ISO 20022 compliant format, allowing the information to be passed on, but banks using this service who are unable to process the messages themselves will be severely limited in their ability to create and deliver value-added insights and services to customers. Access to the rich data available in ISO 20022 payment is critical for banks looking to evolve and offer innovative new services.
Because of the increased interest in developing faster and more affordable cross-border payment infrastructure, there has been a lot of innovation in the space, ranging from traditional payment providers like SWIFT to fintech using blockchain and distributed ledger technology (DLT).
Banks should aim to be ready six months before the ISO 20022 payment message cutover in November 2022. Migration to ISO 20022 is a meaningful change, but it will supply significant competitive advantages for both financial institutions and the corporates, assuming everything is managed properly.
Despite the obstacles to global ISO 20022 implementation, it is important to note that the movement to ISO 20022 has been positive, and instant payments are expected to gain traction and market share in the future. Furthermore, in addition to supplying significant potential for cross-border settlements, the ISO20022 standard is likely to improve efficiency gains in other areas, such as domestic and cross-border B2B payments and P2P payments.
Macro Global works very closely in ISO 20022 landscape to bring cross-border payments into the modern era. Learn more about our NetRemit – Cross Border Payment Suite and how our NetRemit is influencing the future of payments.
Cross-Border Buy Now, Pay Later (BNPL) Challenges, Opportunities & Strategies for Banks
Buy Now Pay Later (BNPL), which focuses on no-interest short-term loans, became popular during the COVID-19 outbreak. In markets around the world, it continues to be widely used as it offers new opportunities for merchants, issuers, card networks, and customers who limited access to conventional credit.
There are enormous opportunities in BNPL, as evidenced by recent launches from businesses like Apple, NatWest, Santander, and Zopa as well as new products from those already active in the market, like PayPal. Major players are currently concerned about the possibility of increased competition.
Cross-border BNPL is still a significant untapped market, though. Financial service companies entered the market and changed the debt landscape by globalising BNPL, which caused a wave of adoption among businesses.
There are currently more than 150 BNPL providers worldwide. These businesses are a sizable presence in the payments space, including occasionally for cross-border payments. They collaborate with merchants to offer a range of BNPL services as a payment method at checkout.
Intriguing opportunities are offered by short-term instalment loans at every level of the payments ecosystem, but there is risk involved, as there is with most financial opportunities. Before investing in the infrastructure required to support BNPL payment options, merchants must take these risks into account, especially those that conduct business internationally and in multiple currencies.
Banks can apply BNPL strategies in a variety of ways to their operations. Let’s examine the size of the opportunity, the factors driving its rapid expansion, and the options available to banks looking to enter this market.
Cross Border BNPL – The Future is wide open
Customers find the term Buy now, pay later (BNPL) more appealing and it is a growing trend that’s upending the credit sector. Fintechs have been working hard to provide BNPL options for both physical stores and e-commerce purchases. Customers’ needs are the focus of BNPL’s convenience and personalization offerings.
By 2028, BNPL is expected to increase from $4.1 billion to $20.4 billion. In many markets, particularly Scandinavia, the UK, the US, and Australia, it is now considered a “must-have.” Its presence in the EU is expanding quickly, led by nations like Germany, Italy, and France.
The adoption of BNPL has initially been assessed in e-commerce, but Fintechs are quickly expanding into in-store payments. As more businesses join e-commerce marketplaces and traditional consumer goods companies start selling directly to customers, the adoption (and expectation) of BNPL has accelerated even more.
Ascent’s 2021 survey shows that 62% of users think BNPL could replace their credit cards. Credit card volumes might continue to decline as BNPL adoption increases. According to Payments Journal, three of the biggest banks in the US reported a decline in credit card purchase volumes of more than 20% in 2020 alone.
BNPL is well-liked by people of all ages. Over 40% of consumers in the 55+ age group have also used BNPL, though younger consumers are more likely to continue with the most convenient form of payment.
The fact that BNPL is still being used shows that, when done properly, it can be a workable, profitable, and win-win payment choice. Merchants must control their exposure to the risks while making sure they gain from the large upsides.
The Cross-border Buy Now, Pay Later (BNPL) industry is under a lot of pressure due to various environments which we will see in detail in the below section, but there are unquestionably still huge opportunities in the sector.
Risks & Challenges in Cross Border Buy Now Pay Later
1. Global Economic Dynamics
The world economy experiences both growth as well as decline. Many BNPL providers are financially strained due to increased inflation, rising interest rates, the potential for a recession, and increased competition. To deal with increased competition, these BNPL businesses will find it more expensive to obtain loans to fund their operations as interest rates rise.
Several large BNPL providers have made layoffs because of poor earnings and stock market performance, and regulations have started to tighten as the industry comes under more scrutiny.
The impact of a significant shift in the economic climate, such as a recession, on BNPL, cannot be foreseen because it is still relatively new.
2. Local Regulatory Challenges
The more regions you choose to run a business in, the more regulations you must consider to protect yourself and your customers from fraud while also avoiding fines and lawsuits.
BNPL providers must abide by payment network regulations from various regions, including displaying payment cards, the need for transaction-related receipt data, and the open disclosure of return and refund policies.
Businesses’ tax obligations depend on several variables, including sales volume, transaction volume, and location of sales. In addition to the local tax laws, the choice of payment model matters.
To facilitate cross-border BNPL eCommerce, it is necessary to simplify the regulations that support international payments. It is vital to design and adopt regulations that address all significant obstacles at once and make sure that solutions are compatible across national boundaries.
3. Risk of Defaulters
In this BNPL business model, a customer makes the first instalment to receive a product and then makes weekly or monthly payments throughout an agreed-upon period (typically three or six months). Although many BNPL contracts completely waive fees, interest, or late fees.
A short-term financial agreement with a lower regulatory threshold comes with some clear benefits, such as high customer approval rates and flexibility in contracts and agreements. The drawback is that lower standards and higher approval rates increase the possibility of default. Where does the merchant stand if a customer passes the soft inquiry for approval, pays the first instalment, receives the good or service, and then vanishes?
Default risk is not specific to BNPL. A stricter approval process and complicated regulatory infrastructure should be in place to reduce defaults and ease asset recovery to manage the loss.
4. Managing Cross-border risk profiling and creditworthiness
Banks and other BNPL providers should come up with and use policies and procedures to reduce the risks they found in their risk assessments. Customer due diligence (CDD) processes should be made so that the institutions can learn more about their customers by making them find out what they do and why they need services. The first steps of the CDD process should be made to help banks figure out the ML/TF risk of a proposed business relationship, decide how much CDD should be done, and discourage people from setting up a business relationship to do something illegal.
Banks and othert financial institutions should be able to make a customer risk profile by taking a whole-picture look at the information they get when they use CDD measures. This will help the insitution decide whether to start doing business with the individual or the company, keep doing business with the company, or end the relationship. Risk profiles can be used for each individual customer, or they can be used for groups of customers who have similar traits. For example, customers with similar income ranges or who do similar types of banking transactions.
This is a good way to deal with retail banking customers in particular.
Initial CDD includes: identifying the customer and, if applicable, the customer’s beneficial owner; verifying the customer’s identity using reliable and independent information, data, or documentation to at least the extent required by the applicable legal and regulatory framework; and understanding the purpose and intended nature of the business relationship and, in higher-risk situations, getting more information.
BNPL players can efficiently manage cross-border risk profiling and creditworthiness across territories, unlike incumbents.
Like KYC, credit checks are also more complicated when they involve other financial systems and need to be included for every country that the company supports.
Many BNPL providers consider this possibility and supply remedies to lessen the risk. Collaborating with an experienced partner on strategy and implementation is essential because these solutions will differ depending on the provider.
5. Handling Currency Exchange rates in Cross Border BNPL
Currency exchange rates are one of the biggest worries for multinational retailers using BNPL. As opposed to conventional credit, these point-of-sale instalment loans have no provision for absorbing changing currency exchange rates. When conducting cross-border transactions, BNPL may implicate merchants in the risk of the foreign exchange markets.
For instance, a merchant may use a different currency to conduct a cross-border BNPL transaction. After a few months, the currency is no longer worth what it did when the agreement was first made, and the final instalment is then due. Who pays for that expense? Also, is the retailer responsible for the added cost if the customer returns an item that is now worth more than they paid for it because of currency exchange fluctuations?
