Fatihah Ramzi, DigitalCFO Asia | 7 September 2022
McKinsey conducted a study to provide an outlook on how the cross-border industry might expand over the next decade.
The world of cross-border payments has seen increasing upheaval during the last five years. The tried-and-true correspondent banking strategy has faced difficulties as new competitors and alternative alternatives have upended some of the fundamentals of the market. However, it is often unknown what these changes will look like or in what direction they will go.
International payments have long been the driving force behind cross-border investment and trade, and they have played a crucial role in the development of the modern global economy. Banks have historically been the “natural owners” of the global market due to a long list of needs, including a global network of reliable parties, a necessity for sufficient liquidity, and a sizable regulatory and technical infrastructure.
Cross-border margins have historically been strong, and sporadic pricing pressures have affected them, but not to the same degree as the profound cost shift seen in domestic payments. International payments revenues total up to $200 billion globally, split almost evenly between transaction fees and foreign currency (FX) revenues, despite the fact that cross-border flows only account for one-sixth of overall transaction values. This accounts for 27% of all transaction revenues worldwide, and it is growing by 6% annually.
Having said that, McKinsey conducted this study to provide an outlook on how the cross-border industry might expand if specific emergent trends catch on rather than to concentrate on the past of the sector.
More Cross-Border Payments To Come, But Growth Might Not Come From The Expected Sources
Despite geopolitical unrest, rising international payments will be fueled by a strong global GDP and related trade expansion. Globally, there are currently 0.7 annual cross-border transactions per capita (up from 0.5 in 2014), with the total value of cross-border payments averaging 1.8 times nominal world GDP. However, this multiple differs significantly by region, varying from 0.7 percent nominal GDP in Latin America to 5.50 in Western Europe.
The FX margins on large-value credit and capital transfers have shrunk. The cost and complexity of providing cross-border payments are simultaneously rising due to continuing ambiguity, the building of international barriers, compliance risks, and cyber threats, as well as a general deterioration in relations between nations as evidenced by trade wars, sanctions, and compliance standards.
Although McKinsey anticipates that it will decline from 6 to 7 percent to 4 to 5 percent over the next few years, the robustness of the global economy has made it possible for this category to continue to grow. Business-to-business (B2B) transactions continue to be the most pertinent group overall.
Customers, Not Providers, Will Shape Future Services
A seamless and transparent experience is what customers want. There is reason to suppose that if real-time payment experiences are valued by consumers domestically, they will also be valued internationally. Customers value features like consistent payment delivery, availability of preferred payment options, and the opportunity to monitor currency rates and plan payments accordingly.
These services are already offered for remittances, and they will be made more widely accessible for additional use cases such as cross-border bill payments. Large and multinational corporate entities have always sought to connect to banks in an effortless manner for their needs related to international payments, but they typically agreed to use only the few payment partners, rails, and standards that were already integrated with their enterprise resource planning (ERP) systems.
This is primarily a hygiene issue. Instead, businesses anticipate that the data contained in payment transactions will connect to any ecosystem in which they take part. Future payments will be dependent on transparent systems and integrated into business procedures.
Banks may also need to be cautious of any interfaces or layers that are a part of corporate ERP systems or buyer-supplier networks. The service providers at these tiers have the opportunity to take on the role of decision-makers or solution integrators, choosing the payment processor based on convenience or price.
There Will Be A Single Integrated Experience, No Matter How Fragmented The Value Chain
With users perceiving ever fewer differences between card payments, correspondent transfers, new options like Alipay and PayPal, or emerging distributed ledger technology-based exchange mechanisms, it is simple to imagine a world in which the majority of payments could be accomplished through a wide range of innovative payment rails.
Customers might then pick and select from the available options, choosing, for instance, inexpensive trains or suppliers that provide particular services (like FX), connecting them to various purchasing trips. A progressively diverse group of players would then provide access to various payment rails. Even if the value chain were to break up, the buyer would probably not even notice. The same as check and draft have done in domestic payments, payment systems that cannot guarantee clean execution will suffer and may transition to a “legacy” category of solutions.
These are only some of the things predicted by McKinsey on the future of cross-border payments. If you wish to find out more about it, you can find the full report here.