Voice of the Industry

The untapped potential of digital money in cross-border payments and trading

Wednesday 27 January 2021 08:31 CET | Editor: Alin Popa | Voice of the industry

The Paypers' Mirela Ciobanu dives deeper into how digital money can affect cross-border payments, and the challenges merchants have to face when trading internationally

Noticing what can be done via the internet and digitalisation to transform communication, consumers and businesses strive for the same experience with payments, money transfers, and (e)commerce. No matter what channels are used (physical card, bank transfer, even cash), the action taken (swipe, tap, wave, wink, touch) is not so much due to COVID-19. Regardless of where the process of payments starts (online, offline), consumers aim for a quick and stress-free experience – and, most of the time, this happens when buying a small, common item, such as a cup of coffee. But when paying for imports or sending money to relatives abroad, the process often involves filling out forms (therefore it is paper-based), waiting for days, and paying too much, given that there are hidden fees sometimes. Cross-border payments are too slow, too expensive, and not everyone has access to them. 

The rise of digital money

The world needs reliable and interoperable payment means and trading rails that can deliver on the promise of ‘the internet of money’ – and goods, we might add. Moving money and products around the globe, while abiding to country-specific regulation, should be as easy and cost-effective as sending a message or sharing a photo. We are about to get there sooner than some have expected, as cross-border payments are about to be disrupted, with solutions such as Alipay, Libra, M-Pesa, Paxos, Stablecoins, Swish, WeChat Pay, DCEP (China’s Digital Yuan), and Zelle that are expanding consumers’ choice of ecommerce payments. 

What keeps international merchants up at night?

To better understand the disruptive potential of the new payment means that have captured our attention, let’s start by examining the challenges encountered by merchants when it comes to cross-border payments and (e)commerce. Prior to that, it is worth mentioning that while adapting to local customs, and especially while trying to innovate, many international merchants have turned these challenges into opportunities.

  • Selling across borders in different currencies – trading is a cultural thing, and a US-based merchant might find it difficult to sell in LATAM. Not only because customer behaviour in LATAM is different from the one in the US, but there are also separate rules when it comes to regulations or FX fees and, of course, different currencies. Currencies could represent a major obstacle for brands that sell abroad. In some instances, international ecommerce sites only accept one type of foreign currency, making it difficult for shoppers to use their own currencies when purchasing goods. 

  • Paying out suppliers across borders – with no end-to-end system across borders, cross-border payments typically involve higher transaction fees and longer processing times than domestic payments. Smaller businesses making infrequent global transactions to suppliers are most impacted by this complexity. This could be one of the reasons marketplaces such as Uber, Lyft, and Farfetch have joined Facebook’s Libra.

  • Offering diverse payment methods – the differences in customer behaviour also impact the preference for certain payment methods. To please as many customers as possible, merchants need to be able to offer the full stack – cash payments, mobile payments, contactless payments, bank transfers, boleto, and so on. Brands must know what payment methods are present in their target countries or regions, and they need to make sure that they can support them. However, this is a cumbersome and costly movement for a merchant looking to expand in multiple countries/regions.

  • Taking regulations into account – some countries have adopted stringent consumer protection laws, making it difficult for online merchants to reach them. 

  • Speaking the same language – irrespective of the languages they speak, many global merchants use browser-based translation tools to make their online shopping platforms more accessible to shoppers. Furthermore, there are also websites that optimise their content 100%, by providing country-specific versions of their platform and not relying on browser-based translation tools to translate their content. But there are also situations in which the translation tools do not support the languages spoken by certain customer segments. 

  • The current trade war between the US and China – which affects online sales between these countries.

  • A complex payment ecosystem – localising payment methods, abiding by local laws, speaking similar languages, and using the same currency for trade led to a complex payment ecosystem. Yet the industry players are working to simplify it, as cross-border merchants consolidate their collaboration with their PSPs and with other payment providers that can offer a payment orchestration layer. 

Digital money – a helping hand

Considering the complex context described above, a series of initiatives have been created that – along with many other aspects of the payments experience – are also set up to create a disruptive paradigm shift in the cross-border ecommerce market. Central bank digital currencies (CBDC), electronic money or e-money, stablecoins, cryptocurrencies, tokens, and more could change ecommerce and solve its payment-related pain points.

Stablecoins are digital units of value that are not a form of any specific currency (or basket of currency) but rather, by relying on a set of stabilisation tools, try to minimise fluctuations in their price in such currencies. South Koreans have started to move from card to stablecoin payments, and the fastest growing mobile payment app in South Korea is CHAI, which is based on the Terra blockchain. Terra is an algorithmic stablecoin that maintains the value of its currencies through self-correcting market mechanics, rather than holding funds into a vault and issuing coins based on that, the way Libra is proposing. Terra allows the issuance of tokens pegged to different currencies (e.g., USD, KRW), which makes it a practical unifying system for cross-border payments.

