In partnership with Banking Circle, the next generation tech-first payments bank. Learn more. Fintech/Analysis/ How close are we to frictionless international payments? Enabling frictionless and instant payments anywhere in the world is surprisingly difficult By Sifted 18 July 2022 In partnership with Banking Circle, the next generation tech-first payments bank. Learn more. Fintech/Analysis/ How close are we to frictionless international payments? Enabling frictionless and instant payments anywhere in the world is surprisingly difficult By Sifted 18 July 2022 High costs, slow speeds, sprawling networks and poor transparency make international payments notoriously inefficient. According to the Bank of England, some foreign transactions can take as long as ten days and cost up to 10% of the transfer value. But resolve some of these legacy issues and there’s much to gain. A recent report by Boston Consulting Group puts the value of cross-border payments more than $250tn by 2027 — up from $150tn in 2017. That’s a rise of more than $100tn in just ten years. So how close are we to frictionless international payments? We asked the experts what roadblocks are remaining and how smoother cross-border transactions will affect both startups and the global marketplace in the future. What’s holding us back? Søren Mogensen, chief growth officer at Banking Circle Group, which includes Banking Circle, a tech-led payments bank specialising in B2B banking solutions and international payments, says the major challenge today is the correspondent banking system. That’s where one bank gives services to another bank, usually in another country. “Countries and jurisdictions have different conventions for data format and storage. Harmonising these requires manual intervention” “Every transaction on the correspondent banking system must go through the main banks before it can reach the final beneficiary and each bank needs to do its sanction screening and monitoring, which costs time and money,” says Mogensen. “This fragmentation means that often the money doesn’t get there, or half gets there, or it comes back to the sender.” Lewis McLellan, editor at the OMFIF Digital Monetary Institute, an independent forum for central banking, tells a similar story. “Countries and jurisdictions have different conventions for data format and storage,” says McLellan. “Harmonising these requires manual intervention. Similarly, there are different standards for data protection, such as AML (anti-money laundering) and CFT (combatting financial terrorism) controls that require processing at both ends of the transaction, or by correspondent banks in the chain.” McLellan adds that banks may also have different operating hours and work across different time zones, which can slow the process. Smarter, faster, better? To sidestep some of these issues, neobanks and other financial institutions have entered the payments space promising to make cross-border banking smarter, faster and better. “As Banking Circle has its own banking licence, we are building our own access to major currencies, and as we bring that access together on the same platform — with the right tech, anti-money laundering controls and the right data management — we can deliver frictionless international payments that are near real-time and low cost,” says Mogensen. Other businesses looking to revolutionise cross-border payments include UK-based fintech Leatherback, which raised a $10m pre-seed round in April 2022 to expand its solutions across South Africa, Egypt, Uganda, India and the UAE. And payment services can be particularly useful for fintechs yet to receive financial licences — something that Banking Circle offers. “Banking Circle Group can deliver Banking-as-a-Service for non-licence-holding businesses,” says Mogensen. “Most recently Juni, the Nordic fintech that grew its team by 644% last year, has benefited from that as they wait for their licence to go live.” A mobile revolution Smartphones are another key driver towards frictionless international payments. “The mobile payments revolution began in the UK about ten years ago when Barclays introduced PingIt, an app that enabled the ability to transfer money from one person to another with a minimum amount of friction,” says Mogensen. “Since then, we’ve seen similar offerings in just about every European country, spreading either in the shape of P2P (peer-to-peer) solutions or P2M (peer-to-merchant).” But while this has helped improve domestic payments, he says cross-border payments still fall short. “European Mobile Payment Systems Association (EMPSA) employs a technology it calls ‘The Bridge’, which links together different members to enable frictionless international payments” One initiative that is helping broaden the scope of mobile payments is the European Mobile Payment Systems Association (EMPSA). It was founded in 2019 to unite payment methods across the European continent, and today it links 15 mobile payment systems, more than 90m mobile payment users and hundreds of banks. “EMPSA employs a technology it calls ‘The Bridge’, which links together different members to enable frictionless international payments,” says Mogensen, adding Banking Circle is helping the initiative with its tech. “We are very excited to be able to help them in achieving this new cross-border mobile payment system,” he tells Sifted. “Because effectively it will become a new European payment method.” Whether EMPSA does become the de facto payment method in Europe or not, many fintechs and neobanks are making good use of the digital infrastructure offered in the mobile payment ecosystem. Crypto to the rescue? Cryptocurrency and public blockchains also offer near-instantaneous transactions. But to send cash across borders, users need to access a crypto exchange to exchange fiat for crypto, send said cryptocurrency to the recipient’s crypto wallet and then exchange it back to fiat — hardly a frictionless experience. “Technically, cryptocurrency can be transferred internationally without friction,” says McLellan. “However, the absence of the AML, CTF and KYC checks means that it does not represent a viable alternative payment mechanism for international business.” Because of this, many countries are researching or piloting central bank digital currencies (CBDCs or government-backed digital tokens that are the digital version of their fiat currency) to harness the speed and frictionless nature of cryptocurrencies, while still providing much needed checks and balances. A frictionless future is key to global trade Mogensen tells Sifted, optimistically, that more and more payments in the future will be account-to-account based, no matter the location. But, he says, the current inefficiency in frictionless international payments is hampering startups, global trade and ecommerce — once we improve these inefficiencies and reduce friction, we’ll encourage more efficient international trade. “The value lost to payment processors can be spent on capital investment, job creation, research and other more productive things” McLellan paints a similar picture, saying that friction in payments helps no one except the businesses that extract revenue from processing payments — and the sooner that stops the better. “If a system can be devised where international payments can be sent instantly, securely and cheaply, then the value lost to payment processors can be spent on capital investment, job creation, research and other more productive things,” he says. “It will also lower the margins on international trade, opening markets that would previously not have been economically viable.” In partnership with Banking Circle, the next generation tech-first payments bank. 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