As I discussed in my previous post, within fintech there are three primary business models: credit / debit card interchange; cross-border currency exchange; and financing. Whether directly or indirectly, the foundation of most fintech companies is built upon one of these three models. Today’s post dives into the second fintech business model: cross-border currency exchange.
Fintech companies providing cross-border payment services function as a critical component to enable international trade and provide a lifeline to millions of families in developing countries. This article explains the fundamentals of the cross-border currency exchange model and outlines the four major cross-border payment applications across consumer remittances, B2B payouts, supplier payments, and educational transactions.
The Cross-Border Payments Business Model Explained
As with card interchange, the revenue model for cross-border payment providers is relatively simple. (Note that the mechanics that go on behind the scenes to enable the movement of funds is anything but simple. However, that’s best left to another blog post to explain!) The most common approach is to apply a percentage markup to a publicly quoted wholesale exchange rate. For example, to convert $1 USD to EUR at the wholesale daily exchange rate, the rate may be 0.92 EUR. A cross-border payment provider might apply a 2% markup, so that the recipient actually receives 0.9 EUR. This final rate could still be attractive, since only banks or the largest corporations are able to benefit from the wholesale rate.
Cross-border payment fintechs apply this revenue model to a range of use cases that represent massive flows of funds, both for consumers and businesses.
Consumer Remittances: Bridging Families and Borders
Typical flow of funds: From migrant workers to families in their home countries
Market size: $630B (per the World Bank)
Fintech company examples: Wise, Western Union
Receiving funds from family members working abroad has helped pull millions of families from poverty in developing countries around the world. Cross-border fintech solutions play a vital role in enabling these individuals to send money swiftly and affordably to their families. Modern platforms offer user-friendly interfaces that allow users to convert their local currency into the desired foreign currency and send funds with a few clicks. With real-time exchange rates and lower transaction fees compared to traditional banking, these fintech platforms contribute not only to financial stability but also provide a crucial connection to workers forced to leave home to provide for their family
B2B Payouts: Powering Global Marketplaces
Typical flow of funds: from goods and services marketplaces like Amazon and Upwork to third party sellers around the globe
Market size: over $200B (per McKinsey)
Fintech company examples: Payoneer, PayPal
Marketplaces like Amazon, Alibaba, and eBay have revolutionized the way businesses operate, offering a platform for small and medium sized businesses in countries such as China and India to reach a global audience. The success of these platforms hinges on the effective transfer of payments to these third-party sellers across borders. Cross-border payment providers like Payoneer and PayPal play a crucial role in this process by facilitating seamless, secure, and swift transactions from marketplaces to sellers around the world. These sellers from diverse corners of the globe can receive payments in their local currencies, effectively eliminating the need for complex currency conversions and potential delays. Small and medium-sized businesses are now more easily able to tap global markets and take advantage of opportunities that would not exist without these marketplaces and the fintechs that support them.
Supplier Payments: Strengthening Global Supply Chains
Typical flow of funds: from companies to international suppliers
Market size: $10 trillion (per PYMNTS)
Fintech company examples: Corpay, Monex
Businesses today source products and services from diverse suppliers located in various parts of the world. This intricate web of global supply chains necessitates efficient cross-border payment solutions. The cross-border currency exchange model plays a pivotal role in streamlining B2B payments to international suppliers. Rather than navigating the complexities of traditional banking systems, businesses can turn to fintech platforms that provide real-time exchange rates and secure cross-border payment channels. This not only ensures that suppliers receive payments promptly but also bolsters relationships between companies and their global partners, enabling supply chains to operate smoothly around the world.
Educational Transactions: Enabling Global Learning
Typical flow of funds: from international students to universities
Fintech company examples: Flywire, PayMyTuition
Market size: $660B (Flywire estimates)
The pursuit of education knows no borders, and students from around the world often choose to study in foreign countries. However, the logistical challenges of cross-border payments can pose significant hurdles. Cross-border currency exchange platforms play a crucial role in facilitating payments for tuition fees, accommodation, and other educational expenses. These platforms offer competitive exchange rates, transparent fee structures, and the convenience of digital transactions, making it easier for students to manage their finances while pursuing their academic aspirations abroad.
Summary
Fintechs facilitating cross-border payments have transformed the way individuals and businesses conduct transactions across borders. From consumer remittances that bridge families across continents to B2B payouts that empower sellers on global marketplaces, and from supplier payments that strengthen supply chains to educational transactions that enable global learning, the impact of this model is far-reaching. As technology continues to advance, fintech companies leveraging the cross-border payments business model are set to play an even more pivotal role in shaping a truly borderless financial landscape.