Cross-border payments are a vital part of the globalized economy, transferring trillions of dollars between countries each year. These transactions span traditional methods such as bank transfers and credit card payments, as well as emerging alternatives like digital wallets and mobile payment solutions. By 2030, Javelin Strategy & Research estimates that the market will grow to nearly $3 trillion.
By definition, cross-border payments exist outside the purview of a single currency or national regulatory framework. Each transaction involves multiple currencies, different financial systems, and varying regulatory schemes. Additionally, they are subject to currency fluctuations, international trade laws, and compliance standards, which collectively make the process more cumbersome and time-consuming.
Businesses that have evolved to meet the need for cross-border money movement are equally complex. These international payment systems include federal governments, consortiums established by major banks, international nonprofits, and traditional card networks like Mastercard and Visa.
Today, there are 0.7 annual cross-border transactions per capita on average globally, up from 0.5 in 2014. Although cross-border flows represent only one-sixth of total transaction values, international payment revenues total up to $200 billion globally, split roughly evenly between transaction fees and foreign exchange (FX) revenues.
These payments not only fuel global commerce but also provide benefits to all types of economies.
Let’s explore the latest insights into the contemporary world of global cross-border payment solutions, including key trends, challenges, and the emerging technologies transforming international transactions—and how individuals, businesses, and financial institutions can benefit from them.
Cross-Border’s Major Players
The most important facilitators of cross-border payment have traditionally been organizations established by major banks and national governments, working together to facilitate a smoother global economy. The primary ones include:
- SWIFT (Society for Worldwide Interbank Financial Telecommunication), a trailblazer in this area, is the most widely used network for international payments, providing a standardized messaging system for financial transactions between banks worldwide.
- The Single Euro Payments Area (SEPA) is a European Union initiative that simplifies bank transfers denominated in euros, promoting faster and more cost-effective transactions within Europe.
- The Clearing House Interbank Payments System (CHIPS) is a U.S.-based clearinghouse that handles large-value cross-border dollar payments.
However, a challenge to the hegemony of these players is coming from a more established segment of the financial landscape. Traditional card networks, including Visa, Mastercard, American Express, Capital One, and Discover, have been elbowing their way into cross-border transactions. Through their existing global networks—historically used for consumer transactions—they are capturing an ever-growing share of the vast cross-border market.
Mastercard and Visa, specifically, are hedging their interests in retail payments across many EU markets, while American Express has long been a leader in corporate relationships—a natural landing space for cross-border transactions. Although transaction amounts on the card rails are relatively low compared to those conducted over SWIFT, they will continue to grow and gradually chip away at large capital purchases that are currently almost entirely completed via wire transfer.
It’s important to note that the card rails won’t simply watch their revenue stream erode due to the rise of instant payments.
Visa and Mastercard have been able to navigate the regulatory landscape that allows them to process payments overseas and settle them without relying on correspondent banking. The rails themselves have become more sophisticated in their ability to handle cross-ocean or cross-continent payments.
While it’s still early, time will tell how the card networks become involved in cross-border and instant payments. Eventually, India’s UPI, Brazil’s PIX in Brazil, as well as FedNow and RTP in the U.S., could become the primary route for these payments.
Key Growth Factors in Cross-Border Payments
The old system for making international payments was the correspondent banking model, composed of the largest banks in the world. This network of large legacy banks relies on one another to transact across borders.
For example, if someone in the United States wanted to buy an airplane from a seller in the Emirates, they might contact JPMorgan Chase. JPMorgan can then process the payment, through the SWIFT payment rail, to the bank in the Emirates that the seller uses.
But this model has been under pressure as the market grows. Over the past decade, the volume and value of cross-border payments have increased by 61% and 37%, respectively, according to the Bank for International Settlements Committee on Payments and Market Infrastructures. The Faster Payments Council has outlined five key developments that were responsible for much of that growth in cross-border payments:
- In 2017, Swift introduced its Global Payments Initiative (GPI), allowing financial institutions to send and receive funds quickly and securely anywhere in the world. GPI also allowed for full transparency in the status of a payment at any given moment. By working together to strengthen the SWIFT network, banks can help ensure that clients receive a consistent and value-added global payments service. They can also pave the way for fast, traceable cross-border payments.
