Cross-border payments have long been a complex and costly process, often involving multiple intermediaries and lengthy settlement times. However, the rise of fintech companies and technological advancements have led to a significant shift in the way these payments are made. In this blog post, we'll explore the differences between traditional bank-based cross-border payments and the innovative solutions offered by new fintech providers like NIUM, Airwallex, and Wise.

Traditional Bank-Based Payments: SWIFT and Correspondent Banking

For many years, the Society for Worldwide Interbank Financial Telecommunication (SWIFT) has been the primary network for facilitating cross-border payments. Traditional bank-based payments typically involve the following steps:

1. Initiation: A customer sends a payment request to their bank.

2. Intermediary Banks: The payment is routed through multiple intermediary banks, each of which charges a fee.

3. Settlement: The payment is finally settled between the sender's and recipient's banks.

This process can be slow, expensive, and lack transparency. The multiple intermediaries involved often result in higher fees and longer processing times. Additionally, the lack of real-time visibility into the payment journey can make it difficult to track and resolve issues.

Fintech Innovators: A New Era of Cross-Border Payments

Fintech companies like NIUM, Airwallex, and Wise have disrupted the traditional cross-border payments landscape by offering faster, cheaper, and more transparent solutions. These companies leverage technology to streamline the payment process and reduce costs.

The key to their efficiency lies in their utilisation of local banking rails. Instead of transferring funds across international borders, these platforms leverage their network of bank accounts in various countries to facilitate domestic transfers.

A breakdown of how these platforms typically operate:

1. Customer Deposits: A customer sends funds to the platform in their local currency.

2. Currency Conversion: The platform converts the funds to the desired currency using its proprietary technology and exchange rate partnerships.

3. Local Transfer: Instead of transferring funds across borders, these platforms maintain bank accounts in numerous countries worldwide to be able to make domestic transfers within the recipient's country. This leverages the efficiency and lower costs of local banking rails.

4. Local Payout: The recipient's bank receives the funds from the platform's local account, effectively completing the cross-border transaction.

Key features of these alternative providers include:

• Faster Payments: By utilizing local banking rails and advanced technology, these providers can often process payments in a matter of hours or even minutes, compared to days or weeks for traditional bank transfers.

• Lower Costs: By eliminating intermediaries and negotiating better exchange rates, fintech companies can offer significantly lower fees than traditional banks.

• Increased Transparency: These providers offer real-time tracking and visibility into the payment journey, making it easier for customers to monitor the status of their transactions.

• Wider Range of Payment Options: Many fintech companies offer a wider range of payment methods, including local payment options and digital wallets.

While these platforms don't physically move money across borders, they still need to convert the currency to ensure the recipient receives the funds in their desired currency and to protect themselves and their customer from potential losses due to currency exchange rate fluctuations. So the platform converts the funds at the agreed-upon exchange rate at the time of the transaction. They also often

• Hedging: They often use hedging strategies to offset potential losses from adverse currency movements. This involves taking positions in other financial instruments that will gain value if the currency they hold loses value.

• Currency Reserves: They maintain reserves of various currencies to manage their exposure to FX risk. By holding a diversified portfolio of currencies, they can reduce their overall risk.

• Dynamic Pricing: Some platforms may use dynamic pricing models that adjust the exchange rates they offer based on market conditions. This can help them manage their risk and remain competitive.

Hidden Costs in Cross-Border Payments

While traditional banks and fintech providers often advertise competitive fees for cross-border payments, there are several hidden costs that can significantly impact the total cost of a transaction. These include:

• Exchange Rate Markups: The difference between the buying and selling price of a currency (the bid-ask spread) can vary widely, and some providers may charge a wider spread than others.

• Intermediary Fees: Even with fintech providers that claim to eliminate intermediaries, there may still be hidden fees charged by correspondent banks or payment networks.

• Currency Conversion Fees: Multiple currency conversions can result in additional fees.

• Transaction Fees: Fixed or percentage-based fees can add to the total cost.

• Regulatory Fees: Taxes, duties, or compliance costs can impact the overall expense.

To minimize these hidden costs, it's essential to compare fees, understand exchange rate dynamics, negotiate with providers, choose transparent options, and be mindful of potential hidden charges.

The Future of Cross-Border Payments

While traditional banks will likely continue to play a role in the cross-border payments landscape, fintech innovators are poised to disrupt the market. As these companies continue to grow and expand their offerings, we can expect to see even more competition and innovation in this space.

In conclusion, the landscape of cross-border payments is rapidly evolving. Businesses and individuals looking to optimize their cross-border transactions should carefully consider the benefits offered by both traditional banks and fintech providers to make informed decisions.