Cross-border payments are at the heart of the global economy, enabling businesses to serve customers wherever they are based in the world. Volumes are growing, with transactions estimated to reach a value of over $250trn by 2027. In particular, we’re witnessing a large growth in high volume, low value transactions. And this trend is happening for several reasons.

One reason is the increasing rate of globalisation and cross border commerce – including for middle market and small businesses – driven by advancements in technology and trade policies. Recognising that cross-border trade is a major driver of economic growth, regions are increasingly focusing on trading relationships to help local businesses expand and economies thrive. With larger numbers of businesses operating across borders, transaction volumes of all sizes are growing.

At the same time, the way people work has changed tremendously over the last few years, and we see more and more people opting for flexible, part-time, or gig opportunities. Additionally, since remote working became normalized during the pandemic, digital nomadism is gaining steam around the world. This new way of working means that businesses need to be able to pay their employees in different ways – in varying amounts and in various countries.

Another driver is remittance flows, which continued to grow in 2023, estimated at $860bn in 2023, and are posed for moderate growth in 2024. Although in 2023 the growth hasn’t reached the peak from 2021 and 2022, the sector is holding up well and remains a big driver of rising payment volumes.

The lack of inclusion in cross-border payments

This environment has led to an influx of new cross-border payment use cases. However, because they tend to be high volume and low value transactions, these consumers and businesses remain largely underserved by banks. SWIFT, for example, is the most prominent go-to cross-border network for high value transactions, but when it comes to the gig economy, small businesses, remittances or other high volume, low value payment use cases, this method is often not suitable.

As a result, these customers have increasingly turned to fintechs or alternative payment providers to their bank. For banks, this can lead to missed revenue opportunities, risk of losing customer loyalty and retention for other services, and a lack of inclusivity in payments.

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The industry faces several other challenges, such as the lack of transparency, long delays in accessing funds and high costs of transferring money across borders, which can have a greater negative impact for this segment. At the same time, in our current era of instant payments, customer expectations have heightened around speed and transparency.

The high cost, slow settlement of funds, lack of transparency, de-risking, and management of correspondent banking relationships are some major challenges currently faced by financial institutions. According to the Bank of England, long transaction chains can cause friction, delays and increased costs for banks which lead to additional funding needs and validation checks to protect all parties in the transaction.

A big challenge for banks is that connecting to hundreds of payment rails or accessing billions of accounts is a major undertaking if they have not upgraded their payment processing capabilities. A significant number of financial institutions recognise the importance of payment modernisation in terms of cost reduction and profitability and see modernisation efforts as an opportunity to access hard-to-reach markets.

The way forward for banks

For banks wanting to capitalise on this market opportunity and increase customer acquisition and retention, there are a number of alternative cross-border payment networks that enable them to effectively cater for this underserved group.

For instance, Visa Direct is a network of networks that provides access to billions of accounts through push to account offerings and via many market infrastructures such as real-time payment schemes, the Automated Clearing House network, and real-time gross settlement networks. These alternative payment rails, among several others, provide a single access point for money movement for all consumers and corporates – whether gig workers or small businesses – while providing them with cross border services that are accessible, seamless, transparent, cost-effective and fast.

The growth in Banking as a Service (BaaS) solutions makes this process even simpler. While deploying a custom-built cross-border payment solution can be both expensive and time-consuming, banks can, for example, implement Visa Direct via a BaaS offering to speed up time to market and value.

The significant progress made towards domestic instant payments in regions around the world means customers have come to expect seamless, frictionless services. And they are increasingly expecting the same with cross-border. As the volume of payments increases around the globe, so does the demand for faster, more transparent, and more affordable transactions.

The ability to offer instant, transparent, and cost-effective cross-border services is not just an expectation but a necessity in today’s fast-paced global economy. As we witness an upsurge in cross-border payments, adopting efficient and user-friendly platforms becomes imperative for banks to increase market share and keep up with customer demands.

Banks that do not expand their offering are ultimately giving their competitors new opportunities and potentially damaging the loyalty of customers that are excluded from these services. By collaborating with fintechs and implementing alternative payment rails via BaaS, they can capture this opportunity at speed and scale. Importantly, banks can build bridges that enhance customer retention and experience, foster financial inclusion, and open up new horizons for cross-border payments.

Josh Cogan is Lead Client Partner, BaaS, at Finastra