From December 2019, 14,000 physical CU stores (Korea's largest convenience store chain) adopted CHAI payments. The company also integrated with TMON, one of Korea's more prominent ecommerce sites with more than 9 million users. These payment initiatives, coupled with attractive discounts offered to buyers and low fees to sellers, enabled the South Korean company to achieve growth in a short period

Today’s entrants in the payment arena will transform the way in which money works, and central banks will play an important role in moulding this future. The rules they set will bear heavily on the adoption of the new digital money. They have already embarked on this innovative journey, as in some countries central banks partnered with e-money providers (China’s case) to effectively test and provide central bank digital currencies (CBDC), a digital version of cash.

According to the Bank for International Settlements (BIS), CBDC is ‘a digital form of central bank money that is different from balances in traditional reserve or settlement accounts’. A CBDC is a digital payment instrument, denominated in the national unit of account, that is a direct liability of the central bank. 

As cross-border payments involve numerous players, time zones, jurisdictions, and regulations, they are often slow, opaque, and expensive, making us believe that an interoperable CBDC could play a role in improving cross-border payments. The country that is most advanced when it comes to testing their CBDC, promising to launch such a system prior to the Winter Olympics in 2022, is China.

According to Fan Yi Fei, Deputy Governor of the People’s Bank of China (PBoC), the country’s ‘digital currency, electronic payment’ or DCEP trials have surpassed 3 million transactions (USD 162 million) between April and August 2020 in the cities of Shenzhen, Suzhou, and Xiong’an. Ranging from transportation tickets, bills, government services to buying groceries, DCEP has already covered over 6,700 payment scenarios, according to the Governor’s statement. However, PBoC maintains that DCEP has solely covered micro-transactions. The DCEP tests have integrated with existing payment methods like QR codes and facial scanners. As per Yi Fei, more than 120,000 personal and corporate digital wallets for the DCEP were created since the trials began.

Facebook Libra

The digital payment experiment that has sparked and intensified the need to innovate how money moves is, by far, Facebook’s Libra. According to the European Central Bank, ‘Libra is an integrated construct that simultaneously encompasses a new settlement asset, a new payment rail and new end-user solutions’. 

Libra is a stablecoin to be used on a permissioned blockchain payment system, which will be managed through the Libra Association. The Association is a group of 27 members represented by payment companies (PayU, Coinbase, checkout.com, Xapo), technology providers (Uber, Lyft, Spotify), online marketplaces (Shopify, Farfetch), venture capitals, and non-profits. To carry on the transactions between different parties, Facebook has introduced its wallet called Novi. 

Besides the multi-currency Libra, the Association announced in April 2020 that it is augmenting the Libra network by including single currency stablecoins in addition to its own Libra coin. They aim to start with some of the currencies in the proposed Libra basket (e.g., LibraUSD, LibraEUR, LibraGBP, LibraSGD). According to Facebook’s Libra white paper, this will allow people and businesses in the regions whose local currencies have single currency stablecoins on the Libra network to directly access a stablecoin in their currency. But people and businesses in countries that do not have a single-currency stablecoin on the network can use the Libra coin for cross-border payments, as a low-volatility option. This approach allows the network to support a wider range of domestic use cases and to provide a path for integrating CBDCs, as they become available. 

Now the Association is just experimenting, but the final goal is to introduce a new payment method, which is as easy as sending a message to someone through their favourite messaging apps. For instance, in November 2020, the team behind Facebook’s Libra conducted experimental research into a payments protocol called FastPay that is seven times faster than the Visa system.

Overall, we should definitely keep a close eye on their journey, because if this whole project turns out to be as good as it sounds, it is going to be quite revolutionary.

This new understanding of the very concept of money is about to battle with good old cash and bank deposits. Traditional banks and payments providers will need to transform and reinvent their products to remain relevant for their users and offer the same convenience as e-money. Of course, no one denies the risks this new form of money involves (stability of its value, consumer protection) and the deeper implications it has on global fiscal and monetary policies; however, policymakers should be prepared for some disruption in the banking and payments landscape.

The concept of digital money is changing the industry, and payment experts are advised to watch this space. Its potential resides in the fact that it is real-time, everywhere, seamless, can be personalised, is predictive and for everyone, and reaches the unreachable, as Chris Skinner stresses in its new book Doing Digital: Lessons from Leaders.

This editorial was first published in our Cross-Border Payments and Ecommerce Report 2020–2021, which assesses the change of pace that occurred in 2020 and provides a comprehensive overview of the major trends driving growth in this space, being the ultimate source of information for players interested in selling across borders.

About Mirela Ciobanu

Mirela Ciobanu is a Senior Editor at The Paypers and has been actively involved in drafting industry reports, carrying out interviews, and writing about innovation in payments and fintech. She is passionate about finding the latest news on AI, crypto, blockchain, DeFi, and she is an active advocate of the need to keep our online data/presence protected. Mirela has a bachelor’s degree in English language and holds a master’s degree in Marketing. She can be reached at mirelac@thepaypers.com or via Linkedin.


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Keywords: The Paypers, digital money, cross-border payments, trading, COVID-19, ecommerce, currencies, supply, payment methods, regulations, global merchants, payment ecosystem, PSP, CBDC, crypto, stablecoin
Categories: Banking & Fintech
Countries: World
This article is part of category

Banking & Fintech