Cross Border BNPL – Pushing Banks into innovative water
Banks are currently experimenting with a variety of strategies to seize the opportunity presented by BNPL. While some are developing models that enable them to run in the background behind BNPL propositions or utilise other players to create differentiated offers, others are offering one-to-one models with specific merchants.
Additionally, some industry observers claim that pressure from fintech companies is at least partially behind bank-led innovation on cross-border payments as banks make technology investments to meet client demand.
With the existing structure and trust consumers place in banks over Fintechs, banks are a viable disruption candidate in BNPL
To compete in the BNPL market, banks must prove they can provide the secure, convenient, and reliable payment options that consumers demand. The most prosperous will be those who act quickly and leave an impression on customers.
Banks must decide whether or how they want to enter this market as BNPL continues to grow. Those who choose not to take part or who delay too long in doing so run the risk of being cut off from a growing value pool and limiting access to a generation of customers with various credit needs.
Most of the FinTech BNPL providers can operate within their zone, while banks can widespread their BNPL offerings across borders due to their existing tie-ups with regional banks to offer other services such as cross-border payments.
Considering how to take advantage of current strengths may be the secret to success for those prepared to challenge Fintechs’ dominance in the market.
- Collaborate to develop differentiated products – Collaborating with BNPL players and regional banks across borders enables banks to capitalise on their long-established strengths and wealth while diversifying into innovative credit options such as short-term microloans.
- Offer BNPL via credit cards at POS – Banks can tie -up with merchants and vendors to offer BNPL options via credit cards at POS. This could be a huge market as consumers are looking for more offers in various sectors.
- Buy or build their platform – Banks can build their BNPL platform or buy BNPL products available from the market to offer services to their customers. Banks may be able to reduce these costs more effectively because of their experience able to operate in regulated markets and providing low-cost payment models.
Buy Now, Pay Later segment will face significant regulatory headwinds, with various regional regulators calling for BNPL products to be subject to the same lending criteria as other credit products such as loans and credit cards.
Many BNPL players currently make a “soft call” on an applicant’s credit history or rely on self-certification for smaller purchases. Banks, on the other hand, typically have strong relationships with their customers that span multiple products, allowing them to make quick, accurate and data-rich decisions about a customer’s creditworthiness.
The bottom line is the trust that banks have in their customers, combined with their in-depth understanding of spending patterns and credit histories, opens the door to new, innovative products in BNPL.
Talk with our industry experts to learn the strategies and plans on how banks can acquire cross-border BNPL opportunities.
The Evolution & Future of Cross-Border Payments in 2022 & Beyond
For banks and other financial institutions, it’s still challenging to transfer funds quickly across borders as technology continues to change how people and businesses manage their financial transactions globally. Most of the systems are unable to keep up with contemporary technology because they have remained antiquated.
In the past, customers were forced to open bank accounts abroad, and use high-priced bank drafts, wire transfers, or currency exchanges to settle such transactions, all of which come at an inflated cost and with the added inconvenience for all parties involved. As a result of the need for multiple third parties to complete the process, sending remittances from one country to another has been both slow and expensive. In addition to high fees, time zone differences caused frustrating delays in settlements that put the process and its participants at risk.
Globalisation has created a fantastic and profitable opportunity for this industry’s advancement and the need for a more efficient, cost-effective system keeps rising. The demand was fueled by this rising use of e-commerce market platforms, according to a 2021 study by Juniper Research. Additionally, they demonstrated that B2B payments, which currently total USD 34 trillion in 2021, are expected to surpass USD 42.7 trillion across all cross-border payment types in 2026.
The growth of Cross-Border Payments
Over the past few years, the cross-border payment industry has expanded greatly. Emerging market participants work to incorporate intuitive innovations and improvements to make international remittances affordable, simple, and hassle-free.
Digital payments have been severely disrupted by the COVID-19 pandemic. In the upcoming years, a rise in cross-border, real-time transactions will be brought on by the sector’s emerging trends.
A real-time, highly secure alternative to conventional payments has been made possible by the growth of a global infrastructure that enables cross-border settlements. Additionally, it gets rid of the disjointed payment systems that expose companies to needless risks.
The ISO 20022 standard is undoubtedly the hottest development in the field of fast payments technology to keep an eye on. For the exchange of electronic messages between banks, this is a global standardisation strategy.
The innovation has the potential to be a key enabler for promoting the adoption of cross-border payments. Above all, it makes it possible for financial institutions everywhere to communicate with one another. As a result, service providers will be able to replicate domestic real-time payouts on a global scale. In the end, they would usher in a new era for electronic cross-border payments.
Indeed, the world is promptly moving toward digital transactions, making enterprises and consumers less dependent on cash and checks. Furthermore, Fintech firms invest heavily in real-time technology, easing the transition from traditional e-commerce to digital, real-time payments.
Unfortunately, the current procedures for sending money abroad is still convoluted and inconsistent. Businesses and individuals who send money abroad frequently experience unpredictable costs and aggravating delays. The process can be slowed down by factors like numerous parties, risks, currencies, laws, and systems. The unfortunate outcome is that global trade moves slowly. A new system is required to meet the requirements of the present and future global economies.
Cross Border Payments should be Real-time
Cross-border payments have undergone a significant transformation because of the introduction of real-time domestic payments and round-the-clock central bank settlement. Using new technology, widespread standards, and improved service level agreements, the industry is rethinking how rapidly cross-border payments can be delivered.
As more banks switch from batch to real-time processing, transaction speeds will continue to rise. Banks will have to start processing their payments in this way to avoid falling behind because customers are demanding faster payments and more markets are moving to real-time.
Moving to real-time will become more and more crucial. This is so that banks will have a better understanding of how quickly their correspondents process transactions because of increased payment transparency. Banks will either be forced to speed up by their customers, or they will move their business to correspondents with quicker processing capabilities. Real-time processing is forcing banks to increase interbank processing hours as well, which are now 24/7. a trend that is quickly taking over.
The requirement for a two-pronged approach
A two-sided solution is required for cross-border payments. The only alternative is to continue using legacy systems if the required technology is not yet operational in the recipient nation. This is expensive for the sender, the recipient, as well as the entire world economy. This lag slows down the entire flow of global trade, influencing both businesses and the final consumer along the way. We are aware that the need is for a system that enables users to instantly send money to anyone, anywhere in the world while doing so through a convenient, secure, and safe ecosystem.
As consumer habits change, so too are customer expectations. Both individuals and businesses have grown accustomed to the simplicity and convenience of being able to complete a variety of financial transactions with the touch of a button while keeping an entire financial ecosystem in their hands. They are therefore entirely within their rights to ask for the same capabilities for international remittances.
The potential use of digital currencies in international transactions
Digital currencies are drastically changing the payments landscape. Money that a central bank, such as the Bank of England, can create is known as central bank digital currency (CBDC). Because it isn’t actual money like notes and coins, it is referred to as digital (or electronic) money. It appears on a computer or other similar device as an amount.
Since cryptocurrencies and stablecoins promise instantaneous value transfers across boundaries and jurisdictions, disintermediating banks and disabling regulators, the private sector has taken the lead in this movement thus far.
So how might digital currencies help to alleviate the current problems with international payments? There is a claim that a stablecoin or CBDC-based system could potentially reduce the costs, time, and complexity involved in the process by lowering the number of parties required to settle payments.
Cross-border payments have a lot of room for improvement, which would enable banks to transact more quickly, affordably, and transparently. Instant payments are one advantage. Currently, it may take several days for a merchant to receive a credit card payment. However, that process can be made instantaneous with digital currency.
Other advantages include not having to carry physical cash, lowering the risk of counterfeit payments, and enabling contactless payments, which is especially appealing considering the current global pandemic. By eliminating middlemen, this strategy could greatly improve the system’s efficiency and transparency.
CBDCs deliver 24/7 central bank money, which will become beneficial for the participants in cross-border payments because digital currencies are available around the clock.
But the fact that the systems needed to settle cross-border payments are not available 24 hours a day is the main problem. In other words, if the real-time gross settlement system isn’t active while we’re making a payment to another nation, we can’t complete that final settlement.
Whether Digital Currencies is good enough to overcome all the challenges in Cross Border payments?
