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Digitalization of cross-border payments: how we move money around the world now. Part 1

Digitalization has penetrated into all parts of the Financial landscape and expanded the opportunities for more globalized payments. 

International payments have always been a sector of constant change and disruption as it has been attributed mostly to international trade development. 

According to Statista, the value of global cross-border payments in the retail sector was predicted to increase from 1.95 trillion U.S. dollars in 2016 to 3.56 trillion U.S. dollars in 2022. 

Initially, cross-border payments acting as an inseparable part of the globalized world, still always presented a challenge for most Financial Institutions, mainly because of low speed, additional costs (FX conversion fee, transaction fees), and problematic transparency. Additional pain points of conventional cross-border payment systems are speed and manual workload that in the era of flash transactions lingers back the whole process.  

Still, international trade and globalization immensely prompted cross-border payments on the forefront of the payment industry. While traditional banks rush for innovations, Fintechs put their ways for smooth and seamless transactions around the globe. 

With the digitalization development that shapes the industry, cross-border payments and transfers also are easily completed on a global scale due to advanced technology propositions. 

New technologies bring speed and flexibility enabling more integrated and seamless transactions. 

Cross-border payments have been for years and still remain the prerogative of correspondent banks. A complete convenience these banks offer acting as an intermediary on the behalf of another Financial Institution allowed them to stay the main domain of cross-border payments. The opportunities of international transactions that require to be made in the local currency have facilitated business international payments for years and enabled quite a stable payment processing for businesses. Moreover, correspondent banking is much more suitable for large sum transactions that are still the field of high fees for fintech services. Still, with the digitalization bringing in mobility and agility to Finsector, the disruption also has touched the correspondent bank services.

The primary notion is that Fintech due to its collaborative nature carries out new changes in the cross-border payments based on traditional bank networks. SWIFT and SEPA payment networks enhanced these ties and made this collaboration more intertwined. This combination of the SWIFT communication network and correspondent banking relationships has been the go-to method for moving money across borders over the last 40 years. For example, due to such collaborations, such services as Instant Payments emerged in the sector. 

Now let’s dive deeper in the services that change the cross-border payments landscape. 

Instant Payments

An IP is a payment executed in seconds, with immediate confirmation sent to the payer and beneficiary. It is fast gaining momentum in many countries, due in part to the surge in e-commerce during the pandemic.

Many countries have already developed their own instant payment solutions. The solutions present quite different schemes and use-cases. However, the basic common payments messaging standard is ISO 20022 XML-based format.

Most of the international instant payment systems are switching to ISO 20022 XML, such as SWIFT and TARGET2.

Also, SEPA Instant Credit Transfer (SCT Inst) is based on SEPA credit transfers (SCTs) and can be seen as an evolution of the SEPA scheme introduced in 2008. The introduction of this scheme determined the development of Instant Payments in the SEPA zone. SCT Inst assumes that the services should be provided in seconds and be available 24/7, and immediate notification of the payer from the recipient’s side upon the funds’ receipt. 

Instant payments are taking one of the major roles in cross-border payments as instant, convenient and the absence of physical exchange streamlines the transactions and enhances customer experience. 

Virtual IBAN 

A virtual IBAN is a reference number issued by a bank that allows incoming payments to be routed to a physical/regular bank account. Virtual IBANs present a flexible, fast, and agile banking method.

Traditional brick-and-mortar settlement accounts involve long, laborious onboarding processes during setup, with ongoing complicated processes needed to ensure all banking relationships are maintained appropriately. Unlike the traditional IBAN account, when you need an IBAN per account, the virtual IBANs are provided multiply on the basis of one real IBAN account, each per company’s customer. 

A virtual IBAN regulatory infrastructure is similar to that of a traditional bank but presents a more unified model for payments implementation.  A virtual IBAN provides payments businesses with a multi-currency, multi-jurisdictional banking solution without the need for several different banking relationships. Thus, Virtual IBAN expands the reach of financial institutions and reduces the costs associated with executing a large number of transactions.

A virtual bank means speed and agility due to its nature. Thus Virtual IBAN enables Financial institutions to create and allocate multiple virtual IBANs to each individual customer, enabling hussle-free automated processing and reconciliation. 

In general, the whole system is aimed at facilitating reconciliation and thus the potential administrative costs are further reduced, allowing businesses to operate in a more efficient way on a global scale. 

As we see the innovation in cross-border payments based on the traditional technologies removes such inconveniences as slow speed and complexity of cross-border payments.

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