What Are Cross-Border Payments? A Complete Guide
Cross-border payments are essential to global trade and commerce, with transactions exceeding $150 trillion in 2022.
They fuel economies in both developed and emerging markets, helping businesses expand beyond domestic borders.
The cross-border payments landscape is evolving rapidly, driven by new technologies, digital transformation, regulatory changes, and increasing demand for faster, seamless, and transparent transactions. Businesses and individuals now expect real-time payments and greater efficiency from financial partners, shaping the future of international money transfers.
Demand is evolving fast, too: to succeed in today’s market, user experience has to be as fluid and frictionless as possible for any transaction, in any location and with any currency.
At Thunes, we provide a real-time infrastructure to support various cross-border payment methods. Let’s explore cross-border payments, how they work, and how they evolve the global digital ecosystem.
Table of Contents
How do cross-border payments work?
Cross-border (or international) payments are transactions in which the sender and recipient of funds are based in separate countries and usually use different currencies.
These transactions can involve individual consumers, businesses, governments, or banking institutions that want to move money internationally for various reasons.
At Thunes, we provide various solutions to send and receive cross-border payments:
- Mobile Payments: Businesses and their customers can send instant payments to over 120 mobile wallet brands – and 3 billion mobile wallet accounts – worldwide. With Thunes, businesses can also accept mobile wallet payments from customers, with direct access to over 100 mobile wallet brands through one single API Integration.
- Bank Payments: Send and receive cross-border payments to and from bank accounts instantly and in real-time. With a single API integration provides access to our global network of 4 billion bank accounts
- Digital Vouchers: Simplify receiving customer payments and reduce fraud by accepting funds through digital vouchers and gift cards.
- Buy Now Pay Later: Allows a company to accept funds from a customer through payment instalments. Our network of BNPL providers can help you optimise brand loyalty and drive sales.
Cross-border payments use cases
Consumer-to-Consumer (C2C) Transactions
These are cross-border transactions between individual consumers. They consist primarily of remittances and transfers of money from workers in one country back to their country of origin, often through payments to family members. An example of this might be a migrant worker from Nigeria employed in the UK who is sending money back to his wife and children in Lagos.
Consumer-to-Business (C2B) Transactions
These are transactions from a consumer to a business or a government. These may include e-commerce purchases, bill payments, and international education or healthcare payments. An example might be an online shopper in France paying for her e-commerce purchases from China on AliExpress.
Business-to-Consumer (B2C) Transactions
These are transactions from a business or government to an individual. They include salary payments, marketplace disbursements (payouts), social benefits payouts, and refunds. An example of this might be Airbnb paying its hosts in local currencies in many different countries across the world.
Business-to-Business (B2B) Transactions
These are transactions between businesses or governments. They include international trade, corporate investments, and treasury flows. An example of this might be a US supermarket chain paying their Mexican fresh produce supplier.
How do you use different cross-border payment methods?
Today, cross-border payments can be made in many different ways. Traditional methods include bank account transfers, card payments, or cash, but recently a new range of alternative payment methods (APMs) have become popular, such as eWallets or mobile wallets, direct debit, buy-now-pay-later solutions, prepaid vouchers, airtime credit, e-invoices, cryptocurrencies, and other emerging technologies.
With Thunes, businesses can send international payments directly to recipients’ mobile wallets or bank accounts. Both solutions are instant, giving all parties involved in the transaction transparency and efficiency.
Key Drivers of Cross-Border Payment Growth
Cross-border payments are a fundamental part of the global economy. Without them, the world we live in today would be completely different, as they are key enablers of global trade, investment, and commerce. More importantly, they contribute to the growth and development of emerging nations by creating opportunities for them to participate in the global economy.
There are four significant trends driving the growth of cross-border payments:
- Growth in international trade
- Growth in remittances
- Growth in cross-border e-commerce
- The rise of the sharing economy
The infographic below provides some key facts and figures around these four trends, which will continue to drive growth in cross-border payments in the future.
Sources: World Trade Organization, McKinsey, World Bank, Airbnb IPO prospectus, Fiverr
Who initiates cross-border payments?
Many types of businesses are involved in cross-border payments. They can be classified by their use case focus, geographical coverage, target customer segments, business model, and operating model.
To keep things simple, we have defined the following six broad categories of providers of cross-border payments:
The Future of Cross-Border Payments
Moving money around the world has come a long way. Initially, people transferred money to another country – a cross border transaction – in one of three ways:
- Carried physical cash across borders
- Used acquaintances or couriers to move the money on their behalf
- Used informal trust-based broker networks (such as hawala) to transfer the money without physical money movement.