According to a new paper from the European Central Bank, Central Bank Digital Currencies (CBDCs) may be the solution to the years old quest for the pinnacle of international payments.
However, when it comes to cross-border payments, CBDCs are not a magic bullet. The availability of the central bank is only one piece of the puzzle because there are many parties involved in a payment chain. “The beneficiary must also be on the same bank”. The problem is not resolved if the end beneficiary bank is operating normally but the central bank is not. Digital currencies may therefore have the potential to enhance cross-border payments, but they might not be able to address all the present issues.
Along the way, there are still a few more challenges that may need to be overcome. Stablecoins may eventually be able to be used internationally for cross-border payments, reducing remittance challenges, and enhancing the speed and fluidity of cross-border payments, but this is not yet the case.
Most cross-border payments will eventually be made in digital currencies. However, there is currently a knowledge, platform, and skill gap, as well as a lack of understanding of how to exchange and convert digital currencies when making cross-border payments.
No one disputes that the current cross-border payments system has issues, but the emergence of unregulated private sector digital currency solutions poses serious risks to the stability of the financial system. A new problem faces policymakers. They run the risk of losing control of the system and being outcompeted by solutions created without taking mandates for financial stability into account if they are unable to modernise the cross-border payments network.
Almost all central banks are currently looking into the advantages, drawbacks, and different features of CBDCs, but with a strong emphasis on domestic requirements. So far, very few central banks have made definite design decisions. Even if only used domestically, CBDCs will have effects that cross international boundaries, so it is essential to coordinate efforts and find common ground. If properly coordinated, the blank slate provided by CBDCs could eventually be used to improve cross-border payments when combined with other advancements. The creation of an effective, competitive FX conversion layer and the addressability of accounts globally are among the difficulties. AML/CFT compliance is required to ensure STP.
None of these issues are unavoidable, and for large cross-border payment corridors with sizable volumes and enough political will, both interlinking solutions should be practicable and effective.
Final thoughts
The cross-border payments market assures us to address the urgent problems plaguing the highly connected online environment of today. Market players are looking to Fintech startups for solutions as demand for borderless e-commerce grows. They want to improve the speed, security, and transparency of cross-border B2C payments.
The puzzle of cross-border payments, which has historically restricted trading to geography, can be remedited by Macro Global’s NetRemit – Cross Border Payment Suite. NetRemit offers quicker and more affordable international transactions whitelabel platform with futureproof technology and functional stack to scale as you grow and meet your need as new innovations unboxed.
By working with banks, non-banking financial institutions, and other online platforms, NetRemit enables you to create a single hub to the entire world. By removing the obstacles to cross-border payments, NetRemit enables people to concentrate on what’s most important: helping their loved ones and expanding their businesses.
What, How & Why Sanction Checks in Cross-Border Payments
Sanction Checks & Reporting for Cross-Border Payments
Financial sanctions orders simply ban a business or an entity from doing business with a specific individual or organization (known as the target). In some cases, the order will restrict a company from providing financial services to the target.
These measures can range from the most comprehensive banning any funds from being transferred to a sanctioned country and freezing the assets of a government, corporate entities, and residents of the target country – to targeted asset freezes on individuals/entities.
- The entity is directly named on a sanction list;
- The entity is indirectly sanctioned through beneficial ownership/controller/shareholder; and
- The individuals who are the directors or employees of the entities are named on a sanctions list.
Failure to comply with a financial sanction is a criminal offence unless the institutions have an appropriate licence or authorization from the Office of Financial Sanctions Implementation (OFSI). The sanctioned entities, and individuals’ names are listed on the OFSI website as well as any other sanctions lists published by any other countries or jurisdictions. Their website provides information about current financial sanctions, including a comprehensive list of all those subject to asset freezes or sanctions under UK law.
These anti-money laundering sanctions lists, also known as watchlists, are an aggregation of several regulatory and enhanced due diligence lists from all major sanctioning bodies around the world, including global lists like OFAC (Office of Foreign Assets Control), UN sanctions, EU (European Union) sanctions, HM Treasury and PEP (Politically Exposed Persons), and in-country lists like OFAC, UN sanctions, EU sanctions, HM Treasury and PEP.
- Government can impose financial sanctions on any individuals, entities, and other countries.
- The Government that imposes financial sanctions will not be enforcing the sanctions law. OFSI oversees implementing, administering, and enforcing the financial sanctions regime.
- Financial sanctions apply to all transactions; there is no monetary minimum.
- Most listed individuals and entities are aware that they are on the OFSI’s publicly available Consolidated List of Politically Exposed Persons (PEPs). As a result, the issue of ‘tipping off’ (as defined in the Proceeds of Crime Act 2002) should not arise in most cases.
- Clients are not screened against the OFSI’s Consolidated List in standard anti-money laundering checks. Companies should not mix up the government’s financial sanctions regime with anti-money laundering procedures.
- These sanctions lists are not static; they change as regulations change and people’s status changes.
Sanctions Screening
Dealing with people on sanction lists can have serious ramifications. For any entities involving cross-border payments, it is vital to have an efficient system to perform financial sanction checks that ensures legal compliance and reduces the risk of fraud or illegal funds entering your payment process.
Beneficiary screening for payments is a control used by Financial Institutions (FIs) to identify, monitor, and prevent sanctions risks. Beneficiary screening is critical to ensuring that the financial institution does not do business with a sanctioned entity and remains compliant.
- Transaction screening – Transaction screening is a technique for detecting transactions involving specific people or entities.
- Customer screening – During onboarding or the lifecycle of the customer relationship with the FI, customer or name screening is used to identify targeted individuals or entities.
Transaction and customer screening are intended to work together to create a strong set of options for identifying sanctions targets. It should be recognised that the way these controls are managed has several limitations and that they should always be used as part of a larger Financial Crime Compliance programme.
- Your existing clients against the OFSI Consolidated List
- All new customers before providing any services or transactions
- Are there any updates to the OFSI Consolidated List?
- Any changes to your client’s details
It is the individual, entity, or government’s responsibility to ensure that they and their system can mitigate the risk of financial crime, including those that allow you to comply with financial sanctions obligations. These may need to differ from those in place for anti-money laundering purposes because compliance with sanctions requires you to consider who is receiving payments and whether funds are coming from a completely legitimate source.
To ensure that the business receives funds from a legitimate source, they should verify the sender’s identity, conduct due diligence, and often monitor the sanctions list.
If you are dealing with international clients or individuals, make sure they are not on any sanction lists, which are lists of people who have been or could be harmed by illegitimate funds. include politically exposed persons (PEPs), those entrusted with a high-profile public position, and their close associates’ families. These individuals are more likely to be involved in corruption and bribery because of their position of power and influence.
What is the difference between domestic and cross-border payments screening?
Transactions that take place entirely within the country are referred to as domestic payments. These are not subject to the same screening in medium and large FIs. As both the originating and receiving FIs are in the same jurisdiction and are therefore bound by the same regulatory standards when onboarding clients.
Cross-border payments involve transactions between parties based in two or more countries. Correspondent banking is a process in which a foreign and domestic bank enter into an agreement and a correspondent account is created at one bank for the other. Correspondent banking entails the establishment of reciprocal accounts between the two banks, allowing the domestic bank to make payments or money transfers on behalf of the foreign bank, and allowing the foreign bank to handle international financial transactions for customers.
In terms of screening, the main difference is that cross-border payments are undoubtedly screened for risk and monitored with greater thoroughness. This is because many foreign businesses trade in US dollars and are therefore subject to the Office of Foreign Assets Control’s strict requirements and jurisdictional reach (OFAC). Because FIs must deal with cross-border regulatory requirements outside of their legal framework, these payments are more difficult to track. This problem is compounded in the international banking space, where correspondent banking is used in most cases which do not involve their customers in a substantial chunk of the payments, there is limited information available for the customers to figure out if the payment has a sanctions risk.
Non-Compliance Penalties and the consequences
Cross-border payments have been and always will continue to be highly regulated and secure. Each country in the transaction network will have its own legal and regulatory requirements, as well as its compliance and security protocols.
If any financial institutions find their payee or payers on a sanctions list, it should be reported to the regulators. Failure to do so leads to an increased risk of regulatory action, which can result in large fines and reputational damage, as we’ve seen recently with global banks. Before reporting to the regulator, alerts generated by sanctions screening must be probed further and potential sanctions risks assessed.
