"Cross-border payments: challenges and trends"

The actual correspondent banking model does not meet every customers needs and, along with the growing volume of low-value cross-border payments, banks are found in the position to rethink their current approach to cross-border fund transfers. Given that alternative payment systems from non-banking providers flourish and a new distributed network model disrupts the existing international payments architecture, can banks find a one-size-fits-all solution for cross-border payments, or will partnerships among players become a clear market trend? This aspect is examined further in a new report from Aite Group, ‘Cross-Border Payments: Challenges and Trends’.

Globalisation is driving corporations to transact more frequently across borders and consumers are increasingly using ecommerce and m-commerce services for their overseas purchases as well. Demographic shifts and the growing number of people working abroad are other drivers that feed the volume of global payments and are generating a demand for fast, efficient, secure and transparent cross-border payment solutions.

Correspondent banking is still the primary channel to deliver cross-border banking services and remains an attractive business for banks. Profit is under pressure, however, as banks need to comply with more regulation and deal with increased competition. Financial institutions face a huge challenge in collecting accurate and complete know-your-customer (KYC) information. The activities around gathering and maintaining their counterparties data while addressing the different KYC regulations are consuming a great share of resources.

All the involved actors consider correspondent banking services, also known as international wires, to be slow, inefficient and expensive. This model was designed for high-value, highly secure payments, while todays payments are increasingly low-value, retail-oriented and generated by small and midsize enterprises (SMEs), and occurring between individuals and via mobile devices.

The correspondent banking models unsuitability to modern needs has led to the flourishing of alternative systems, which either maintain a central agent structure (e.g., the global Automated Clearing House [ACH] model proposed by the International Payments Framework Association [IPFA]) or disrupt the existing architecture and replace it with distributed networks (e.g., cryptocurrency networks).

Each alternative solution fits specific use cases. Aite Group forecasts that, to get the full benefit of different models, flourishing partnerships among players will be a clear market trend.

Cross-border payments will continue to be an attractive and profitable business for banks; global transactions keep rising in volume and value and are predicted to maintain this trend in the coming years. The Asia-Pacific region is the main contributor to this growth thanks to its significant increase in cross-border trade volume.

In addition, correspondent banking will also remain the prevalent model for B2B high-value payments underpinned by trade finance services. For high-value payments based on open account and low-value payments, corporations and SMEs are demanding traceability and predictability for the payment transactions.

About the authors

Christine Barry serves as a research director at Aite Group, focusing on the strategies and technology implementations of global banks of all sizes. Her recent research has addressed global cash management trends and technologies, capturing the valuable small-business customer, corporate mobile banking, the drivers of global core banking system replacement, remote deposit capture, and best-practices for community banks and credit unions.

Paolo Zaccardi is a senior analyst at Aite Group specializing in wholesale banking, global payments and innovation in corporate banking. Based in Rome, he is considered a trust advisor to corporate banks and payment services providers in Europe and brings a solid industry expertise to Aite Group’s Wholesale Banking practice.

About the company

Aite Group is an independent research and advisory company focused on business, technology, and regulatory issues and their impact on the financial services industry.