Cross-Border Payments: Its History, Challenges, And Future

Wednesday, September 22nd, 2021

When it comes to exploring the history of cross-border payments, we would need to start from the beginning. And that would be the barter system. Since the early days of long-distance trade, there was the need to exchange precious goods that could not be procured in one’s native land. 

People would travel lengthy distances in order to exchange valuable goods such as fabric, spices, and precious stones. This is the earliest evidence of exchanging value, marking the early beginnings of cross-border transfers. Named as such due to people physically moving valuable goods across many borders.

The Uprise Of Currency

With the availability of precious metals came the conversion of this material into primitive coins. This would be exchanged for goods and services.

Since different coins and currencies were made throughout many cities and countries, it was only natural that the next step would be the exchange of these currencies. Dating back to biblical times, money changers were available in markets in order to convert foreign currencies back to the local currencies to allow the purchase of goods and services in that specific market. All this was reliant on the physical movement of the currencies. 

The Beginning Of Banking And Wire Transfers

With the age of industrialization, it became more important to transfer funds between locations that were considerably far from each other. A former telegraph company by the name of Western Union, enabled the transferring of money through “wiring” to another location.

How it originally worked was that the sender would pay the funds in one office where the operator would send the message and wire the funds. The recipient in another office location would then collect that money.

Not long after this, banks adopted the wire method to transfer funds telegraphically from one location to another. This gave rise to the EFT (Electronic Funds Transfer). Remarkably, this option exists till this day as an option in banking apps. This is a good option if you need to transfer money locally.

The Challenges Of Cross-Border Payments

Fast forward to today, consumers no longer have to wait for days for funds to be deposited into a recipient’s account. Thanks to innovations in fintech, cross-border payments are no longer slow or costly. 

The most common ways of initiating cross-border payments include credit card payments, bank transfers, and Alternative Payment Methods (APMs).

No new technology is without its share of challenges and cross-border payments are no different.

Here are some hurdles that it is up against:

• Customer Expectations Differ

Customer expectations on what makes a great cross-border payment transaction varies widely by the country. What’s priority for a customer in Japan might not be so much for a customer in Canada. Same day payments in the cross-border platform is rare, the lack of transparency and cost is also an issue. It is normal that consumers want to know the cost before making such a transaction.

• Financial Inclusion Lacking

Cross-border payments are not financially inclusive to some individuals. This is especially true in countries where access to a bank account is quite low. As a result, not everyone will have access to making cross-border payments. 

• Fraud Is Widespread

Banks are still learning to balance between over-verifying a customer’s credentials and not verifying enough. The customer’s experience is of prime importance, so much so that some institutions are sacrificing data. Usually, the higher the transaction, the more due diligence is required. The issue stands that fraud continues to be a global problem.

Looking Towards The Future

Fintech companies are ushering in a new and improved era for cross-border payments. What they have contributed has included international transactions that are 100% digital, quick, cost-effective, compliant with regulations, and transparent. 

Through the use of forward-thinking business models, suitable APIs, and Swift GPI, cross-border transactions will overcome the current barriers.