Institutions that do not comply may be subjected to long-term monitoring. Monitors are unbiased experts who examine a company’s culture, systems, and processes on the company’s dime before making recommendations and validating their implementation. These can result in a bank losing its licence to trade in certain currencies in the most severe cases, and they can last for years. Even after the monitorship has been lifted by a court, the bank can be audited at any time and must always follow the auditor’s instructions.
Handling compliance breach depletes resources and makes it difficult to recruit and keep top talent, putting payment providers at substantial risk of falling behind in terms of innovation.
Payment service providers and banking institutions, on the other hand, cannot afford to cut corners on customer service. Making quick decisions is critical because delaying legitimate payments can result in financial penalties and customer dissatisfaction.
Conclusion – Need for Technology to achieve compliance
As compliance plays a significant role in cross-border payments, it is vital to choose the best FinTech solutions for AML sanction checks that should go together with cross border payments platform. Screening is not just the matching of names; it involves various business logic and risk-based algorithm to derive the desired results to comply with the regulators.
Macro Global, the leader in RegTech as well as in FinTech solutions, built our NetRemit – Cross Border Payment Suite with automated eKYC validation integrated within the product. NetRemit also features AML & Sanctions check to offer seamless customer onboarding.
NetRemit’s Integrated Transaction Screening feature scrutinises the sender and recipient, preventing money laundering and financial crimes before the process cycle begins, saving banks a significant amount of money.
For compliance and business efficiency, MG’s NetRemit provides extensive reporting capabilities. It generates more than 30 analytical and management reports, such as Suspected Fraud Reports, Enhanced Due Diligence Reports, Compliance Reports, and Watchlist Reports, allowing stakeholders to always stay on top of the market.
NetRemit provides cross-border, real-time, and faster settlement solutions for B2B, B2C, and P2P services, allowing for immediate and prompt pay-outs into bank accounts and third-party wallets.
NetRemit is a complete end-to-end solution for managing, monitoring, and improving business processes, allowing companies to complete the process life cycle on a single platform.
Our upgraded global product features customised data analytics and business intelligence modules along with improvised notifications through AI & ML that serves the purpose of our client. Please, visit our product page for more information.
Automation in Cross-Border Payments: The Pressing Priority
How Automation Improves the Cross-Border Payment Process?
Cross-border transactions are critical to global commerce, but they continue to face challenges. The involvement of Multiple jurisdictions and reliance on correspondent banking networks results in inconsistency, costs that are not always transparent, and the reality of settlement to the beneficiary that is unclear which all adds up to the pain for any businesses that desperately need meaningful automation.
The G20 Roadmap for Improving Cross-Border Payments elaborates on current and emerging payment systems and arrangements. However, there is still room for innovation and creativity beyond basic technological advancements. Financial institutions must consider how they can identify and deliver improvements on top of ongoing infrastructure change, both individually and as players in regional ecosystems.
While ISO 20022 will continue to play a leading role in the modernization of cross-border payments, trying to meet the unified communications requirements will only get us so far. To effectively harmonise and leverage the available opportunity, financial institutions must go beyond meeting new standards.
Key challenges experienced in traditional cross border payments systems
1. Data formats that are fragmented or truncated
Payments are made via messages sent across banking institutions to update the sender and recipient’s accounts. These payment messages should include enough information to authenticate the identity of the parties to the payment as well as the credibility of the payment. Data standards and formats differ between jurisdictions, systems, and message networks.
Some formats, for example, only allow Latin characters, while others allow more data than others, requiring names and addresses in other scripts to be translated, resulting in differences in precise spellings. This makes it difficult to implement a streamlined process, resulting in processing delays and an increase in running costs. Our Netremit cross-border payment suite embraces artificial intelligence to handle data fragments more effectively with machine learning techniques that continuously learn from the failures and repair them through harnessed templates to fix them so they can be rightly routed.
2. Processing Complex compliance checks
Since regulatory regimes for sanctions screening and financial crime are inconsistently implemented, the same transaction may need to be checked several times to ensure that the parties are not exposing themselves to illicit finance.
Banks may conduct their checks using various sources, which can result in payments being flagged incorrectly (for example where entities have similar names to those on sanctions or financial crime databases). The number of intermediaries in a chain adds to the complexity, as the original data provided to meet initial checks may not contain elements required for checks under other national regimes. This increases the cost of designing compliance checks, impedes automation, and causes payment delays or rejections. Netremit has inbuilt fraud and enhanced compliance checks that are more effective and matured over years with the frontline experience ported across the process.
3. Limited business hours
Bank account balances can be updated only during the hours when the underlying settlement systems are functional. The operating hours of the underlying settlement system in most countries are typically aligned with normal business hours in that country. Even when extended hours have been implemented, they are frequently limited to specific critical payments. This leads to delays in clearing and settling cross-border payments, especially in corridors with considerable time differences. This causes delays and requires banks to keep enough cash on hand to cover the unknown costs of the eventual foreign exchange rate, which fluctuates during this time, increasing the overall cost of the transaction. This is referred to as trapped liquidity.
4. Legacy technology platforms
A substantial chunk of the technology supporting cross-border payment systems is still being built and working on legacy platforms that were created when paper-based payment processes were first migrated to electronic systems.
Legacy platforms have shortcomings due to their dependency on batch processing, lack of real-time tracking, and limited data processing capacity resulting in settlement delays and trapped cash flow. These constraints affect domestic operations, but they become even more difficult to overcome when different legacy infrastructures need to interact with one another. In this case, interfacing with legacy technology can act as a barrier to the market entry of emerging business models and technologies.
5. Expensive funding
Banks are required to provide funding in advance, often in multiple currencies, or to have access to foreign currency markets to facilitate quick settlement. This creates risks for banks that must be covered by capital, which means that capital cannot be used to support other activities. Uncertainty about when incoming funds will arrive frequently results in overfunding of positions, which raises costs.
6. Lengthy transaction chains
These frictions make it expensive for banks to maintain relationships in all jurisdictions. Therefore, the correspondent banking model is used, but it results in longer transaction chains, which increases cost and delays while also creating additional funding requirements (including covering unpredictable fees deducted along the chain), repeated validation checks, and the potential for data corruption along the way.
Why the cross-border payments should be automated?
As digital invoicing and payments make it easier for B2B funds to cross borders, 64 per cent of B2B firms are moving away from physical invoices to avoid international payments friction. Financial Businesses now are seeking automated technological innovation to better categorise and store data, indicating that meaningful modernisation is now stepping up in the sender and beneficiary space.
Businesses are beginning to assess how their B2B payment processes can accommodate the changing needs of themselves and their clients, as they can no longer bear the time-consuming and costly frictions associated with more traditional B2B payment methods such as wire transfers.
Automation and artificial intelligence (AI) can significantly speed up domestic and cross-border B2B payment processes by eliminating the time and resources needed to finalise attached documents and categorise relevant payment data. Implementing some degree of automation into the cross-border payment practises can assist customers, and businesses with increasing transparency, allowing them to better monitor their transactions.
With consumer-centric peer-to-peer (P2P) payments and associated innovations influencing business payment expectations sending cross-border payments as quickly as domestic ones are critical to building a competitive business. Using an international third-party payment provider could assist businesses in effectively navigating this challenge.
During the pandemic, businesses are frustrated by delayed payments. Payment players are thus investigating ways to modernise the cross-border payment processes associated with cash management, an obstacle that becomes more difficult when dealing with world currencies and an increasingly stringent global regulatory environment era.
Automated Data Reconciliation for faster and easier cross-border payments
Banks and other payment service providers dealing with cross-border payments experience challenges in managing data as they do not have a streamlined process in place which is the primary issue. Customers must provide their identity documents, source of money and other relevant documents to send and receive money. Banks must validate the data and ensure the transactions are done properly. Due to multiple time zones, limited business hours and lack of technology, it is a heavy lift for organisations to share these data for smooth and faster payments. Hence customers experience delays in transactions, payment rejection or even failure in payments.
Institutions must collect, categorise, and validate the huge amount of data which should be shared between various endpoints to enable the transactions. Many organisations use siloed processes as each system is liable for only one step at a time and disconnected from others.