However, all these methods posed problems – they were inefficient, unreliable, risky, and often costly. It took 100 years before major advances enabled effective cross-border payments on a global scale.
Let’s now look at how international payments developed in the modern era.
The development of communication networks and messaging standards
In the early 1930s, the German postal service developed the first major Telex network of teleprinters, which enabled the electronic transfer of written messages. Banks could use it to communicate with their counterparts overseas to settle transactions. As a result, Telex became the primary tool to facilitate international money transfers in the developed world until the 1970s.
In 1973, 239 banks from 15 countries came together to develop an even better medium—the Society for Worldwide Interbank Financial Telecommunication (SWIFT). Based in Belgium, SWIFT established a common language and model for payment data worldwide, which has since served as the default network for communication related to cross-border transactions. Today, SWIFT is used by more than 11,000 financial institutions across over 200 countries and territories globally.
The emergence of correspondent banking relationships
Communication networks alone did not solve the other prerequisite for making reliable cross-border payments – a way to transfer funds between disconnected systems.
Currencies are closed-loop systems, so banks had no way to move money from a domestic payment system in one country to another. As a result, financial institutions developed a new funding mechanism to solve this challenge – correspondent banking.
If Bank A in one country wants to transfer money to Bank B in another country, each needs to hold an account with their counterpart. During an international transaction, there is no physical movement of funds – instead, bankers credit accounts in one jurisdiction and debit the corresponding amount in the other.
This combination of the SWIFT communication network and correspondent banking relationships has been the go-to method for moving money across borders over the last 40 years. This is the reason why more than 80-90% of cross-border payments revenue is still captured by banks (see graph below).
While it remains practical for the majority of corporate transactions, the model is not economical, especially for lower-value transactions. As such, there is an influx of non-bank providers who are increasingly focusing on making bigger inroads to address the growing SME and consumer markets.
As you can see from the chart above, banks still capture the vast majority of the market for cross-border payments, even when it comes to lower-value consumer and SME transactions. This presents an opportunity for non-bank providers to address the significant challenges SMEs and customers face when moving money internationally.
We need to envision a future with an enhanced solution for lower-value transactions
There are six major challenges for lower-value transactions with the correspondent banking model.
- Speed. Cross-border payments can take up to two to three days if multiple intermediaries are involved and even longer for some less-developed markets. Often banks don’t always know how many correspondent banks are involved in the transfer. Since peer-to-peer (P2P) payment systems have introduced domestic real-time payments, customers want cross-border transactions to take place in real time. But real-time payments for low-value transactions can’t happen because you need sufficient volume to move money economically – banks are unlikely to get an FX quote for 20 rupees, for example.
- Limited transparency and dependability. Even more important than speed is transparency – where the payment is in the chain and when it will arrive, confirmation of payment into a recipient’s account and upfront transparency on speed, cost and time of arrival. With the standard operating model, there’s little transparency. That’s because the different intermediaries in each transaction chain do things differently, affecting cost, speed and arrival confirmations. For example, banks don’t have full visibility over the different fee-sharing agreements between third-party correspondent banks. They only know the exact cost of the transaction after it has been processed rather than in advance.
- High transaction costs. Costs can be quite high. There are three cost components per transaction – SWIFT messaging fees, transaction fees, and spread on foreign exchange (FX). With multiple intermediaries, all these costs can often add up to US$25-35 per transaction (even higher in some markets), excluding FX, as each correspondent bank will need to be reimbursed for their service, with fees ranging widely depending on individual commercial agreements. That might not seem much for very high-value transactions (more than US$100,000+, for instance), but it can be extremely costly when it involves processing many transactions under US$5,000.
- Lack of interoperability. The correspondent banking model only involves banks, and SWIFT is owned by and designed to serve banks. In today’s increasingly diverse financial ecosystem, however, customers need to be able to seamlessly move money across multiple payment methods in addition to bank accounts. Mobile and eWallets, for example, are being used by more than two billion people globally, but the current model does not offer the ability to move money from bank accounts to eWallets easily and vice versa – it lacks interoperability across payment methods.
