Cross-border payments remain vexing for consumers, businesses

• Key insight: Cross-border payments are popular, but still complex and expensive. 
• What's at stake: Not supporting international commerce can harm a bank's ability to compete. 
• Forward look: Swift and the Federal Reserve are among those planning to improve processing. 

Cost, speed, transparency, legal and regulatory hurdles continue to hamper cross-border payments despite some successful attempts to lift these barriers.

In 2020, the G20 launched a roadmap to make cross-border payments faster, cheaper, more transparent and inclusive. While "significant progress" has been made, there's still a long way to go, according to a progress report from The Financial Stability Board released earlier this month. 

Despite efforts, "the impact has not yet translated into the desired level of tangible improvements for end-users," the report said.

Improving the friction for cross-border payments is complicated because many factors affect the process, including technology, regulation, geopolitical issues and country-specific nuances—and it's a long-term play. "We are moving in the right direction," said Gareth Lodge, principal analyst at Celent. "It isn't just one issue that needs to be fixed, but if you don't try, you're not going to get there," Lodge told American Banker.

Here's what banks need to know about the challenges and recent efforts to lessen the pain points:

The challenges

While instant payments are becoming more prevalent within the U.S., there are more headwinds for international payments. This is understandable considering "there are 195 countries all with their own payments systems, regulations and levels of technological maturity," J.P. Morgan noted in a report. 

That doesn't make it less frustrating for consumers and businesses who want the ability to move money seamlessly around the world. More than 40 countries offer faster payment systems, and "people are used to moving money instantaneously within their countries. Not being able to do it cross-border is a real issue," said Rodman Reef, managing principal at Reef Karson Consulting in Larchmont, N.Y.

The challenges are plentiful. For starters, the cost to send a cross-border payment can be exorbitant, with the average cost tending to run about 2.5% to 5% of the transaction value, said Reef, a member of the U.S. Payments Forum who is also part of the Faster Payments Council's working group on cross-border payments.

Another sticking point is that it can take several days for transaction beneficiaries to have access to the funds. On top of that, the sender doesn't always know the total cost of the transaction or when the beneficiary will have access to the money. "I can move a video around the world in seconds, but I can't move money around the world in seconds. That frustrates a lot of people, and to a lot of folks it makes no sense," Reef told American Banker.

Incremental steps

There have been incremental steps aimed at lessening some of the pain points.

For example, Swift said in September it was collaborating with more than 30 banks to provide "a consistently fast, predictable and transparent experience for retail customers worldwide."

Together they will develop rules to set a new standard for consumers and small businesses sending money internationally. Participating institutions will commit to upfront transparency on payment and FX fees, guaranteed full-value delivery, end-to-end visibility of transactions and instant settlement where available, Swift said.

Another step to ease friction was announced by the Federal Reserve earlier this month; the Fed said it plans to expand operating days of its Fedwire Funds Service and the National Settlement Service, to include Sundays and weekday holidays. The expansion will be implemented "no earlier than 2028 to ensure operational and industry readiness," according to the announcement. Currently, both the Fedwire Funds Service and NSS operate Monday through Friday, excluding holidays. 

Fintechs step up

While banks have struggled to offer low-cost cross-border transactions, several fintechs have introduced faster, less expensive ways to move money internationally. They've been expanding their reach and gaining momentum.

For instance, earlier this year, Wise said it would collaborate with Google to make international payments more accessible to U.S. consumers. Another provider, Revolut, grew its customer base by 38% to 52.5 million globally last year. Customer balances climbed 66% to $38 billion, according to its annual report. Another major player, TransferMate, continues to expand its global footprint, announcing various partnerships and additional license applications this year.

Potential from stablecoins

Some payments professionals see stablecoins as a way to reduce friction related to cross-border payments. There will still be FX costs, but it's an option to solve the speed issue, Reef said. It's also a solution to the correspondent banking issue. Correspondent banking relationships have fallen by over 50% in the last decade, making it more difficult for banks to provide lower-cost cross-border services, Celent's Lodge told American Banker. 

Countries are in the process of creating legal and regulatory frameworks for stablecoins. Notably, the U.S. recently passed the GENIUS Act, creating a federal regulatory system for stablecoins.

Separately, Mastercard and Visa have been expanding their ability to enable stablecoin transactions. For example, Visa said in September that it will launch a stablecoin prefunding pilot through Visa Direct to reduce friction, offer quicker access to liquidity and provide financial institutions more flexibility to manage global payouts.

"There's not a general agreement that this is the way of the future, but there is certainly a lot of talk about it," Reef said.