- The global standard ISO 20022 became a reality for SWIFT member banks in March 2023. It established a common language to both send and exchange payment data, enhancing the current interface within companies, payment schemes, and financial institutions worldwide. ISO 20022 offers enriched payment data, enabling more robust fraud controls, behavioral predictions, and more resilience.
- Distributed ledger technologies, which blockchains are made from, facilitate payments by providing a secure and transparent platform for the transfer of funds. Blockchain is particularly well-suited to cross-border payments, where numerous intermediaries are involved in processing transactions, and continues to drive technological innovation.
- Application programming interfaces (APIs) allow applications to communicate with each other, offering more accessible, transparent, affordable, and faster cross-border payments. APIs facilitate faster and more efficient cross-border payments by reducing manual intervention and supporting more timely data exchanges across the payment chain.
- Central bank digital currencies (CBDCs), digital versions of a country’s fiat currency, allow for faster, cheaper, and more secure payments compared to traditional methods. Digital currencies and tokenized assets have immense potential to alter the global cross-border payments landscape by making it faster, cheaper, and more secure.
Challenges and Solutions for Cross-Border Payments
Many challenges remain for organizations trying to build a fluid system for cross-border payments. Perhaps the most significant of these is the currency fluctuation inherent in these transactions.
Exchange rate fluctuations can create uncertainty for businesses and individuals. Instant payments, which have the potential to clear and settle within 20 seconds, can help reduce this uncertainty.
A 24-hour window to complete a transaction gives both national currencies the chance to fluctuate in value, making the settlement cost a moving target. With instant payments, traders can almost pinpoint exactly what the exchange rate will be.
Companies today use several tools to help mitigate that risk. For example, natural hedging involves an organization holding funds in a local currency in case they need to make a payment in a foreign currency. Other types of currency hedging can lock in rates for a fee. Bringing instant payments to cross-border transactions, as several blockchain experiments have shown, would eliminate the need for these techniques.
Other challenges facing cross-border payments include:
Regulatory barriers: Differing regulatory frameworks, anti-money laundering laws, and Know Your Customer requirements can complicate sending and receiving international payments. While essential for preventing fraud and ensuring security, these regulations can be burdensome, especially for underbanked regions where individuals may lack the documentation or financial literacy to comply with stringent requirements.
High transaction costs and fees: These costs include currency conversion fees, intermediary bank charges, and compliance-related expenses, which collectively reduce the net amount received by the beneficiaries.
Slow processing times: With multiple intermediaries, different time zones, and varying banking systems, cross-border payments can be unpredictably slow. This can affect an organization’s cash flow for businesses and cause headaches for those expecting the payment.
Fraud: With international payments,the physical distance between criminals and their victims significantly lowers the chances of perpetrators being caught, and victims have limited options for recourse after being defrauded. While only representing 11% of total card payment transactions, cross-border payments account for 63% of card fraud.
Lack of transparency: It can be difficult to get reliable information on transaction fees, exchange rates, and processing times, lack of visibility into these factors can make it hard for business to choose the right option.
Emerging Technologies and Innovations in Cross-Border Payments
One reason cross-border payments are evolving away from the correspondent banking model at such a rapid pace is technological innovation. Some of the most important recent developments that are affecting this landscape include:
Blockchain/Tokenization
Blockchain’s potential to reduce fraud, lower transaction costs, and increase transparency is particularly beneficial for cross-border payments. Cryptocurrencies operating on blockchain technology offer an alternative to traditional fiat currencies, enabling peer-to-peer transactions without intermediaries. While this can significantly speed up transactions and reduce fees, the volatility of cryptocurrencies and regulatory uncertainties pose challenges for their widespread adoption in commercial payments.
The blockchain has the potential to bypass the traditional correspondent banking model. Theoretically, individuals do not need to be banked to use the blockchain, which democratizes cross-border capabilities.
Tokenization—the process of creating digital tokens, such as cryptocurrencies, on a blockchain to represent assets, including financial instruments—offers several benefits. These include greater simplicity within the financial system, faster settlement, and a potential reduction in fraud. It represents a more efficient and transparent approach to value movement than the methods banks currently employ.