- Limited coverage. Despite SWIFT offering connectivity to over 200 markets, each bank’s coverage is limited to the size of its correspondent banking network. This is because SWIFT is the messaging layer and Correspondent banking agreements the funds movement layer. Interestingly, the number of active correspondent banking relationships globally declined by 20% between 2011 and 2018, while the number of active corridors dropped by 10% (BIS). Key drivers for this include the high regulatory burden, decreasing banks’ risk appetite, and low profitability associated with certain payment corridors.
- Limited accessibility. In some markets, bank account penetration is very low (below 30% across the population), so most people don’t even have access to cross-border payments. Additionally, as banks continue to abandon corridors, certain customers (such as those in emerging markets) are left with less formal options to receive or send money internationally, making the few choices available costly. In such cases, underserved individuals and businesses often opt to use informal channels that pose additional risks.
Regulators, governments, and businesses must address the challenges above to make cross-border payments faster, cheaper, more transparent, and more accessible, especially for those that have been traditionally underserved by large financial institutions. An increasingly globalised world and ever-more complex financial ecosystems make this issue more urgent. In fact, in 2020, the G20 prioritised enhancing cross-border payments to support economic growth, international trade, global development, and financial inclusion.
Future Innovations in Cross-Border Payments
Cross-border payments are rapidly evolving, enabling businesses to send and receive money from anywhere in the world.
The core infrastructures driving the adoption of cross-border payments include SWIFT GPI, payment network aggregators, and proprietary payment networks.
SWIFT GPI
SWIFT has recently enhanced its service by implementing its global payments initiative (GPI) and it’s nothing like its predecessor. This technology enables banks to provide details of deductions, payment status and confirmations to a tracker hosted on the GPI cloud, which banks and end users can access to get payment status and other information. Settlement speeds and transparency for correspondent banks have improved, but these changes have only impacted the large payment flows.
For most banks, using the SWIFT GPI is expensive, and they do not have the resources to implement this solution. Additionally, with this model, higher transaction costs are sometimes passed on to the senders, which is in conflict with the goal of making cross-border payments cheaper.
Payment network aggregators
Payment network aggregators operate payment networks that primarily rely on indirect network connections. Similar to correspondent banks, they leverage third-party relationships to reach markets where they don’t want to establish their own connections. This makes it easier for them to scale and offer broad coverage as they aggregate multiple partners’ individual connections. However, indirect connections charge ongoing fees, expose payment network aggregators to varying levels of risk associated with each partner, and offer limited visibility of fund flows.
For cross-border payment providers, these types of partners offer a quick and easy way to reach many markets, but this can mean compromising on transparency, costs, and security.
The types of networks offered by these players can vary based on their ability to move funds between different payment types. Some are specific (only allowing transfers from bank accounts to bank accounts, for instance), while others are interoperable (such as allowing transfers from mobile wallets to bank accounts).
Proprietary payment networks
Proprietary payment networks, such as Thunes, build individual direct connections with each of their network members, as opposed to using (and paying for) the connections built by others. In other words, they have built an infrastructure that allows money to change hands easily. Companies just need to be part of the network. As a result, these networks have complete visibility over the fund flow and greater control over transaction costs and risks, which translates into higher transparency, higher security, and lower costs for customers using them.
Research from McKinsey shows that the costs associated with cross-border payments can be reduced by up to 90-95%, which is what some operators of proprietary payment networks are already achieving.
Source: McKinsey
The geographical coverage of proprietary payment networks can vary significantly. Building their own networks, instead of using existing third-party connections, is a slow process. As a result, only a handful of players offer multi-regional or global coverage, while the rest are usually focused on a single region (Europe, North America or Asia-Pacific, for example).
Similar to payment network aggregators, some of these players provide networks for a specific payment type (bank accounts only, for instance), while others offer interoperable networks (such as allowing transfers from mobile wallets to bank accounts).
How Thunes can help
Unlike solutions like SWIFT, which offer only the messaging layer, Proprietary networks, such as Thunes’ networks, offer, through one connection, both the messaging layer and the funds movement layer. For financial institutions, it means less tech integration time for the messaging layer, and less negotiation time with corresponding banks for the funds movement layer.
Thunes’ proprietary interoperable global payment network enables seamless movement of funds across borders. Thanks to a single API connection, customers reach new markets and multiple payment options in over 100 countries without the need for countless integrations to multiple systems.
Today, more than 400 banks, payment service providers (PSPs), money transfer operators (MTOs), mobile wallet operators, platforms and fintech companies around the world use us to process cross-border payments in a cheaper, faster, more transparent, and more secure way.
Contact Thunes to find out about our payment network and how you can simplify sending and receiving cross-border payments.
