International payment part 2: pain points and solutions

  1. Pain points in international payments are: 1. cost, 2. speed, 3. no transparency, 4. ease of access. Root cause is lack of international payment rail.
  2. A number of fintech start-ups have sprung up to address these problems, but true disruption would require both at the infrastructure level as well as business level.

Intro

International payment is an area that I am really passionate about. As a practitioner and consultant to international businesses, I experienced the frictions in international payment first hand. As a fintech nerd, I know that international payment is an area for disruption for the following reason:

  1. market size
  2. technology discontinuity
  3. fragmentation: lack of standard
  4. excessive waste or cost / is there an opportunity to create efficiency

The fundamentals

Pain points in international payments:

Note some of the pain points I described below have been improved by the banks as we are in a transitional phase.

  1. expensive
  2. slow
  3. lack of transparency
  4. ease of access

How is money moved across border?

Note: I will the discussion on the high level here. For those interested to get a solid understanding of the basics, please refer to my previous article: how foreign exchange works.

The cause of the pain (the why)

The reason for the pain points in international payments is lack of international payment rail. There are closed loop rail within each country, such as Fedwire and CHIPS in the US, and there is no standard format / protocol for these national payment rail to communicate with each other.

Source: Glenbrook partners

Current application level solution:

Currently, whether you go through banks, Western Union, or fintech start-ups, the way money is moved across border is The current is:

  1. SWIFT messaging
  2. Nostro and Vostro accounts / correspondent banking,
  3. and wire transfer for domestic money movement.
  • Lowered the cost: By netting, pooling, and direct connection to major correspondent banks
  • Provided transparency: Transparency on timing by providing estimates of arrival and show status of where the money is. Also provided transparency on fees
  • Improved delivery time: Speed up timing through direct connection. However, can’t avoid the slowness and limitation of the underlying rail
  • Ease of use: Digital access through computer and mobile. Focused on user experience and product design
  1. speed is limited by the limited operating hours of the rail: CHIPS operate from 9 to 5 ET and Fedwire operate from 7:30 to 7:00 ET.
  2. Still too much fragmentation
  3. Still excess costs and wastes without standardized international wire

Current infrastructure level solution

In today’s digital economy, we should have 24/7 rail that can make international payment in real time. Though we may not actually get real time due to fraud / AML measures, but the capability should be there.

Visa B2B connect

Conclusion

It’s hard to say who will be the winner, or whose product is better without looking under the hood. The market is certainly big enough for all 3 companies to do well. With competitions, Ultimately I wish the winner is consumers. Perhaps there ought to be an IBaaS (international banking as a service) company that make it easy to switch between the different rail providers, so that consumers are not locked to a specific platform / solution. This will keep the solution providers competitive and make consumers the true winners.

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Ming-Chieh Lee

Ming-Chieh Lee

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passion for #fintech #payments #RTP real time payment #Banking as a Service #digital strategy #blockchain