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This article was originally published in Global Banking & Finance Review and can be accessed here

The trends with new cross-currency consumer payment solutions and why banks will have to adapt

The value of global cross-border payments is expected to reach US$156 trillion US dollars by 2022. The lion’s share of this involves business to business transactions. Yet the US$5.2 trillion of cross-border payments which involves consumers is not to be sniffed at. There is also evidence that consumer cross-currency payments are growing rapidly, often driven by increased online shopping, migration, tourism and cross-border working.

Technology has transformed the world of cross-currency consumer payments. In recent years, we have seen the remarkable rise of popular payment and transfer services such as Revolut and Transferwise, which recently rebranded as Wise.

Wise has over 10 million customers and transfers some £4.5 billion per month across 54 currencies. It’s easy to see why consumers have adopted such services. The Wise mobile phone app enables consumers to transfer money into international bank accounts in a range of currencies rapidly and cheaply. Such transfers can be made more secure by using the phone’s biometric capabilities, such as fingerprint scanners or face scanning technology. Consumers can even upload money from Apple Pay, again using biometric identification.

This means that an international transfer can be completed without entering any cumbersome security codes, or any other method of verification. A currency transfer to an international payee can be authorised by two scans of the consumer’s face. The transfer may well arrive within a couple of hours. Wise claims that its international currency transfers and payments cost the consumer less than they would if done though bank or money transfer service.

It’s no surprise that consumers will choose services which offer greater ease, speed and value in international currency transfers. Costly and sluggish international transfers have long been a bone of contention with bank’s customers around the world. Startups such as Revolut have not been slow to point this out to consumers, arguing that, “Back in the ‘80s, the quickest way to send money from London to New York was to physically take cash with you on a plane, just like in the movies. Surprisingly, this still holds true today, but have you ever wondered why?” Revolut says that it can provide consumers with instant and free transfers between its users, “because our technology takes away the need to go through clunky and outdated banking systems such as SWIFT or SEPA”. At the end of 2020, Revolut had 14.5 million consumers and 500,000 businesses as customers. The company’s revenue grew by 57% in 2020 alone.

In tandem with the rapid growth of Revolut and Wise, we are also seeing a wider proliferation of new technology and payment methods, including digital wallet alternatives, blockchain technology. Clearly, the rapid adoption by consumers of new ways of sending money internationally requires a response from banks. While many of the promised responses remain in the works, we are beginning to see traditional financial service providers roll out services which could meaningfully challenge the rise of services like Revolut or Wise. The advent of person to person push card service like Visa Direct and Mastercard Money Send are a step in the right direction. Visa Direct makes payments directly to another person’s card account in 30 minutes, and it can also facilitate international transfers for consumers.

Some have touted cryptocurrencies as a good way to securely make payments internationally, however their volatility renders them unsuitable for consumer use. Due to their perceived links with cybercrime and money laundering, cryptocurrencies also look set to be subject to ever tighter regulation in the coming years. However, blockchain technology may yet come to the fore. However it now looks as though it will be central bank backed digital currencies which will win the day.

Major central banks are already actively planning the rollout of digital currencies. China is already trialling a digital Yuan. The US Treasury has described the creation of a digital dollar as a high priority project. The ECB is also advancing its plans for a digital Euro. The advent of major central bank backed digital currencies look set to make international currency transfers faster, cheaper and more secure.

Earlier this year, Fabio Panetta, a member of the Executive Board of the ECB, said that the digital euro could “act as a catalyst at the international level. By ensuring interoperability with foreign digital currencies, including other central bank digital currencies (CBDCs), it could create much needed efficiency gains in cross-border payments lowering their costs.”

Mr Panetta went on to warn that digital currencies may also exacerbate the volatility of currency market, saying, “Paradoxically, a digital euro may prove too successful.[17] If it is not properly designed, its main strengths – safety and liquidity – could affect monetary and financial stability on three fronts: first, financial intermediation and capital allocation in normal times; second, financial stability in times of crisis; and third, the functioning of the international financial system.” Mr Panetta said that “recent research suggests that, in the presence of a CBDC, shocks could result in greater exchange rate fluctuations and have a stronger effect on foreign financial conditions.” This is essentially because by making it easier and more secure to rapidly buy and sell foreign currencies, digital currencies could rise or  fall more quickly in times of crisis.

Digital currencies could therefore provide consumers with a more secure and cheaper way of making international payments. A downside may be greater volatility in the value of currencies globally. Yet banks already deploy measures to protect business customers from currency fluctuation, such as FX lock ins for certain transactions and consultative support for payment mitigating strategies. Similar supports could be offered to consumers exposed to currency fluctuation. With the rise of remote working, we have seen a concomitant rise in cross-border working. Such consumers are at greater foreign exchange risk if their salary is in a different currency to their mortgage and their domestic bills. Offering cross-border mortgages in the currency in which the consumer is paid would alleviate a lot of such risk for such people.

Another macro trend driving an increase in cross-border payments is the rise in migration and mobility around the world. Migrants often need to send money home to support their families or their business concerns.

Research by McKinsey on cross border payments notes that such “retail remittances” are set to drive cross border transfers, “sustained by increasing migration flows as well as more mobile affluent classes. For instance, China’s urban upper middle class population will more than quadruple from 2012 to 2022, while their personal consumption grows by seven times during the same period.3 This group’s increasing international focus also leads to cross-border education and bill payments exceeding traditional remittance growth.”

The growth of online shopping, fuelled by the coronavirus pandemic, is also set to have an impact, according to McKinsey, which says that “a rise in consumer cross-border payments: “Cross-border payments growth is particularly compelling in marketplace payments and the gig economy. Amazon, eBay, Expedia and Airbnb are the drivers behind travel and ecommerce, comprising around 50 per cent of the marketplace disbursements space, while niche players like Etsy and Upwork are also growing strongly—fuelling cross-border commerce and employment and driving C2B, B2C and business-to-small-business payments.” Alongside the growth in such online platforms, even small local businesses now often operate online shops, and as a result may take orders from overseas, necessitating cross-currency payments.

Another risk to consumers from the explosion in global online payments is that their data could become a product to be sold on. McKinsey suggests that “where private and SME customers are using ecosystems that use cross-offerings or data to drive revenues. Services that can use data to generate insights into consumer and corporate purchasing behaviour, and couple these insights with supplemental data, can provide better services to customers; but they can also go a step further by capturing new opportunities to extract value through the monetisation of the data itself.” Data protection concerns may cause some consumers to move towards service offerings by banks, which promise strong data protection.

Yet the reason that monetisation of data is seen as potentially necessary for some cross-border payment providers to make a profit is that the margins from such services are expected to crash. McKinsey predicts that “By 2025, per-transaction pricing for cross-border payments will have eroded to a fraction of their historic levels, even for large value transactions, making low single-digit dollar transactions a likely outcome.” As cross-border payments become cheaper, their volume is likely to increase, while purchasing services and goods internationally is likely to become more attractive to consumers.

The growth in demand for cross-currency consumer payments looks set to continue for the foreseeable future. As new technologies arise to make the process of international payments cheaper and easier, banks will have to adapt quickly to provide their customers with the sort of secure, cheap, easy-to-use cross-currency payment methods that consumers want.