According to a paper published by the US Faster Payments Council in January 2024, the value and volume of international transactions over the past decade have grown by 37% and 61%, respectively. While such an increase reflects the improving interconnectedness of the global economy, it also emphasizes the need for more efficient cross-border payment systems.
However, achieving the perfect ratio of speed, security, and convenience in this sphere requires addressing a number of obstacles along the way. Keep reading to learn more about the key challenges currently present in the cross-border payment sphere and ways in which they could potentially be overcome!
Yet, there is still plenty of room for improvement and many challenges to tackle, including:
1. Regulatory Compliance Complications
Entities involved in cross-border transactions often struggle with navigating complex legislation, such as anti-money laundering (AML) and know-your-customer (KYC) regulations. Besides, rules and guidelines tend to vary across different jurisdictions.
While these regulatory measures are aimed at creating a secure money transfer system for all stakeholders, industry experts agree that they can sometimes be too fragmented. Global standards harmonization and streamlined compliance processes could significantly ease this challenge.
2. Lack of Transparency
Another common hurdle in international payments is the lack of transparency, which leads to delays, disputes, and confusion when it comes to resolving potential issues. This problem is mainly due to the fact that the payment process typically involves multiple intermediaries that often do not have the right infrastructure for real-time status updates in place.
Fortunately, the wider adoption of blockchain and distributed ledger technologies is expected to become a game-changer in this field, providing a secure and transparent record of transactions.
3. Security Risks
Cross-border transactions go hand-in-hand with the transmission of sensitive financial information between different countries, which makes them vulnerable to cybersecurity threats like hacking and fraud.
Therefore, entities dealing with such payments must invest in enhanced encryption and multi-factor authentication, as well as continuously update their security protocols to ensure the safety of data and funds.
4. Exchange Rate Fluctuations
The volatility of exchange rates makes the value of cross-border transactions unpredictable, which, in turn, impacts both businesses and private persons.
Luckily, it is possible to address this challenge by implementing hedging strategies, utilizing financial derivatives, and promoting collaboration in fiscal and monetary policies.
5. High Costs
Moreover, traditional cross-border payments often entail high transaction fees, currency conversion costs, and intermediary commissions. These expenses can be a significant setback, especially for individuals and smaller businesses.
This is why companies, financial institutions, and local authorities nowadays are actively exploring ways of cutting down international transaction costs by implementing innovative fintech solutions.
6. Interoperability Hurdles
The diverse technologies, standards, and protocols used by FIs and PSPs across the globe lead to the lack of interoperability between different payment systems, which ultimately disrupts the flow of cross-border transactions.
As practice has shown, such hurdles can be effectively addressed with the help of standardization solutions like ISO 20022 and open banking initiatives.
7. Increasing Competition
The growing number of players in the cross-border payment space has led to rapidly intensifying competition.
Thus, organizations that want to remain competitive in the international payment sphere must adapt by embracing tech trends, forming strategic partnerships with fintechs, and adopting a customer-centric approach.
As you can see, despite the fast pace of payment advancements, there are still quite a few significant obstacles separating us from completely seamless cross-border transactions. And while overcoming them is possible, it requires unified efforts from governments, FIs, and technology providers.
By working together, the global community is sure to pave the way for a more efficient, secure, and transparent international payment infrastructure that aligns with the needs and expectations of modern businesses and individuals in the foreseeable future.
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