International Payments in the new world!
Ever wondered why sending money internationally from your home country is so complex and takes a few days while sending money within your country is real-time or how do you get the best foreign exchange rates while making the transfer?
International Payments is complex for the simple reason that here different currencies are involved and not all banks within international boundaries talk to each other.
With remote work, the economy is becoming more global and thus, the need for international payments increases further- in the form of payroll, reimbursements, dividends, equity payments, customer payments, etc.
According to a report by McKinsey, International Payments volume has increased manifold over the last few years.
Preferred ways of transferring money change depending on whether it is B2B, B2C, C2B, or P2P.
However, some common methods that you can use to either pay a peer, a contractor or a business are as follows:
Wire Transfer: Most of the local banks have an international payments division. These banks have correspondent banks across countries and transfer the money via SWIFT. SWIFT(build by a consortium of banks) acts as a messaging system among the banks helping to communicate whether the money has reached its destination. E.g. A typical transaction will look like this:
Considering so many banks are involved in between, this method is usually expensive unless the payment volume is high and thus, you can get good fx rates.
Transferwise: Transferwise has local bank accounts in multiple countries and thus, there is no actual transfer of funds. It is cheaper to transfer funds through this method because no bank fees are involved. They also give you good rates and are very transparent in giving a comparison between them and their competitors. This, however, might not be the best option in case you have to do high-value recurring payments. The fees range from .6-1.5%
Revolut: Revolut is one of TransferWise’s direct competitors that was very quick to be adopted in Europe because they had the multi-currency card, which was their way to get customers on board. It is also expanding to other geographies now.
Payoneer: Payoneer works more for freelancers and businesses and is not relevant for individual transactions. It charges around 2.5% in fees. Only transfers are allowed for private accounts. Most of the blue-chip companies and huge corporates still use Payoneer as one of their payment options, including Amazon and Airbnb.
PayPal: Paypal provides direct transfers and is the quickest way to send money (Paypal to Paypal). However, it charges a heavy fee and is more relevant for E-Commerce transactions which are more real-time.
Crypto: This is a very recent phenomenon to avoid the fees involved in paying intermediaries. You can pay the other person in Bitcoin or Ether or any other cryptocurrency. This is, however, still not evolved because cashing it might be a challenge in a lot of countries due to legal complexities and those expenses might overpower the savings in avoiding banks. Also, the volatility involved makes it less preferred.
There have also been some recent trends to improve the landscape further.
Virtual Bank Account:
Virtual accounts, which are provided to a company by its banking partner, are linked to that company’s physical bank account. They enable a company to segregate cash within its physical account, eliminating the administrative workload, complexity, and costs associated with holding additional physical accounts for different functions or lines of business.
Though virtual accounts have existed for a while, they are gaining traction now due to changes in market dynamics with respect to regulation and customer requirements, coupled with the drive-by banks to achieve greater operational efficiency.
JPM Onyx: It is a blockchain-based interbank information network to maintain the balance of currencies for international transfers. In simple words, in the previous example of bank transfer, this makes JPM India to JPM USA reconciliation faster and keeps a track of the balance to be maintained of currencies between the two banks.
Swift GPI: SWIFT GPI (GPI stands for Global Payments Innovation) combines the traditional SWIFT messaging and banking system with a new set of rules. Any bank that joins GPI has to follow these rules, which include transparency of fees, end-to-end payment tracking, and confirmation of credit to the recipient's account. The initial launch of SWIFT GPI was in 2017 but there are already over 3,700 banks that are members, processing over $300bn a day.
Thus, for now, Transferwise seems like the best solution for peer-to-peer transactions and Paynoeer and banks make more sense for Business transactions.
Even though there are multiple innovations that have happened in the space, there is still a lot of white space and the possibility to make international payments as seamless as domestic payments. the blockchain infrastructure being developed by multiple startups might also be a potential game-changer here.
I am just waiting for the day when we can get a UPI type solution here.