Several organizations are exploring tokenization as a way to enhance the speed and integrity of cross-border payments. Among private banks, UBS, JPMorgan Chase and Citi have all made forays into this arena.
A number of governmental entities are also dipping their toes in this space. For instance, the Federal Reserve Bank of New York, along with six other central banks, has teamed up with the Bank for International Settlements (BIS) to test the benefits and utility of tokenization. Operating under the name Project Agora, the collaboration intends to ease international payments while addressing differing legal, regulatory, and technical requirements.
Central Bank Digital Currencies (CBDCs)
The increasing popularity of cryptocurrencies has prompted central banks and financial institutions to explore the potential of CBDCs as a way of increasing the efficiency of cross-border payments. These digital currencies, backed by the central banks, offer the benefits of cryptocurrencies, such as faster transactions and increased transparency, while retaining the stability and regulatory oversight associated with traditional fiat currencies.
A report from The International Monetary Fund explores how new platforms for CBDCs can improve cross-border payments. IMF’s blueprint foresees the ongoing digitalization of the financial sector, providing a framework for countries to leverage the advantages of digital currencies in a regulated environment.
While IMF’s vision aligns with the digitization trend, it also represents a departure from the decentralized nature of cryptocurrencies. The envisioned global CBDC platform, while efficient and cost-effective, does not fulfill the aspirations of crypto enthusiasts seeking a decentralized financial system. It may, however, provide benefit, without much of the risk that has plagued cryptocurrency exchanges.
Card Companies
Existing credit card companies’ payment rails can also be seen as a growing technology. Visa, Mastercard and American Express have a presence in 200 different countries, allowing U.S. consumers to buy products from India or China without realizing a cross-border payment is involved.
For larger entities, Visa’s B2B Connect has been offering cross-border commercial services for some time and was recently joined by Mastercard Move Commerical Payments. Their inroads into the commercial payment business have grown substantially over the past two to three years.
Nonprofit Consortiums
Because cross-border payments fall under the regulatory structure of multiple governments, it’s common for international consortiums to spring up, often consisting of major banks that band together to facilitate such payments. This label applies to the entities formed by the banks mentioned above, as well as initiatives like Project Agora.
Another example is the Interledger Foundation, an organization advocating for an open and interoperable payment network. It has worked with fintech Chimoney to facilitate cross-border payments in 130 countries, and extended these capabilities to rural Mexico through a partnership with the People’s Clearinghouse, a tech platform serving community banks and credit unions in Mexico. For remote corners of the world teeming with underbanked or unbanked people, nonprofits will play a key role in unlocking secure and reliable cross-border transactions.
Future Outlook in Cross-Border Payments
Efficient, reliable cross-border payments are a necessity in a truly globalized economy. U.S. consumers can now make digital purchases from distant locations without ever considering how the transaction is processed. The traditional correspondent banking model is ill-suited for handling the sheer volume of fast-paced, relatively small-scale transactions. As is often the case, commercial interests will drive technological advancements, while government regulations will aim to foster innovation rather than impose undue restrictions.
Cross-border payments have never been more important, even for small retail outlets. Take the example of a mom-and-pop necklace shop in Bali that doesn’t have a bank account but likely has a phone. That smart device could receive payments from anywhere in the world through blockchain technology. This innovation could enable small businesses to operate like Fortune 500 companies, extending their supply chains globally.
Advances in global cross-border solutions are likely to accelerate over the coming decade, driven in part by three factors:
New competition: The credit card issuers’ payment rails are just one means of bringing new players into the cross-border arena. Central banks around the world have also been working to foster global money movement, as well as quasi-governmental organizations like FedNow. The increasing number of cross-border payments is likely to bring even more entrants to the field.
Technological innovation: Blockchain technology has the potential to revolutionize global payments 15 years after it was first introduced. The next 15 years promise developments that are barely being dreamed of today.
Nonprofit initiatives: There is both a moral and an economic incentive to bring payments to the far corners of the globe. As more business entities recognize the value to reach the underbanked, the more payment options will proliferate in these areas.
Cross-border payments will continue to accelerate, both in the number of transactions and the volume of purchases. It’s inevitable that more options and opportunities will emerge to meet these growing needs.
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