An improved and accurate reconciliation process is critical to enable frictionless real-time cross-border payments despite the transaction volumes. A more efficient process would also avoid putting a lot of pressure on the finance, operations, and treasury teams, which could lead to errors and disillusioned employees.
With our expertise in payment technology including open banking, cross-border payments, and payment clearing solutions, Macro Global is consistently delivering the best customer experience.
NetRemit enables banks to integrate with a vast network such as financial institutions and alternate payment services. Every single payment transaction, as with any financial organisation involving multiple parties, must be reconciled promptly to ensure smooth operations, and compliance, identify fraud risks and maintain the best standard of service for our customers.
Most SMEs perform reconciliation manually through their back-office team. When only a few people are involved, this method remains effective. But how do you handle reconciliation if you have a large number of partners, each with their payment method, transaction format, and data point, as well as millions of transactions?
NetRemit can handle enormous complexity and rising volumes while providing real-time payments. Our V21 version of NetRemit automates the reconciliation process for large transactions with varying payment methods, formats, and data points, faster than ever before. Furthermore, transaction discrepancies can now be detected much earlier and flagged in real-time before being resolved using a simple built-in workflow process.
MG’s NetRemit will take care of all the heavy lifts, and you stay ahead of your peers in the evolving payments space, ensuring that your customers have the best real-time payment experience possible.
Handling Reconciliation for a Frictionless Cross Border Payments
As cross-border payments become more common, businesses must sort, manage, interpret, process, and check ever-increasing volumes of complex data. The involvement of multiple intermediaries, jurisdictions, regulations, and time zones in completing a transaction slows down the transaction process and makes the remittance business a bit complicated.
When the currencies involved are less common, enabling, recording, and resolving payments can become more expensive. The addition of ‘correspondent’ or intermediary banks increases the number of links in the transaction chain, while the transaction process can be slowed due to differences in regulations and security requirements per country or region.
G20 Roadmap for enhancing cross-border payments
G20 Intergovernmental forum is thriving to reduce friction in cross-border payments as it is one of the vital requirements in the international remittance industry. The G20 recognises the benefits of a more seamless, connected, and coherent global financial environment that will address the challenges and pain points around cross-border payments.
It recommends that businesses must adapt quickly to ensure the smooth and secure flow of data and payments around the world. The G20 emphasises limitations with legacy platforms as a key area, as these can cause data processing slowdowns, resulting in negative consequences such as delayed settlements and liquidity issues.
In short, businesses are expected to deal with larger and more complex datasets faster, without sacrificing accuracy or increasing corporate risk. Failure to deal with the increasing complexity and scale of cross-border payments can have ramifications for costs, productivity, and even brand reputation.
As a result, businesses must think about new ways of working in the coming years that minimize risk, expedite operations, and maximise efficiency.
Reconciliation is the smart way to step ahead
Every payment transaction must be reconciled as soon as possible, just like in any financial organisation with multiple parties, to ensure smooth operations, and compliance, spot fraud risks, and uphold the standard of service for our clients and partners.
Reconciliation is typically a manual process carried out by the back-office staff of SMEs. When there are few parties involved, this strategy is still effective. However, how do you manage reconciliation when you have millions of transactions, hundreds of partners, and various payment methods, transaction formats, and data points?
Increasing resilience and speeding up cross-border payments processes
Cross-border payments are the driving force behind international commerce. However, as with all domestic payments, they must be subject to stringent checks and balances. Businesses have two options in the face of this growing scale and complexity: continue to work in a labour-intensive, manual manner, or rely on outdated systems that may fail when handling more extensive and delicate data. Alternatively, they can invest in automation systems that will assist them in adapting, reducing costs, and remaining agile to stay competitive in the new environment.
Automatic reconciliation of payments data
A significant area for improvement in cross-border payments is automatic reconciliation. Businesses can avoid the delays caused by mismatched data, fraud worries, and accounting hold-ups by automating the cross-border payment verification process. Human error is eliminated by automation, freeing up your staff to focus on tasks that add value.
Automated reconciliation of payments data ensures the streamlining of cross-border payments at a fast pace by reducing the complexity and ensuring smooth internal operations. Automatic reconciliation ensures the intermediaries are coordinated quickly irrespective of the number of transactions processed at the same time.
Automation makes it simple to spot data anomalies, problems, or irregularities. Reports are then generated for the appropriate person to act on, enabling more rapid decision-making and problem-solving. It gives businesses more control over their data, resulting in safer management and an improved real-time picture of customer or company finances.
A Multi-acquirer reconciliation approach for payments orchestration
To accept cross-border payments efficiently, a multi-acquirer setup should be in place to connect multiple payment service providers (PSPs). This allows them to provide the appropriate payment methods for the jurisdiction in which they operate, as well as benefit from lower processing fees because of geographical location and other determining factors. While this has advantages, it is not without logistical challenges.
With a lack of accurate reconciliation and settlement data across all their PSPs, it is unable to effectively monitor the remittance lifecycle. This is a frequent complaint that can occur when connections are made separately and do not interact. No matter how many PSPs or even different currencies, such as fiat or cryptocurrency, are involved, merchants can monitor the entire activity from a single dashboard by connecting to payment gateways using just one API.
The data is gathered and presented uniformly by a payment infrastructure that permits a consolidated multi-acquirer setup, such as a payment orchestration platform. This is made possible by the fact that the payment orchestration platform serves as a technical intermediary between the merchant and the PSPs/acquirers.
Transactions are sorted through the payment orchestration platform and then, based on rules set up by platform users, are routed to the most appropriate processor. Additionally, it implies that the platform stores the payment data, making it possible for the payment orchestration platform to gather the necessary data from the payment processors. An effective cross-border payments application with a BI dashboard can import all the data stored on the platform, making it simple to analyse and share data.
Final thoughts
Although reconciliation may appear simple at first glance, there are many hidden difficulties, particularly in cross-border payments where FX and a lack of API integration can cause complications. These complexities must be methodically addressed by the team in charge of the operational process. Businesses must view reconciliation as a core process in their daily work and not just as an activity that takes place at the end of each month to provide a smooth and efficient service.
Selecting the right third-party solution for cross-border payments also guarantees that the technology is managed by experts, is scalable, and is always current. NetRemit is one such efficient cross-border payment solution that offers an easy-to-use admin centre that enables remittance providers to provide a simple onboarding process, handle customer and transaction data, and manage all remittance operations on a single platform.
Through technological innovations like digital identity validation and Open Banking integration, the modern infrastructure of NetRemit’s data orchestration process enables money to transfer between nations without any interruptions.
Business leaders can make informed decisions by analysing important factors like transaction volume, FX commission, and operational revenue with the help of integration with reporting tools (SSIS for data transformation, and Microsoft Power BI for visualisation).
Businesses can use data mining and extended marketing data analytics to forecast consumer behaviour, enhance all types of decision-making, and calculate the return on investment from their marketing efforts.
We support major banks in the UK to take control of their data, ensuring compliance and control with a high-quality product customised for each client’s requirements. Our collaborative approach guarantees that we are always available to streamline your procedures and offer advice on industry best practices.
If you’re interested in learning more about how we can boost the efficiency of your company’s cross-border payment, pls reach us at salesdesk@macroglobal.co.uk.
Cross Border Payments – Regulations, Complexities, Risks and Solutions
How to overcome the challenges of Cross-Border Payments
Cross Border Payments Regulations
The G20 has made improving cross-border payments a priority for 2020. This work included identifying the cross-border payment challenges caused by a series of divergences in current processes and developing a set of key components to confront them.
In the work programme for 2021 – 22 released by Committee on Payments and Market Infrastructures (CPMI), one of its key priorities stated in it was to shape the future of payments. This includes cross-border payments, which the Bank of England anticipates will be good enough to justify over $250 trillion by 2027.
The more regions you choose to run a business in, the more regulations you must consider protecting yourself and your customers from fraud while also avoiding fines and lawsuits. Below are the major regulatory categories in cross border payments.
1. Policies governing payment networks:
This includes any rules, regulations, guidelines, or specifications established by payment networks, such as Electronic Fund Transfer Networks and Credit Card Associations. Payment networks can penalise and fine merchants who do not adhere to established policies.You must follow network policies such as appropriate display of payment brands, transaction-related receipt data requirements, and transparent disclosure of return and refund policies.
