An overview of the fragmented world of cross-border payments

Introduction

I’m a Banking & Payments Consultant and part of what I do is travelling. A lot. And within these travels or escapades as I lovingly call them, I get to do a lot of field research and meet with thousands of people. I enjoy observing them, asking them questions, understanding how they interact with money. What is money to them? How does it revolve around their lives? How do they spend it? etc.

I’ve done this from rural shanty towns outside of Dar-es-Salam in Tanzania, to the posh locale of upscale hotels in Paris and everything in between. I’ve seen how money moves and it fascinates me.

Why are we going to discuss money today?

Because I feel it is essential to understand how it flows around the world and around us, because this is why a large majority of us get up in the morning for and work pretty much all our adult lives to earn it. That makes it pretty darn important. Sure you can say you also get up in the morning for water, but water is a natural resource, money is not.

If banking is to be considered a single payment system, then today, there are about 1,900 (give or take) payment systems in the world. Banking, PayPal, Paytm, Boleto, bKash, CUP, AliPay, SEPA, etc. to name a few.

Less than 3% of them are connected (with two hops or more). Less than 1% are connected with single hops. All the world’s data networks are connected and talk to each other. But not so with money. Money as email, email as money. It is amazing that we can walk into a room and with absolute confidence exchange cards, for we know we can send an email to the counterpart. But when it comes to money, we cannot be sure.

Allow me to demonstrate. Ask yourself these questions and you will soon enough realize what I am referring to:

I’m pretty sure if I asked for a show of hands, you would put your hand up.

You don’t think about it right? An email is an email. At the end of the day you just send it.

I am pretty sure if I were to ask you, you’d shrug! You just don’t think about it. It just gets there.

Preposterous you say! And I agree. That would be totally unacceptable.

Well, that is how money behaves. Below I have stressed some of the feelings the current fragmented cross-border money transfer system generates to the senders and recipients:

If I have to pay you, I am extremely conscious if the payment is going to be local or foreign;

I am extremely cognizant that the payment mechanism has to be one that matches yours, or else the money will not get there;

I am even more concerned about how much it will ‘cost’ me to send money across;

I am worrying about when will the money get to the recipient and how much will it get there.

Don’t you think it is kind of strange that I, without much of an effort, can send an email to each and every one of you reading this article, but not money! Think about that for a minute or two.

Sending money to Santiago, Chile

If I have to send an email to someone in Santiago, Chile, I don’t for one second consider whether my email can go there. I don’t doubt my internet provider or call them to ask about it. Hold on to that thought and we will be right back at it.

Cash versus electronic payments

How does money move globally today is interesting to understand. In most cases, there is a charge to move money amongst different systems. For example, if I have a 100 Dollar note, I can exchange it back and forth all day long and one of us will still have a USD 100 note. (I learned this from Ben Milne, CEO of Dwolla’s personal blogpost Generally Obvious Things About Real-Time And USD 0 Transactions).

If I were to do this electronically, I would pass it on to you, you would have USD 97 and when you pass it back to me, I would have USD 97 - 3% and so on and so forth. We can only do this back and forth 79 times before it goes to zero.

This is why there is a strong lobby to go cashless, so that electronic money can be shaved off more efficiently and on MORE money. By more money I mean, more money comes under the umbrella of electronic money. i.e. on monetary transactions that are outside the digital money circle.

Bitter example of email when moved as money

Now coming back to our example of the email, here is how the email would look like if I were to take the analogy from cross-border payments.

You have an important email to send:

You don’t know if you can even send it across to the person who needs it;

You will have to call your provider and find out if it is possible;

In some cases you might have to go to the provider’s office and fill out some paperwork to send the email across;

There is a charge to it;

You don’t know ‘how many words/characters’ will be received on the other end;

There is also a minimum number of words to send across;

You also cannot tell your colleague when the email will arrive.

So the email arrives after 3.5 days.

Alternatively, the recipient gets a call that an email has arrived for them. Great! So what’s the problem?

Well it turns out, the receiving email provider and also an “in-between” email service provider decided to take a cut!

This is the reality if emails were ever treated like money. We’d be up in arms! To sum it up, moving data has no issues, but moving value does.

About Faisal Khan

Faisal is the CEO of a consulting boutique that provides banking & payments consultancy to both incumbents and startups. He has vast experience in cross-border payments, digital banking, and mobile payments/commerce.