The Bank of England(1) estimates global cross-border payments will grow to more than $250 trillion by 2027, up from $150 trillion in 2017. That equates to a rise in excess of $100 trillion in just ten years. This growth is being driven by the increased mobility of goods, services, capital and of course, people. The e-commerce sector is a significant contributor to cross-border trade, whether through international customers or supply chains, and is leading the calls for the modernization of the current payments system that is structured around the use of global intermediaries.

In the Middle East, small and medium enterprises (SMEs) expect to increase cross-border payments amid changing consumer preferences. A report by Mastercard(2) found the majority - some 96% of SMEs - are using more international suppliers and services than 2022. It also determined that 82% of SMEs in the United Arab Emirates now use an app to make cross-border payments - the fourth-highest percentage across the markets surveyed.

This number represents the largest advance among all countries participating in the research, and a rise of 27% compared to 2021. Taken together these factors are pushing SMEs to create payment infrastructure that is secure, efficient, and for consumers, comparable to the domestic checkout experience. With the global e-commerce market set to exceed $57 trillion by 2032 according to Precedence Research(3), the increasingly international nature of e-commerce is likely to intensify in tandem with the further democratization of payments.

Globalization also includes cross-border supply chains that are the foundation for the growth in trade and e-commerce. Amid this heady growth, payment providers will see an uptick in corresponding demand for cross-border transactions and the use of new forms of payments, such as digital payments.

Exploring the Transition in Cross-Border Payments

Cross-border payments feature alternative payment methods such as e-money wallets and mobile payments, but also incorporate more traditional methods such as bank transfers and credit card payments. They can be divided into two chapters, namely wholesale and retail cross-border payments. Current cross-border payments rely heavily on correspondent banking - a network of intermediaries that are the bedrock of the contemporary payment system. 

Unsurprisingly SMEs want new payment rails that conjure a faster, more cost effective and seamless service, and they are pinning their hopes technology will tear down the current barriers to cross-border trading. The good news is that the emergence of APIs allows greater interoperability between banks and nascent fintechs to create integrated systems, and has the potential to harness the best of both world’s expertise.

As the market and SMEs gravitate to new technology, it is important businesses understand the added complexity that cross-border transactions entail, and scale their compliance protocols accordingly. Digitalization is undoubtedly upending markets, and technology such as distributed ledger technology commonly referred to as blockchain, is seeing wider use, particularly when it comes to providing digital identities for screening and due diligence under KYC (Know-Your-Customer) and AML (Anti-Money Laundering) obligations.

Unlocking the Future of Cross-Border Payments

For some, blockchain and its inherent immutability and digital currencies are an obvious solution to current cross-border payment bottlenecks. They could also be the answer to the high rejection rates SMEs face accessing trade finance for cross-border business, with innovations such as peer-to-peer lending and crowdfunding. But migrating to technologically advanced payment methods is not without challenge, and requires careful planning if it is not to disrupt the day-to-day stability of business.

New international markets and an upswing in cross-border B2B, B2C, and C2B transactions will see wider use of machine learning and AI in areas such as financial modeling, automated customer support and analytics. And as SMEs expand trade across borders cloud computing offers scalability which allow payment providers to handle the increases in transaction volumes. It also provides reassurance over security concerns with end-to-end encryption and multi-factor authentication.

Technology can also be a key enabler to make cross-border payments more transparent, traceable, cheaper and faster.

Conclusion

The optimism engulfing SMEs amid the rise in cross-border trade is checked by the practical challenges. Yet despite the issues, cross-border e-commerce will increasingly feature in SMEs payment architecture and open the possibility of new revenue streams. Indeed, anticipated advances in technology offer the hope of a renaissance in cross-border payments that are faster, cheaper, and more transparent.

 

References:

  1. Cross-border payments - https://www.bankofengland.co.uk/payment-and-settlement/cross-border-payments
  2. Borderless Payments Report -  https://www.mastercard.com/global/en/business/cross-border-services/borderless-payments-report.html
  3. E-commerce Market Size, Trends, Growth - https://www.precedenceresearch.com/e-commerce-market
  4. The Top Three Pain Points Faced by SMEs -  https://www.sme-news.co.uk/the-top-three-cross-border-payment-pain-points-faced-by-smes

 

 

 

Shrushti Ghosh