2. Data privacy:
Different regions have different regulations concerning the handling of personal data, which is generally characterised and often includes information such as an individual’s name, email, location, online identifier, IP address, home address, and so on, whether in a work or domestic setting. These regulations cover the rights granted to individual data subjects to the personal data stored, such as the right to prior notification of what the data will be used for, how the data will be handled, and when it will be deleted. Certain data privacy regulations must be followed depending on the region in which you operate.Business conducted in Europe is subject to the General Data Protection Regulation (GDPR), a regulation in place throughout the European Economic Area (EEA) that improves the degree of control that EEA and UK citizens/residents have over their data while also presenting a more unified environment for international business across Europe.
3. Consumer security:
Because new payment technology necessitates new payment security, various regions have enacted regulations to safeguard consumers against fraud and theft. The Revised Directive on Payment Services (PSD2), enacted by the European Parliament to better protect consumers when they pay online, is one of the more significant security measures. PSD2 is one of the most important EU regulations for merchants to be aware of it because it mandates Strong Customer Authentication (SCA) through three levels of identification for every transaction, ranging from card number verifications to texts with authorization codes.PSD2 and SCA apply to all online payments that pass through the European Economic Area (EEA) or the United Kingdom (UK). If you’re a European merchant who isn’t PSD2 compliant, any payments processed through the EEA may be declined — so you’ll need a payment processor that supports PSD2 compliance with features like 3-D Secure. Our NetRemit fully complies with PSD2 Open Banking regulations offering Strong and multi-layer security and offered through mobile with Strong Customer Authentication following PSD2 and GDPR regulatory requirements. Moreover, Macro Global offers Tavas – Open Banking Product Suite and Solutions for banks and financial institutions.
4. Payment Card Industry Data Security Standards:
A Data Security Standard (DSS) is a set of standards established by major card companies to ensure that all businesses that process, store, and/or transfer credit and debit card details maintain a secured infrastructure.These standards assist in defending against cyber-attacks, data hacks, as well as other security breaches, which can result in significant costs for lost business, credit monitoring, post-breach audits, and security updates.
5. Tax collection:
Tax obligations for businesses are determined by several factors, including sales revenue, transaction volume, and location of sales. Aside from the specific local tax laws, the payment model you use has an impact.
6. IT security:
The threat of cyber-attacks and data breaches puts businesses at risk of costly damage from data theft, ransomware attacks, and reputational damage. Cybersecurity regulations have been drafted to cover elements such as data centre redundancy, data storage, data recovery, and other security investments to ensure that businesses are protected from hackers.
Payment regulations differ depending on the location and payment method of a transaction. And, for cross-border payments, your payment provider must be familiar with each region of the world. 3-D Secure 2, for example, is a global specification designed to meet the PSD2 mandate for SCA. It is a sophisticated authentication solution that reduces fraud by determining a cardholder’s identity in real-time, thereby preventing unauthorised card use and protecting the seller from fraud.
When your payment provider offers built-in, out-of-the-box support for integrating 3-D Secure, it’s easy to ensure that you’re compliant with PSD2 regulations if you’re a business in the EU or UK. Macro Global’s Open Banking API supports 3-D Secure, PCI Compliance, and other regional regulations. Working with a payments partner who understands tax and regulations is the simplest way to ensure that you are properly managing all tax and regulatory issues when looking to optimise cross-border transactions.
Inequities, barriers, and issues in cross-border payments – complexity and risk
Historically, cross-border payments were hampered by high levels of complexity and risk. For example, frequent fluxutation in exchange rates, as well as instances when payment providers’ money does not reach its destination due to human error. Businesses, too, have seen international transactions decline and have had to wait weeks or months for payment for goods. There’s also a high risk of fraud and data loss in international transactions.
In terms of cost, speed, access, and transparency, cross-border payments lag behind domestic payments. Making a payment from one country to another is typically more difficult than making a similar payment within the same country. A cross-border payment can take several days and cost up to ten times more than a domestic payment in some cases.
The reality is that significant improvements are needed, particularly for SMEs, which are still hampered by slow procedures and high fees. With big improvements to be made, it stays their top priority.
When compared to large multinational corporations, the magnitude of the challenges around cross border payments becomes clear. There are dedicated in-house treasury teams in charge of all financial transactions and managing end-to-end cross-border payment requirements. SMEs, on the other hand, have historically not had access to this level of support, leaving them to struggle with opening and managing multiple bank accounts, as well as dealing with inflated costs.
Since then, many banks and other financial institutions have taken steps to close the gap, but many cross-border payment systems continue to face the same challenges:
- 1. High exchange rates
- 2. Slow transactions due to multiple intermediaries
- 3. Security issues
- 4. A lack of transparency
High exchanges rates
Cross-border payments are extremely expensive due to the numerous intermediaries involved in transferring money from one country to another, each of whom charges a fee for their services. Regulatory fees will also be charged, as well FX fees when converting one currency to another.
What implications this has for businesses, banks, as well as other financial institutions?
Because of the increase in overseas workers and international businesses, the cross-border payment space has become increasingly crowded. When retail and consumer customers choose a service provider, price will always be an important factor. Customers will shop around if the financial institutions they use do not provide a competitive rate and a reasonable charge.
Slow transactions due to multiple intermediaries
Cross-border payments via traditional bank transfer typically take two to five days to process which is a long time when compared to instant online domestic payments. This is due to the large number of entities involved in a single transaction. For example, if a Spanish wanted to send money to India, it might have to go through intermediaries in Germany or Dubai, then India. Cross-border payments are frequently delayed because of the lengthy series of steps required.
What implications this has for businesses, banks, and other financial institutions?
In a world where everyone wants the quickest and most convenient services, a slow and prone to delays cross-border payment system will not suffice. Businesses and consumers must conduct international transactions, and they must choose between old, slow, and expensive bank transfers and new payment service providers that provide an instant, less expensive alternative. While international transactions are undeniably more complex, organisations must strive to reduce processing time to meet their customers’ expectations.
Security Challenges
Consumers, like banks, want to know that their money is secure when making international transactions. There is no guarantee that a bank will be able to recover stolen funds if a hacker snuck money from a cross-border payment pathway. Such losses can be extremely expensive. Unfortunately, high-level security breaches in cross-border payment systems are common. Because each country follows its own regulations, the cross-border payment system is vulnerable to hacking whenever money enters a country with lenient security and access policies.
What implications this has for businesses, banks, and other financial institutions?
Cybersecurity is a major concern for any person or business making international payments. They’ll be much less inclined to do so using systems that aren’t consistently regulated and lack the best security and risk management procedures. This, however, is a major concern for financial institutions as the reputational risk can be enormous. Banks that are trying to cut costs and retain customers do not need to refund lost money, pay fines, or receive negative press.
Lack of Transparency
The lack of transparency in cross-border payment systems is a common complaint from both businesses and consumers. In fact, according to a 2017 SWIFT and EuroFinance survey, 64% of corporations would like to have real-time payment tracking solution, while 47% want better visibility into to the costs and deductions involved. This transparency is essential for organisations and consumers who want to avoid incurring hidden costs.
What implications this has for businesses, banks, and other financial institutions?
Increased transparency benefits all types of organisations. With these insights, they are not only provide better services to their customers, but also understand and improve errors that impact their profitability. Learning why certain payments are turned down or necessitate investigation, for example, will benefit from improving their processes, save time, and cut costs and resources.
What can the industry do to reduce complexity and risk?
Reducing the complexity and risk of cross-border payments is critical for increasing global trade and facilitating economic recovery. The payments industry should prioritise reducing the complexity of sending and receiving payments across borders and providing people with assurance that their transactions will be processed quickly and reliably in all markets. Transparency on upfront costs and greater predictability for fund delivery are the vital elements for success.
Our NetRemit – Cross Border Payment suite enables the financial institutions to deliver funds in real-time to bank accounts, cards, and cash. We’ve also made better use of technology to combat crimes such as money laundering, giving customers greater confidence when making international payments, as we know that the risk of fraud is the major concern when making cross-border payments.
Through NetRemit, you can establish a single connection to the entire world by collaborating with banks, non-banking financial institutions, and other digital platforms. NetRemit eliminates the barriers to cross-border payments so that people can focus on what matters most: supporting their loved ones and growing their businesses.
