Cross-border payment challenges for non-EU countries in Europe and future regulatory changes

Ognjen Vlačina, Payment and Checkout Leader at IKEA South-East Europe, elaborates on the main cross-border payment challenges encountered in non-EU countries in Europe and future regulatory changes

In the past two years, partly due to the COVID-19 restrictions, ecommerce transactions in retail registered an overall increase compared to in-store transactions. Of the total share of ecommerce transactions with omnichannel, global retailers reached 30 or even 40% and more, compared with the beginning of this period, when it started at 5 to 20%, depending on the market and other influencing factors, such as the type of goods, pricing, logistics, the capacity of the retailer, delivery network capabilities, and so on. 

Furthermore, experts predict that nearly 20% of all ecommerce transactions will be cross-border by 2023. This is leading us to the conclusion that cross-border transactions will become more and more important and interesting for merchants, banks, and fintechs. 

Some perspectives 

In peripheral European countries that are outside the European Union (like Ukraine, Serbia, Montenegro, Bosnia and Herzegovina) interchange fees from the main card network players are not strictly regulated, and they are significantly higher than in the European Economic Area (EEA). Additionally, there are other corresponding fees (FX conversion, account maintenance, etc.) to be considered. What does this mean, practically? The average cross-border ecommerce transaction for one of the above-mentioned markets is sometimes 2.5 times more expensive than a regular, local transaction with the same card network! 

As an illustrative example, if your overall annual turnover is EUR 60 million, and in two years you reach 30% of the ecommerce turnover out of the total market turnover (and you started with 10%), your fee expenses will increase to EUR 276,000 in the above-mentioned markets – instead of EUR 50-100,000 in the EEA. So, the conclusion is overwhelming – markets with less purchasing power have more burdening cross-border payment fee expenses. In practice, this usually translates to higher product/service prices for the end consumers. 

In addition, national diaspora/economic migrants are further fuelling this trend by using this payment channel to transfer money to relatives in their home countries. Research shows that annual diaspora remittance to Bosnia and Herzegovina is at EUR 2.5 billion – around 14% of the country’s annual GDP. 

Having this in mind, as well as the slow speed of cross-border transactions and their transparency and accessibility, there are many opportunities for business disruption in this payment market niche. We expect to see some substantial changes coming very soon from agile fintech’s or even from instant payment initiatives such as Immediate Cross-Border Payments (IXB), which aims to speed up cross-border money transfers – currently under POC development and for which EBA CLEARING, SWIFT, and The Clearing House (TCH) have joined forces. For now, big merchants could consider solutions like Dynamic Checkouts or similar technologically advanced solutions to optimise this payment market niche. 

Regulators 

In line with this unavoidable trend, there is finally a strong and comprehensive response from global regulators, summarised through the Financial Stability Board (FSB) progress report. It was issued in October 2021, and it summarises progress during the first year of the G20 Roadmap for enhancing cross-border payments, under the wide-ranging and interconnected set of initiatives. Simply put at the international level, the FSB coordinates the work of national financial authorities and international standard-setting bodies. This is needed for the qualitative development and promotion of effective policies for the financial sector, especially when it comes to regulation and supervision. Two of the four main challenges that were identified in this space are the high costs and the low speed of cross-border transactions, while other complex topics worth mentioning include KYC and AML, harmonising API protocols, formatting payment messages, liquidity challenges, and so on. 

The Roadmap, developed by the FSB in coordination with the CPMI and other relevant organisations, contains five focus areas, illustrating the payment complexity we are living with: 

• focus area A: committing to a joint public and private sector vision to enhance cross-border payments; 

• focus area B: coordinating on regulatory, supervisory, and oversight frameworks; 

• focus area C: improving existing payment infrastructures and arrangements to support the requirements of the cross-border payments market; 

• focus area D: increasing data quality and straight-through processing by enhancing data and market practices; 

• focus area E: exploring the potential role of new payment infrastructures and arrangements. 

Source: CMPI

Of course, there are other ongoing, correlated topics such as cryptocurrency payments and central bank digital currencies (CBDCs) for cross-border payments that complicate the game for regulators. However, ordinary people and merchants do not see these aspects. They only have the consumer/merchant perspective of financial services and the price to be paid. 

Conclusion 

All the developments noted above will hopefully have the expected results on the global cross-border payments market, while also bringing inclusion to smaller or peripheral markets when it comes to extremely relevant topics, such as fee structure and accessibility. 

To conclude, if the FSB’s goals encompassed in the final report that addresses the challenges of cross-border payments on a cost/fee level and structure are fulfilled, the merchant from our illustrative example presented above would save annually more than EUR 160,000 in fees and would be able to invest this amount in other areas. Wonderful, isn’t it? 

This editorial was first published in our Cross-Border Payments and Ecommerce Report 2021–2022, which taps into the fast-growing cross-border market and provides a comprehensive overview of trends and developments that are pivotal in this space, being the ultimate source of information for ecommerce businesses interested in expanding globally. 

About Ognjen Vlačina 

With over 15 years of experience in retail, banking, and the financial industry, Ognjen is a passionate payment leader at IKEA South-East Europe, breaking the payment dogmas, listening to customers’ needs, participating in setting global payment trends, and creating a positive payment experience. Expertise mostly in multichannel payments, new projects implementation, collaboration with PSPs, commercial banks, and payment networks. Advising stakeholders on the ever-changing and complex payment ecosystem. 

About IKEA 

We share IKEA’s vision and values, and the IKEA culture established by our founder remains at the heart of everything we do. Since Ingka Group was founded, we’ve brought the IKEA brand to 32 countries and millions of homes. As we grow, we make it easier than ever before for more and more people to afford a better life at home.