Making Global Payments Just As Seamless As Local Payments
Contribution by: Guan Li, Product Director
COVID-19 has turned the world upside-down. It has impacted almost every aspect of our lives and work, forcing many industries to make uncomfortable changes to adapt to the new age.
The payments landscape is no exception, yet the change it has undergone is positive – global digital payment adoption has increased exponentially, with at least 1.2 billion mobile money accounts opened across 96 countries.
The pandemic has accelerated a shift to cashless payments and boosted alternative payment methods such as mobile wallets. The next step is taking the convenience, speed and security of domestic digital payments and making transactions across borders just as seamless, reliable and affordable.
Unifying local and cross-border payments
Traditionally, digital payment methods like eWallets and local bank transfers are only available within a country or region’s borders.
But with networks like Thunes on the block, local payment methods are incorporated into global payments networks, allowing them to be used to send money to individuals or businesses across borders.
This article looks at how cross-border payments have become as efficient and safe as local services.
The need for innovative cross-border payments
The drive to make cross-border payments as seamless as local transactions can be traced to the traditional correspondent banking system. This system is inefficient and expensive, requiring banks to use intermediaries, also known as correspondent banks, to exchange funds with each other.
Other players like foreign exchange agents and network providers also join correspondent banks. Essentially, the more complex the transfer, the more players are involved. This arrangement increases cost and inefficiency.
Add unpredictable processing times, hidden fees, and unfavourable foreign exchange rates to the mix, and the entire process becomes unwieldy for everyone involved. According to the World Bank Report 2021, the average fee for sending USD200 in Q1 2021 is 6.38%. This figure represents the loss of a significant slice – especially for people from emerging markets.
Given the correspondent banking system’s disadvantages, innovative solutions became imperative. That is why fintech companies like Thunes have stepped up to integrate cross-border payments with local payment methods.
Coalitions with local payment providers
The first step to innovating cross-border payments is by partnering with local payment providers. They are instrumental in building the infrastructure of payment networks to facilitate seamless transfers across borders.
There are two main reasons why such partnerships are important:
- Consumers tend to use local payment methods
For most online consumers, their preferred payment methods are often local payment options. Boleto is preferred in Brazil, PayTM in India, and WeChat Pay or Alipay in China.
It is thus crucial for cross-border sellers to cater to all these different local payment options – doing so is no longer optional to stay abreast with the current ecommerce landscape.
- Traditional cross-border remittances are impractical
Previously, cross-border remittances involved sending money to an overseas bank account. This kind of transaction is not always feasible, especially in primarily unbanked countries. The Philippines is one such example, where many people in rural areas still prefer cash pickup.
Recent innovations have even made remittances to mobile wallets possible – payment service providers (PSPs) instruct one wallet to move funds to another. Such remittances happen in real-time, a fraction of the 2-5 days that traditional remittances require.
On the surface, the above process appears seamless. However, on the backend, the process is costly and time-consuming. PSPs can’t connect with local partners in every country, especially when trust and regulatory issues are involved.
A global payment network like Thunes can address these issues. We divide the markets’ needs into four broad categories:
- Cash-driven countries (for example, The Philippines)
- Countries with a dominant digital wallet (for example, Kenya’s MPesa)
- Countries with new financial instruments (for example, GrabPay and GoPay in Indonesia)
- Banks that work with businesses
In doing so, cross-border payments become faster and more affordable for all players involved.
Virtual accounts to support cross-border payments
Virtual accounts (VAs) have also emerged to synergise local and cross-border payments, apart from global payment networks. AirWallex, Payoneer, and WorldFirst are all pioneers in the VA space.
Thunes has launched its own VA system to offer its customers an alternative way to make seamless cross-border payments. Here’s a quick primer on how our VA system works.
We start by signing a service contract with a bank to set up a master account (also known as the physical account). The bank will generate VAs that we distribute to our customers.
On paper, VAs look like regular standard bank accounts, each one coming complete with a “bank account number”. But unlike standard bank accounts, VAs are boosted with a special function: they also accept money transfers made through local payment methods in their original currency.
Here’s an example to illustrate. Imagine that you are currently based in Indonesia, and you want to make a payment to a seller in Singapore. To make the payment, you use your DANA wallet to transfer the funds in IDR to the seller’s VA.
From here, the money in the VA automatically moves to the master account, where it is managed and taken care of by Thunes.
Without VAs, cross-border sellers would need to set up their own offshore bank accounts to collect payments from overseas buyers. The process is difficult for sellers, as many obstacles stand in their way. Below are the critical roadblocks:
- Complex administrative and verification processes
- Strict requirements that hinder sellers from creating local entities
- High fees charged by banks
By adopting VAs, cross-border sellers benefit from a smoother customer experience as buyers can now transact in their local currencies or through mobile local bank transfers. In turn, sellers can expect to see a considerable drop in the shopping cart abandonment rate as consumers complete more transactions.
Local or cross-border, there is no difference
Whether through a global payment network or a virtual bank system, it is clear that local and cross-border payments are becoming integrated.
Thunes has developed a highly efficient product that automates the cross-border payment reconciliation process for millions of transactions in over 100 countries. This innovative solution enables our partners to hone a sharp, competitive edge in the ever-evolving payments landscape.
Interested to see how Thunes can help? Get in touch with our team today.