Understanding Cross-Border Payments: A Definitive Guide
What are cross-border payments?
Cross-border payments are cash payments in which the payer and recipient are in different countries. They include both wholesale and retail payments, as well as remittances.
During the pandemic, cross-border payment services saved many lives and enabled others, including small business owners, to pursue new opportunities. With immigration restrictions, more people send money overseas electronically, and many businesses have gone online, sourced international suppliers, and decided to embrace new ways of reaching customers all over the world.
Whether it’s a small business owner receiving payment from a customer on another continent or a migrant worker sending money home to family, increased people are making and receiving cross-border payments. People have understandably come to expect them to be as quick, simple, and dependable as domestic transactions.
There are several methods for making cross-border payments. Bank transfers, credit card payments, and alternative payment methods such as e-money wallets and mobile payments are the most common methods of transferring funds across borders at the moment.
Cross-border payments are categorized into two types:
1. Wholesale cross-border payments: These are typically made between financial institutions to support the customers’ or the financial institution’s cross-border activities (such as borrowing and lending, foreign exchange, and the trading of equity and debt, derivatives, commodities and securities). Governments and larger non-financial corporations also use wholesale cross-border payments for large deals created by the import and export of goods and services or financial market trading.
2. Retail cross-border payments: These are generally made among individuals and businesses. Person-to-person, person-to-business, and business-to-business are the three main types. They include remittances, most notably money sent back to migrants’ home countries.
What is the significance of cross-border payments?
40% of the people are sending and receiving more cross-border payments than before the pandemic. And most businesses planned to do more international trade in the future by capitalising on new opportunities and mitigating risk by not relying on a single supply chain or market.
Increased international mobility of goods and services, capital, and people have contributed to the rising economic significance of cross-border payments over the last few decades. Bank of England stated that the value of cross-border payments is expected to rise by more than $250 trillion by 2027.
Recent years have seen an increase in the following factors:
Manufacturers expanding their cross-border supply chains
International asset management and global investment flows
International trade and e-commerce
Migrants transferring funds via international remittances
These developments have expanded the market for cross-border payments, combined with the ability for end-users to have direct exposure to cross-border payment services that are as secure and efficient as comparable domestic services.
Remittances, in specific, are crucial in low and middle-income economies, and in certain cases are the prime source of development finance. Competitive interest in this market is also being driven by growth and revenue expansion. As a result, creative and unique new business models and participants are arising.
How do cross-border payments work?
Currency exchanges are closed-loop systems. Domestic payment systems are not conventionally tied directly with those of other countries, so the currency is not physically transferred overseas while transferring between two jurisdictions.
International banks, on the other hand, provide account regulations for foreign counterparts and maintain their accounts with their foreign counterparts, allowing banks to make payments in foreign currency. The funds are not transferred across borders; rather, accounts are credited in one jurisdiction and debited in the other. This interbank network is also used by Fintechs and money transfer agents to provide payment services to businesses and individuals.
International Wire Transfers:
An international wire transfer is a bank service that allows you to transfer money electronically from one bank account to another in another country. The average transfer time is 1-2 business days, with a cross-border fee. Because of the associated fee and the fact that routing rules vary by country, this international payment method is not suitable for large payment volumes or B2B transactions.
Credit Card Payments:
Consumers can use credit cards easily; all they need to do is enter their card information. Cross-border payments, on the other hand, necessitate the acquiring bank converting between the two currencies for the merchant with a merchant account. As a result, this method incurs cross-border fees at various points along the payment chain.
Bank Transfers:
International bank transfers allow money to be transferred from one bank account to another. Most international bank transfers are processed via the SWIFT network. The SWIFT network is a secure messaging system that ensures your payment reaches its intended recipient. One disadvantage of this method is that most banks only keep a limited number of currencies in stock. If the currency you need is not in stock, the bank will depend on their international banking partners to facilitate the transaction where more fees added in the conversion chain.
eWallet:
E-Wallet is also known as a digital wallet which is a software-based electronic payment method that enables customers to pay for online or in-store transactions. These are accessible via mobile or web apps on smart devices, where customers can securely store their payment cards. PayPal, Alipay, Apple Pay, and Google Pay are all popular eWallets.
Some eWallets enable customers to transact in multiple currencies and place orders across borders. Although wallet-to-wallet transactions do not technically qualify as cross-border payments, they do help to facilitate the transaction. A cross-border payment occurs when funds are withdrawn from an eWallet and transferred to the merchant’s bank account with origination and payment on contra currencies.
A period of transition, with international trade accelerating and customer, demands shifting.
Businesses are keen to capitalise on the potential benefits of cross-border payments. As a fintech industry player, we can build a simpler, less risky system that not only supports them but also boosts global trade and commerce – something critical as the world’s economies prepare for the post-pandemic era.
We’ve already seen a slew of payment-related innovations that are reducing complexity. Breakthroughs in networking technologies have sped up and streamlined processes and distributed ledger technology allows transactions to be recorded in multiple locations at the same time.
The world’s most vibrant financial markets are desperate to make progress in this area. The G20 nations have made improving cross-border payments as a priority, and the next steps on the roadmap will be laid out in 2022. Cooperation between national authorities and private sector providers will be vital to success, but the benefits of reducing complexity and increasing transparency are already visible.
Picking the right payment processing technology provider is the first step for success:
It is critical to find a global payments processor that accepts a wide range of localised payment methods. It is also critical to select one that accepts payments in multiple currencies. You can streamline the entire cross-border payment process, improve tax compliance, and payees will appreciate the simple registration process with a SaaS-based payment solution.
There are several crucial factors to consider before jumping on the mass global payments processing bandwagon.
How to find the right partner for processing International Payments?
It’s critical to understand your business’ needs: will you work globally and require cross-border payments, or will local currency suffice for in-country operations? Always remember that your service charges should be simple and affordable for customers regardless of where they are.
Once you’ve formed a partnership with a technical solution provider or payment processing companies, you must agree on how payments will be made. Several factors influence payment method choice, including:
Your cash flow requirements(how soon can you make the payment?).
The economic conditions in your country as well as the country from which you are sourcing.
The nature of the product being sourced.
Complicated banking systems.
Adjustable currency conversion rates.
Your creditworthiness; and
Your requirement for the product.
Choosing a payment technology partner can be a challenging task. The only way to avoid getting lost in the sea of options is to first understand your company’s needs and how a chosen payment technology provider can meet them!
A sneak peek about our NetRemit – Cross border payment suite:
NetRemit is a secure online remittance product available as a web and mobile application with a user-friendly interface facilitating a seamless cross-border remittance process.
NetRemit is a highly scalable solution that can handle transactions of any volume and is flexible enough to be customised for any currency corridor across the globe.
NetRemit comes with an intuitive admin centre allowing remittance providers to offer an easy onboarding process, handle customers & transactions data, and manage the entire remittance operations in a unified platform.
NetRemit has been white labelled to 4+ banks, serving 250K customers and handling 50 million GBP worth of transactions annually.
The contemporary infrastructure of NetRemit helps money to flow seamlessly between countries through technology innovations like digital identity validation and Open Banking integration.
NetRemit improves continuously through market adoption from a business and technology standpoint with our strategical goal of conquering the cross-border payments ecosystem globally by 2025.
To discover more about NetRemit, please click here.
What are cross-border payments?
Cross-border payments are cash payments in which the payer and recipient are in different countries. They include both wholesale and retail payments, as well as remittances.
During the pandemic, cross-border payment services saved many lives and enabled others, including small business owners, to pursue new opportunities. With immigration restrictions, more people send money overseas electronically, and many businesses have gone online, sourced international suppliers, and decided to embrace new ways of reaching customers all over the world.
Whether it’s a small business owner receiving payment from a customer on another continent or a migrant worker sending money home to family, increased people are making and receiving cross-border payments. People have understandably come to expect them to be as quick, simple, and dependable as domestic transactions.
There are several methods for making cross-border payments. Bank transfers, credit card payments, and alternative payment methods such as e-money wallets and mobile payments are the most common methods of transferring funds across borders at the moment.
