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What Are Cross-Border Payments?

Payments from one country to another are a crucial part of the global economy. Recent statistics suggest global cross-border transfers in 2022 will be worth $156 trillion. As businesses expand and more people travel, these international capital flows are set to soar. 

So what are cross-border payments, and why are they so central to the global economy? Also, how does crypto fit into the cross-border payments space?

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What are cross-border payments? 

Cross-border payments are money transfers that take place between financial institutions in two countries. As long as the sender transfers funds from one country to a foreign destination, it qualifies as a cross-border payment. 

Economists often split cross-border payments into two categories: retail and wholesale. Retail cross-border payments are smaller transactions between businesses and/or individuals, while wholesale ones are large international transfers typically involving corporations, financial firms, or governments. 

There are many options to send global international payments, but popular methods include bank transfers and fintech apps such as PayPal and WorldRemit. However, senders must ensure their preferred payment app uses a cross-border payment rail. Payment rails are networks that connect financial institutions and help settle digital transactions. For example, SWIFT focuses on global payments. 

How does a cross-border transaction work? 

Not every cross-border payment travels through the same payment rail. However, in traditional finance, most of these transactions work by connecting two bank accounts. In the simplest scenario, banks involved in a cross-border transfer can directly debit and credit both accounts. However, it's more likely the international payment rail will need to find "intermediate" financial institutions to process an international payment. These intermediary banks serve as trusted "go-betweens" since they already have a relationship with both banks. Intermediaries help securely send transaction details between the payer and the payee.  

For example, suppose Susan is shopping for shoes on an eCommerce website. While she is in the U.K., the eCommerce site ships from Spain. If Susan uses a debit card to purchase $25 worth of products on this site, her card's bank would send instructions to the eCommerce site's bank account. With the help of an international payment rail, the Spanish company's bank receives a credit of $25, while Susan's checking account posts a debit of $25. Susan might also pay extra fees to intermediary institutions that helped process the transaction. Banks may also charge foreign exchange (forex) fees for converting British pounds to euros. The shoe company will also pay transaction costs to the credit card processor. 

What is the importance of cross-border payment solutions? 

Cross-border payments make it easier for citizens, corporations, and countries to send capital wherever they want. The rise in cross-border payments can drive investment and innovation in the global economy. Since digital cross-border payments are mobile and relatively frictionless, it's easier for institutions and governments to invest in foreign aid and development. Improvements in cross-border payments help banks and financial firms make foreign investments. 

Many migrant workers rely on cross-border transfers to pay remittances—non-commercial payments between individuals, typically between foreign workers and their families. Many developing countries rely on remittance payments as a primary source of income. The World Bank estimates remittance payments will reach $630 billion in 2022. In some developing nations such as Tonga and Lebanon, remittance payments account for more than 30% of the country's GDP.  

Also, customers can access global goods and services with cross-border payments. Companies can use cross-border payments to scale their operations quickly. With the help of international payment rails, businesses can efficiently use their supply chains while expanding their reach into emerging markets. The growth of global eCommerce portals also gives consumers a greater variety of options. 

Are there any drawbacks to cross-border payments? 

Although international payments help connect the global economy, they aren't as seamless as domestic payments. Every country imposes different rules for money transfers, adding checkpoints for international transactions. Even if cross-border payments are successful, there will likely be long delays and higher fees. 

  • High costs for international transactions: Cross-border transactions often pass through multiple intermediaries, which means they’re subject to higher processing fees. Also, people who want to convert currencies to send their money will pay forex rates.  
  • Longer processing time: Although real-time payments such as Visa Direct are propelling, cross-border transfers typically take a few days to process. Generally, a cross-border payment won't clear for 2-5 business days. Depending on the time zones in the two target nations, this processing time could be even longer. 
  • Safety risks: People using digital funds might be at risk of hacks. For instance, hackers successfully stole almost $100 million from Bangladesh's Central Bank using the SWIFT payment rail in 2016. Gambia's Central Bank also suffered a hack in 2022. Although many payment rails use the latest cybersecurity technology, there are risks associated with cross-border digital transfers. 
  • Censorship controversies: International payment rails must comply with anti-money laundering (AML) and counter-terrorist financing (CTF) laws. While these laws are ought to reduce crime, not every country may agree on the definition of a "questionable" organization. What one country views as a democratic group may seem like radicals to another government. If banks or other authorities have questions about a cross-border transfer, they could freeze it and censor a person's bank account.   
  • Lack of transparency: Cross-border payment networks don't offer transparent tracking details. In most cases, people can't monitor the progress of their international transfer online. This lack of transparency makes it difficult to settle a dispute if something goes wrong with a payment. 
  • Difficult to access remote regions: Although many people have access to cell phones and computers, remote areas still exist. Since most cross-border payments rely on digital networks, people in rural areas may find it challenging to access financial service providers. 

Can crypto be used for cross-border payments? 

Cryptocurrencies aren't the most common form of cross-border payments, but anyone can use them to send value across borders. There's no central bank or government behind digital assets such as Bitcoin, Litecoin, and Ethereum. Anyone with access to the internet can send, swap, and store crypto in a self-custodial wallet

Since cryptocurrencies use decentralized blockchain networks, they’re more censorship-resistant than traditional cross-border payments. While authorities can freeze crypto wallets, tracking and ceasing digital assets is more complicated than blocking a centralized payment rail. Crypto transfers don't have to go through the same checkpoints associated with centralized payment networks like SWIFT.

International crypto transfers are also cheaper and faster than many traditional cross-border payments. Unlike banks, the crypto market is open 24/7. Also, crypto transfers don't have to pass through intermediary institutions transmitting from one wallet to another. Even during times of high network congestion, sending BTC around the world usually costs less than transferring fiat currencies. New solutions like the Bitcoin Lightning Network allow users to send BTC for virtually zero fees. 

It’s also challenging to use crypto for day-to-day transactions. Although some nations such as El Salvador accept BTC as legal tender, crypto payments still aren’t mainstream. This forces people who hold crypto to constantly transfer their coins to fiat if they want to use them in daily life. Often, crypto off-ramps such as exchanges and ATMs charge fees for their services, which will reduce a crypto holder’s purchasing power. 

Lastly, transferring crypto requires a special set of technical tools and skills. People who've never used a crypto wallet or centralized exchange (CEX) might struggle interacting with this new technology. 

Wrapping up 

From remittances and eCommerce shopping to foreign investments and bank transfers, cross-border payments are a significant aspect of globalization. Although international transfers suffer from slow speeds and high fees, more businesses and policymakers recognize the significance of this payment network. As more industries examine cross-border payment rails, sending money anywhere on the planet should become even simpler.  

At Worldcoin, we believe cryptocurrencies can remove many issues in the current international payment system. To help more people understand the value of cross-border crypto payments, we're airdropping DAI stablecoins to anyone who downloads our app. We're also developing a revolutionary eye-scanning technology that can verify wallet ownership without collecting KYC info. Subscribe to our YouTube channel to learn more.

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