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Our perspective on the fintech world

Cross-Border Payment Innovation is Still ‘Lipstick on a Pig’

You may have seen a number of cross-border payment fintech companies making headlines recently. Global B2B payment leader Payoneer is going public in an upcoming SPAC transaction valued at $3.2 billion. Airwallex, out of Australia, has just raised $100 million at a $2.6 billion valuation. Clearly there is gold in those hills for companies who can build a better cross-border payment mousetrap. However, for all the activity that is taking place in this space, most fintechs are still just nibbling at the margins and not driving any real fundamental innovation.

There is a long way to go in order to improve the cross-border payment infrastructure. Even Fed Chair Jerome Powell thinks that cross-border B2B payments are broken. Well, he actually said that they “suffer from frictions” at a recent event in Switzerland, but in the normally opaque world of the Fed, those are some pretty strong words. For businesses looking to pay other businesses in a cost-effective, predictable, and timely fashion, the underlying payment rails have not changed for decades.

For those not intimately familiar with how money moves around the world, international wire transfers rely on a somewhat antiquated legacy system managed by SWIFT, a bank owned cooperative based in Belgium. SWIFT is essentially a global messaging network that financial institutions use to securely transmit information and instructions through a standardized system of codes. It certainly works, and does so at significant scale, processing over 33 million transactions a day through the network. However, the limitations are well known: it’s relatively costly per transaction; it’s slow, often taking 2-3 days to process each transaction; and it’s somewhat unpredictable, with significant variation in the actual cost and delivery time for each transaction. For today’s fintechs, SWIFT represents a pretty low bar to improve upon.

To their credit, Ripple is one of the few new entrants attempting a radical overhaul of the cross-border payment network, leveraging cryptocurrency as the underlying exchange mechanism. While they have made some headway in their 9 years of existence, progress has been frustratingly slow. And more recently, their management team has been preoccupied with the existential threat of an ongoing complaint from the SEC, alleging that they raised over $1.3 billion through an unregistered, ongoing digital asset securities offering via their crypto token XRP.

Most of the recent innovation has emerged on top of the existing banking system and SWIFT network, rather than improving upon the underlying network itself. This can be seen in how leading fintechs both collect and disburse funds around the world.

On the collection side, for example, companies such as Airwallex offer “global collection accounts”. These virtual account numbers act like a local bank account in a foreign country, allowing a business’ international clients to submit payment via a simple local bank transfer. This avoids the costs and challenges of using international wires for individual transactions. The fintech provider then aggregates payments from across their clients and transfers funds to the destination country in bulk, reducing costs and obtaining competitive FX rates. Ultimately, the money moves via SWIFT, but not for each individual transaction.

On the disbursement side, cross-border payment providers often maintain funds in holding accounts at banks in key destination countries to enable local bank withdrawals. For individual transfers, a provider such as Payoneer is able to tap this account and deliver funds quickly and cheaply to a recipient’s bank account in that country through the country’s local payment rails as a low-cost domestic transfer. Again, the provider utilizes the SWIFT network to top up this holding account on a daily or weekly cadence, but does so on an aggregate basis rather than for each payment.

Without a doubt, processing cross border payments at scale, ensuring security, reliability and effective monitoring for money laundering activity is no easy feat. There is a reason why the SWIFT based system has remained in place since the 1970s. However, the search for faster, cheaper, more transparent, and more inclusive cross-border payment alternatives continue with frustratingly slow progress. Fintechs competing in this space do offer real value to their business customers, however, they continue to build their services on a shaky foundation that has barely kept up with today’s Internet age.