Long reads

Cross-border payments: How innovation can emerge from chaos

Sinead Fitzmaurice

Sinead Fitzmaurice

CEO, TransferMate

It is an immutable rule that no matter how neatly you put a bunch of wires into a drawer, when you take them back out in the future, they will have become entangled. You could lock the drawer with a key, put up a forcefield around the house, and you would still find yourself disentangling those Christmas lights a year later.

An actual law explains why this happens: entropy, which says all things tend towards disorder and chaos. We can see this everywhere, and a perfect example of it is in the global economy. No matter what controls governments and businesses try to implement to prevent disorder, economic crashes are inevitable.

Most reading this will have worked through 2008, which will hopefully be the most significant crash we experience, but the economy today is showing all the signs of more disorder to come. First Republic Bank, Silicon Valley Bank, and Signature Bank are the 2nd, 3rd, and 4th biggest banking collapses in U.S. history, respectively, and they all happened in the first half of this year.

Larry McDonald, one of those that predicted the subprime mortgage crisis way back in 2005, wrote in March 2023 that “US stocks could plummet as much as 30% over the next two months” based on his set of 21 systemic risk indicators.

Businesses around the world are reflecting this economic uncertainty. The tech world, in particular, has seen swathes of job cuts, with nearly 350,000 layoffs in the U.S. alone in 2022 and 2023.

While this seems a gloomy outlook, there are always two sides to the coin when a crisis arrives. While we cannot prevent chaos, we can create great things out of it. We are innovators, and businesses can take advantage of plenty of innovations out there to weather this next crisis.

Innovation out of a crisis

While entropy is one of those all-powerful forces of nature, when it comes to humans, there are very few forces more potent than inertia. It means that we do so many things today because it is the way we did them yesterday.   

In the payments sector, inertia is possibly the greatest barrier to innovation. People walk into their jobs, see the process in place that uses the traditional correspondence banking system, and continue along that path.

Usually, only a crisis forces us to break the mould.

What changes will this financial upheaval bring to the payments sector specifically? Will businesses around the world change how they make international payments? To begin answering these questions, we should look at what happened in 2008.

How the 2008 financial crisis changed the payments sector

Let’s start with the answer – the 2008 crisis didn’t change how businesses made payments internationally. In simple terms, the technology and infrastructure was not there to present a viable alternative for businesses.

What the financial crisis did create was a favorable environment for fintech companies to emerge and grow. The crisis exposed vulnerabilities and inefficiencies in traditional financial systems. This, in turn, created an opportunity for fintech companies to offer alternative solutions that were perceived as more transparent, efficient, and accessible.

Following the crisis, there was a surge in investment and funding for fintech start-ups. According to a report by KPMG, global investment in fintech companies reached $19.1 billion in 2015, up from $1.8 billion in 2011. That figure rose to $164.1 billion in 2022.

However, when we take a step back, the vast majority of international payments still went through the traditional banking payment rails using services such as SWIFT.  

We can then say that while 2008 didn’t change how businesses paid internationally, it laid the groundwork for the infrastructure and technology that would allow businesses to do so.

The alternative global payments infrastructure is now a reality

The payments landscape is very different now than it was 15 years ago. Over the past decade and more, fintech companies have built up an alternative global payment infrastructure to rival the traditional banking one.

They have accomplished this by acquiring banking licenses for individual countries and then combining them into a single, integrated, and global network, then using technology to create easy-to-use platforms businesses can use. This resulted in more cost-effective, quicker, and more transparent payments, all in a fully regulated ecosystem.

Even before any global crisis arrived, this meant businesses were already moving to this alternative method. In a 2023 report by Flagship Advisory partners, they expect the banking sectors’ share of B2B cross-border payments turnover to decline from c.80% to c.63% over the next five years.

On the surface level, the cost has been driving a lot of this adoption.

In the same report, average bank charges on SWIFT-based international payments have dropped from 3.40% to 2.50% from 2017 - 2020 but still lag far behind the average fintech charge for the same service.

Any financial crisis will bring the cost conversation right to the very top of the agenda for any leadership team. With payments, there is the potential for businesses to save a few percentage points on every one they make, as well as using technology to cut the time it takes to process payments, freeing up significant potential for extra productivity in their finance teams.

With economic uncertainty rife and with a mature alternative global payments infrastructure and technology now available for businesses, this might well be the period where the inertia spell around the traditional correspondent banking system is broken.

Of course, the cost is nothing without a sustainable, secure service underpinning it, and the successful fintech’s have been the ones who put compliance and regulation at the center of their offering. This has led to much collaboration with the traditional banking sector, co-building products and services for customers, and driving adoption of the fintech payment infrastructure even more.

Collaboration is a central point, if not the central point, on what is to come.

The joining together of fintechs and banks has been a revelation in recent years, with both sides realizing the exponential value they can create by combining their capabilities. With Open Finance collaborations, many businesses will begin adopting the fintech payments infrastructure without even realizing it, benefiting from the services without having to break through that inertia.

Due to this confluence of factors, the global fintech market is projected to grow at a compound annual growth rate of 16.8% between 2023 and 2028.

The future is clear (kind of)

No one can predict market movements with true accuracy – we can only look at trends and extrapolate from there. There are too many competing forces in the world to align in the mind’s eye and see what comes next amongst the chaos. What is clear is that the twin forces of financial uncertainty and the groundwork laid by fintech’s since the last financial crisis will allow businesses to do things differently.  

When we open the drawer marked ‘international payments’ over the coming years, what we will find is bound to be complex, but now we at least have new tools to disentangle the disorder.

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