Demystifying cross-border payments – Part One

Welcome to the world of cross-border payments

Moving money successfully across borders is fundamental to international trade and commerce. It drives and sustains economies in developed and emerging markets. It allows large established corporations as well as ambitious startups to extend their market reach beyond domestic shores or outside their regional trading bloc. It provides consumers with more options by giving them access to merchants around the world. And it means a migrant worker can continue supporting his family while employed overseas. Cross-border payments are the oil that keeps the globalisation machine going.

Each year, a vast amount of money is moved across borders – in 2018, cross-border payments totalled more than $130 trillion. This provides unlimited opportunities for industry participants. 

Additionally, the pace of change in the global cross-border payments arena has been building up steam over the past few years. This has been driven by the emergence of new technologies, a rapidly evolving digital ecosystem, changing regulation, and individuals and businesses who are increasingly demanding a seamless, real-time and transparent experience from their payment partners.

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.

These forces have led to increasing complexity in the industry, making it difficult for users and customers to navigate. 

With this series, we hope to offer you more clarity around what cross-border payments are and how they work in order to help you make more informed decisions. First, let’s start with the basics.

What exactly are cross-border payments?

Cross-border (or international) payments are transactions where the sender and the recipient of funds are based in separate countries and usually with different currencies in play. These transactions can involve individual consumers, businesses, governments or banking institutions who want to move money internationally for a variety of reasons.

Here are some typical use cases for cross-border payments:

C2C (Consumer to Consumer)

These are cross-border transactions between individual consumers. They consist primarily of remittances, 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 sending money back to his wife and children in Lagos.

C2B (Consumer to Business)

These are transactions from a consumer to a business or a government. These may include e-commerce purchases, bill payments, payments for international education or healthcare. An example of this might be an online shopper in France paying for her e-commerce purchases from China on AliExpress.

B2C (Business to Consumer)

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 located in many different countries across the world in local currencies.

B2B (Business to Business)

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 making a payment to their Mexican supplier of fresh produce.

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.

Just how big is the cross-border payments market?

Based on data from McKinsey, the World Trade Organisation and the World Bank, we estimate that cross-border payments represented $136.4tn of transaction flow and $241bn of payments revenue in 2018 (revenue includes transaction fees and foreign exchange fees). 

Historically, cross-border payments revenue has grown at 4-6% per year. Prior to COVID-19, Boston Consulting Group forecast the market to continue growing at 6% compound annual growth rate (CAGR) over the next 10 years. However, the impact from COVID-19 has been mixed across different market segments (for example, negative for remittances but positive for e-commerce), so it is still unclear what the impact on overall market growth will be.

Sources: McKinsey, World Bank, World Trade Organization

What is driving growth in cross-border payments?

As we mentioned earlier, 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 a key enabler of global trade, investment and commerce. More importantly, they contribute towards the growth and development of emerging nations by creating opportunities for them to participate in the global economy.

There are four big 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 we believe 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:

We hope this introduction to cross-border payments has given you a good overview of the landscape. Looking to learn more? Read the next article in our Demystifying cross-border payments series where we dive deeper into the mechanics and history of international money movement, coming soon.