Cross-border payments are categorized into two types:
- Wholesale cross-border payments: These are typically made between financial institutions to support the customers’ or the financial institution’s cross-border activities (such as borrowing and lending, foreign exchange, and the trading of equity and debt, derivatives, commodities and securities). Governments and larger non-financial corporations also use wholesale cross-border payments for large deals created by the import and export of goods and services or financial market trading.
- Retail cross-border payments: These are generally made among individuals and businesses. Person-to-person, person-to-business, and business-to-business are the three main types. They include remittances, most notably money sent back to migrants’ home countries.
What is the significance of cross-border payments?
40% of the people are sending and receiving more cross-border payments than before the pandemic. And most businesses planned to do more international trade in the future by capitalising on new opportunities and mitigating risk by not relying on a single supply chain or market.
Increased international mobility of goods and services, capital, and people have contributed to the rising economic significance of cross-border payments over the last few decades. Bank of England stated that the value of cross-border payments is expected to rise by more than $250 trillion by 2027.
Recent years have seen an increase in the following factors:
- Manufacturers expanding their cross-border supply chains
- International asset management and global investment flows
- International trade and e-commerce
- Migrants transferring funds via international remittances
These developments have expanded the market for cross-border payments, combined with the ability for end-users to have direct exposure to cross-border payment services that are as secure and efficient as comparable domestic services.
Remittances, in specific, are crucial in low and middle-income economies, and in certain cases are the prime source of development finance. Competitive interest in this market is also being driven by growth and revenue expansion. As a result, creative and unique new business models and participants are arising.
How do cross-border payments work?
Currency exchanges are closed-loop systems. Domestic payment systems are not conventionally tied directly with those of other countries, so the currency is not physically transferred overseas while transferring between two jurisdictions.
International banks, on the other hand, provide account regulations for foreign counterparts and maintain their accounts with their foreign counterparts, allowing banks to make payments in foreign currency. The funds are not transferred across borders; rather, accounts are credited in one jurisdiction and debited in the other. This interbank network is also used by Fintechs and money transfer agents to provide payment services to businesses and individuals.
International Wire Transfers:
An international wire transfer is a bank service that allows you to transfer money electronically from one bank account to another in another country. The average transfer time is 1-2 business days, with a cross-border fee. Because of the associated fee and the fact that routing rules vary by country, this international payment method is not suitable for large payment volumes or B2B transactions.
Credit Card Payments:
Consumers can use credit cards easily; all they need to do is enter their card information. Cross-border payments, on the other hand, necessitate the acquiring bank converting between the two currencies for the merchant with a merchant account. As a result, this method incurs cross-border fees at various points along the payment chain.
Bank Transfers:
International bank transfers allow money to be transferred from one bank account to another. Most international bank transfers are processed via the SWIFT network. The SWIFT network is a secure messaging system that ensures your payment reaches its intended recipient. One disadvantage of this method is that most banks only keep a limited number of currencies in stock. If the currency you need is not in stock, the bank will depend on their international banking partners to facilitate the transaction where more fees added in the conversion chain.
eWallet:
E-Wallet is also known as a digital wallet which is a software-based electronic payment method that enables customers to pay for online or in-store transactions. These are accessible via mobile or web apps on smart devices, where customers can securely store their payment cards. PayPal, Alipay, Apple Pay, and Google Pay are all popular eWallets.
Some eWallets enable customers to transact in multiple currencies and place orders across borders. Although wallet-to-wallet transactions do not technically qualify as cross-border payments, they do help to facilitate the transaction. A cross-border payment occurs when funds are withdrawn from an eWallet and transferred to the merchant’s bank account with origination and payment on contra currencies.
A period of transition, with international trade accelerating and customer, demands shifting.
Businesses are keen to capitalise on the potential benefits of cross-border payments. As a fintech industry player, we can build a simpler, less risky system that not only supports them but also boosts global trade and commerce – something critical as the world’s economies prepare for the post-pandemic era.
We’ve already seen a slew of payment-related innovations that are reducing complexity. Breakthroughs in networking technologies have sped up and streamlined processes and distributed ledger technology allows transactions to be recorded in multiple locations at the same time.
The world’s most vibrant financial markets are desperate to make progress in this area. The G20 nations have made improving cross-border payments as a priority, and the next steps on the roadmap will be laid out in 2022. Cooperation between national authorities and private sector providers will be vital to success, but the benefits of reducing complexity and increasing transparency are already visible.
Picking the right payment processing technology provider is the first step for success:
It is critical to find a global payments processor that accepts a wide range of localised payment methods. It is also critical to select one that accepts payments in multiple currencies. You can streamline the entire cross-border payment process, improve tax compliance, and payees will appreciate the simple registration process with a SaaS-based payment solution.
There are several crucial factors to consider before jumping on the mass global payments processing bandwagon.
How to find the right partner for processing International Payments?
It’s critical to understand your business’ needs: will you work globally and require cross-border payments, or will local currency suffice for in-country operations? Always remember that your service charges should be simple and affordable for customers regardless of where they are.
Once you’ve formed a partnership with a technical solution provider or payment processing companies, you must agree on how payments will be made. Several factors influence payment method choice, including:
- Your cash flow requirements(how soon can you make the payment?).
- The economic conditions in your country as well as the country from which you are sourcing.
- The nature of the product being sourced.
- Complicated banking systems.
- Adjustable currency conversion rates.
- Your creditworthiness; and
- Your requirement for the product.
Choosing a payment technology partner can be a challenging task. The only way to avoid getting lost in the sea of options is to first understand your company’s needs and how a chosen payment technology provider can meet them!
A sneak peek about our NetRemit – Cross border payment suite:
NetRemit is a secure online remittance product available as a web and mobile application with a user-friendly interface facilitating a seamless cross-border remittance process.
NetRemit is a highly scalable solution that can handle transactions of any volume and is flexible enough to be customised for any currency corridor across the globe.
NetRemit comes with an intuitive admin centre allowing remittance providers to offer an easy onboarding process, handle customers & transactions data, and manage the entire remittance operations in a unified platform.
NetRemit has been white labelled to 4+ banks, serving 250K customers and handling 50 million GBP worth of transactions annually.
The contemporary infrastructure of NetRemit helps money to flow seamlessly between countries through technology innovations like digital identity validation and Open Banking integration.
NetRemit improves continuously through market adoption from a business and technology standpoint with our strategical goal of conquering the cross-border payments ecosystem globally by 2025.
To discover more about NetRemit, please click here.
Modernise your Data Integration with Artificial Intelligence and Machine Learning
Do you agree with the fact that integration of proliferating data takes a prominent role in driving digital transformation?
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MG’s Value Proposition in Digital Banking – Seeing in a new light
Banking post-pandemic has profoundly disrupted and has pressed a reset button as 56% of the global population are intended to avoid branch banking. The new thinking to adapt to the new normal for the banking and financial services stipulated the digitisation of customer onboarding and deposit-taking.
A smooth customer onboarding journey is becoming the norm rather than a differentiator. Fenergo, a digital transformation fintech firm states that about 70% of the millennials demand a frictionless integrated onboarding experience across all banking channels and one in three (36%) financial institutions have faced customer abandonment due to inefficient onboarding. To support the market conditions, customer needs to be combined with cost-effective business operating model with an increased demand for digital interaction, banks are accelerated to invest in fintech solutions to avoid the tedious application process with an all-round service offering – fast processes – easy banking – any time and from anywhere.
Digital Customer Onboarding improves customer experience with intuitive navigation by aggregating their data to make the process smoother or even effortless. The digital platform provides reliable online identification services that help the banks to quickly verify the customer data and subsequently accelerate the customer’s access to the banking products and services.
Financial Institutions are striving hard to leverage innovative technologies ranging from Artificial Intelligence, Behavioural Biometrics to Machine Learning to improve their existing mechanism of data capturing, KYC validation and due diligence checks while onboarding the customer.
Robust eKYC Validation
Enhanced customer due-diligence checks using AI & ML techniques reduces KYC risks for the banks and real-time integration of eKYC offered by third party API Services along with customer onboarding workflow substantially improves the process of AML monitoring and fraud detection & control.
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AI-powered digitisation techniques entail the banks redesign the existing customer onboarding process and deliver high-quality products and services with minimal overheads optimising the onboarding time. Operational efficiency achieved through digital onboarding along with AI/ML-based Straight Through Processing (STP) eliminates manual data entry and processing errors with exponentially better customer service.
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