Overview

Sending money across borders – whether it’s paying an overseas supplier, sending money to family back home, or buying a product from another country – has historically been slow, expensive, and opaque. Cross-border payments, often abbreviated XBP, cover all the ways we move value between countries and currencies.

Era 1.0: On-premise / Mainframe Ledgering

Traditionally, if you wanted to send $1,000 from the U.S. to someone in Japan, and your bank did not have a direct connection in Japan, it would go through a correspondent banking network – using an intermediary bank in New York, which uses another bank in Tokyo, which then deposits into the Japanese recipient’s bank account. Each step could add fees and time.

Using the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network, banks securely send and receive payment instructions to facilitate the international transfers. Note, SWIFT itself does not move money directly!

This is by far the slowest and most costly way of moving money as a standard international bank wire can take 2-5 days and cost $30-50 in fees (sometimes more when hidden fees or poor exchange rates are included). If something goes wrong or information is missing, it can take weeks to trace the payment.

The impracticalities associated with this approach gave rise to money transmitters (MTOs) which are agent networks (physical storefronts) that collect and disburse cash on your behalf. Western Union is the giant in this category, moving billions each year. Many MTOs now have mobile apps to initiate transfers instead of requiring a physical walk-in and partner with mobile wallets for last-mile delivery (MoneyGram, for example, sends into mobile wallets in various countries). Western Union has even dabbled in integrating with bank accounts and cards. Still, their core differentiator is physical reach, which remains important for cash-based economies.

Era 2.0: Global Virtual Accounts

More recently, the rise of cloud-based technologies and the development of virtual accounts in banks have enabled rapid growth among digital payment aggregators like Wise, Revolut, and Airwallex. These fintechs maintain bank accounts in the countries they support, pre-funded with local currency to move money even faster and cheaper.

Growing transaction volumes and relatively high fraud rates experienced by these players have, in turn, created market opportunities for pre-transaction verification solutions like iPiD and Trustpair, which offer proprietary data and algorithms to reduce these headaches.

Countries are also implementing instant payment systems that work across borders, at least regionally. For example, in the EU, the SEPA Instant Credit Transfer allows euro transfers between European countries in seconds (if participating banks are enabled). In Southeast Asia, there are efforts to link domestic faster payment systems of different countries (like linking Singapore’s PayNow with Thailand’s PromptPay). For now, these are fragmented but nonetheless promising developments that can reduce the need for correspondent chains between banks.

Era 3.0: Blockchain-based Transactions

Perhaps the most buzz-worthy trend is the emergence of stablecoins and blockchain solutions for cross-border transfers. Per EY and Coinbase’s research, there is significant interest in using stablecoins for money movement purposes.

Stablecoins, like USD Coin (USDC) or Tether (USDT), are cryptocurrencies pegged to fiat currencies (like the U.S. dollar) and can be sent globally nearly instantly on their networks. They offer a way to bypass banking systems entirely for the transfer – essentially, you convert cash to a stablecoin, send it over the crypto network, and the recipient converts it to local fiat. This can happen in minutes and at a low cost (network fees plus maybe a 0.1% conversion fee). It’s gaining popularity for certain use cases, especially where traditional routes are slow or unreliable.

Even large institutions are exploring this: banks in Japan are testing stablecoins for settling international transactions, aiming for a formal rollout by 2025. They envision completing transactions in less than a second using blockchain.

JPMorgan’s JPM Coin, a digital token designed to facilitate instantaneous payments between the bank’s institutional clients over a private blockchain, was processing approximately $1 billion in daily transactions in October 2023. JPMorgan's Head of Payments, Umar Farooq, projected in November 2023 that daily transaction volumes could increase five to tenfold within the next year or two, potentially reaching up to $10 billion daily!

PayPal USD (PYUSD) surpassed a market capitalization of $1 billion in August 2024, reflecting substantial growth since its launch a year ago. By January 2024, PYUSD had issued approximately 300 million tokens, with over 31,000 on-chain transactions recorded.

Visa has also joined the party by announcing pilots to settle payments using USDC stablecoin.

Key Players and Innovations

The future of cross-border payments is headed towards faster, cheaper, more transparent, and more accessible solutions.

A big potential game-changer on the horizon is the concept of central bank digital currencies (CBDCs) being used for cross-border transactions. If multiple major countries issue CBDCs, they could potentially connect them directly. The project between Japan’s banks, SWIFT, and a platform called Progmat is a hint.

Experiments like Project Dunbar (with several central banks exploring a shared platform) indicate that central banks are thinking about using digital currency tech to settle between themselves more efficiently. If that comes to fruition, it might drastically lower the cost and increase speed for bank-to-bank transfers globally.

Just last month, Wyoming introduced a state-issued stablecoin (WYST), aiming for a launch as early as July. The proposed stablecoin would be fully backed by U.S. Treasury cash and repurchase agreements with capitalization expected to be maintained at no less than 102%. Revenue generated through interest income will be used for education and infrastructure projects.

(https://watcher.guru/news/wyoming-to-launch-state-issued-crypto-stablecoin?ref=thisweek)

If regulators provide clarity (like requiring stablecoin issuers to be banks or to hold certain reserves or KYC standards), stablecoins could integrate with the existing financial system rather than stand outside. Be sure to check out this Crypto Payments Playbook by Jess Cheng from Wilson Sonsini on their take to help navigate the U.S. regulatory and legal complexities important for stablecoin success!

Our predictions:

Expansion of instant payment links

The next few years will likely see more connections similar to Singapore-Thailand’s PromptPay link, where QR codes or mobile numbers can be used to send money cross-border almost as easily as domestically. ASEAN countries (Southeast Asia) are planning a broader network linking up multiple countries’ systems. The EU will further unify instant payments. The U.S. launched FedNow (instant USD transfers domestically), and it might in the future think about linking with other systems internationally or at least enabling easier USD clearing that fintechs can hook into for cross-border use.

Competition driving costs down

With so many fintechs and now even big players like PayPal in the game, the cost to send money overseas should keep dropping. The UN Sustainable Development Goal is to get remittance costs to under 3%. Many corridors are already at 2-4% thanks to digital providers. We could see near-zero fee transfers where providers make money more on FX spread or other value-adds, or simply use cheap or mid-market rates and maybe small flat fees. It’s plausible that sending money internationally could become as cheap as sending an email (especially if crypto or other efficiencies remove a lot of the friction).

Inclusive networks

Ideally, the future will also ensure that anyone can receive international payments easily, not just those with bank accounts. The proliferation of mobile phones helps – more people have phones than bank accounts, so mobile-wallet based international transfers can bring in those who were left out. It might become normal that if you have a mobile wallet in, say, Kenya or Pakistan, you can receive money from relatives abroad within minutes.

More than just money – data with payments

Future cross-border payment systems might carry more data along (for compliance or for transparency). Already, the SWIFT gpi now includes more data fields to track fees and status. This should extend to stablecoin transactions that include reference info. Possibly integrating identity (like digital passports for transactions) to ease compliance – e.g., the transaction carries a token that confirms both sides are verified persons/entities. This ties into digital identity and KYC utilities globally and the larger play in agentic AI automating payments for us in the future!

What did we miss? If you’re building in payments, we’d love to hear from you.

Reach out to us at jackson@headline.com and let’s get connected!