Long reads

The status of immediate cross-border payments

Abid Mumtaz

Abid Mumtaz

Commercial Lead, Wise

The speed of cross-border payments has never been more important, or more possible, than it is today. In an increasingly interconnected world, providing instant payments is critical to meeting the needs and expectations of customers and businesses alike. Banks and financial institutions who cannot meet those demands risk losing their business to competitors who can.

This is an excerpt from Future of Payments 2023.

While significant progress has been made both from an innovation and policy standpoint, there is still a long way to go to ensure immediate cross-border payments become the norm – not the exception.

Why do instant cross-border payments matter?

There are two main reasons why instant international payments are vital: customer experience and cost.

People’s lives move quickly – and so should their money. Customers have (rightly) become more demanding in recent years about the speed of international payments. As the competitive landscape of FX continues to grow, the fastest providers are likely to gain an advantage over others. At Wise, we have found that customers who experience instant transfers are significantly happier than those who have to wait for days. This makes sense – at any given point, customers’ main worry is ‘where is my money?’ a problem that can be solved by instant payments. This shows up in the numbers too; Wise customers who have experienced instant payments have recorded over 90 in their NPS.

Satisfied customers are more likely to be loyal to their current provider and continue to use their services in the future. They are also more likely to recommend the same service to others, which can help attract new customers and increase market share. On the other hand, customers who experience longer transfer times are less likely to return and use the same service again.

If this isn’t compelling enough, slow payments are also extremely expensive. Customers who experience longer transfer times are understandably much more likely to contact customer support to check on the status of their payment, which leads to an increase in support costs and a strain on resources. At Wise, we have calculated that the average industry cost of each customer contact is £50. Reducing contacts means that this money can be invested elsewhere into improving products and refining customer experience.

Progress, but not perfection

It’s clear that instant cross-border payments are essential for modern financial services. At Wise, speed has been one of our major focuses for the last decade. We have built an entirely new cross-border payments network which allows us to send money around the world faster and cheaper than traditional providers. In Q1 2023, 55% of payments made via Wise arrived instantly (in under 20 seconds).

We have been able to achieve this in part thanks to the number of instant payment networks and central banks we have integrated with, both of which increase the speed of payments made via Wise. Wise has obtained direct access to financial infrastructure in four markets: the UK, Hungary, Australia, and Singapore. To give just one example of how effective this has been, in the UK, direct access led to a 98% decrease in speed of payments, from 15 minutes to <20 seconds. Nonbanks can also directly join up to other schemes, such as PIX in Brazil.

Direct access to financial infrastructure in these markets allows Wise to bypass intermediaries and traditional correspondent banking networks. So, Wise can initiate and process payments directly through local payment systems, reducing the complexity of each payment and therefore improving the speed of transactions. This has had a direct impact on customers’ experience of sending money abroad, with over 93% of funds reaching their destination in <24 hours, and in 55% of cases, under 20 seconds, compared to the traditional banking system’s days or weeks.

This is to say nothing of the effect direct access has had on the cost of FX payments. By cutting out intermediaries, Wise can simultaneously offer more competitive exchange rates and lower fees on international payments for our customers. So, the streamlined process and efficiency gained from direct access to payment systems translate into cost savings that can be passed on to customers.

But this isn’t feasible everywhere, as not every country with an instant payment scheme allows direct access for nonbanks. This is sometimes due to regulatory limitations, security concerns, or a desire to maintain more control over the financial system. For example, FedNow in the US is currently restricted only to licensed banks in the region, which excludes smaller challengers from going toe-to-toe in the market without a sponsor bank – often a direct competitor – to facilitate faster payments.

Many of the concerns around opening up direct access are misplaced. By allowing non-banks such as Wise to directly access financial infrastructure, the systemic risk is reduced. Fewer non-banks cluster around the same banks, and consumers can benefit from faster, cheaper and more innovative financial services, including instant payments. It also mitigates the commercial and competition issues non-banks often face vis-a-vis their ‘sponsor’ banks.

There have also been efforts to push more banks and financial institutions towards offering instant payments from governments and international organisations like the EU, but thus far most have had limited impact. This is because the schemes that are introduced are often not mandatory to participate in, which means it’s easy for banks to drag their heels.

For example, in 2017 the EU launched the SEPA Instant Credit Transfer (SCT Inst) scheme as an initiative to facilitate faster and more efficient cross-border euro payments within the European Union. However, the voluntary nature of the scheme led to low uptake among banks. While SCT Inst aimed to harmonise payment processes and reduce transaction costs, banks were not compelled to participate, which limited its effectiveness.

This isn’t necessarily just because of a lack of interest, though. Part of the reason for the low uptake is that banks are operating with legacy infrastructure and systems that are not easily changed. Implementing the SCT Inst scheme required significant investments in upgrading technology and systems to meet requirements, and many banks were hesitant to incur these expenses on the basis of improvements to cross-border payments, particularly because most banks are predominantly focused on domestic transactions.

Many banks question whether instant payments solve a customer problem. Some have used the slow uptake to illustrate that point, failing to mention that in many cases instant payments are offered as a premium service. This discourages people from choosing instant, so we end up with a self-fulfilling prophecy. Without a regulatory push or compelling advantages, banks can be less motivated to invest resources and time into integrating schemes like SCT Inst.

Solutions

For schemes like SCT Inst to be successful, and for instant payments to be adopted across the board, policymakers and regulators need to get tougher on adherence. The European Commission submitted a proposal to introduce mandatory adherence to the SCT Inst scheme, both for sending and receiving instant payments. And in the US, conversations around opening up access to nonbanks are ongoing, though slow moving.

Embedded finance and as-a-service infrastructure also represents an opportunity for banks and non-banks alike wishing to speed up their international payments.

Significant progress has already been made when it comes to immediate cross-border payments, but there’s still a long way to go. Mandatory participation in instant payment schemes is a good start, while embedded finance provides a hopeful solution for banks and nonbanks who want to speed up cross-border payments without undergoing a major technical overhaul.

The world is only becoming more global. Enacting solutions that will enable immediate cross-border payments for every customer, no matter where they are in the world, has never been more important.

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