In recent years, the wave of artificial intelligence (AI) and related technologies has swept across nearly all aspects of our human experiences: AI adoption has nearly tripled in the last five years, and a 20% increase is expected in global adoption this year alone. In response, several organisations and industries are undertaking restructuring efforts to integrate AI and machine learning technologies. One such industry is fintech, especially the cross-border payment sector. 

Mick Fennell, the business line director for payments at Temenos, shared some insights into this at the Money 20/20 Europe conference in Amsterdam this June.

“We see enormous opportunities for AI within the entire payment space, and it’s more of a surgical way of introducing it to various aspects of processing,” he said.

While there seems to be an overwhelming demand for futuristic products in the fintech industry, it is important to pay attention to the present. The leap to the future would be impossible without building a perfect payment processing structure in the present to serve as a launchpad. 

Fennell observed, “There’s multiple challenges for institutions. One of the hardest things to do is to address all of the verifications, especially around fraud monitoring and anti-money laundering, and address those in a real-time world… The other issue we have with cross-border real-time is connecting various systems together.”

Challenges faced by FIs using cross-border payment systems

Fennell offered a well-founded perspective on the issues in the current cross-border payment infrastructure, which is still plagued by a handful of challenges that impair and disrupt its speed, efficiency, and overall adoption. 

Multiplicity of laws and regulations 

Over the last decade, several innovations have been developed to further shrink the world into something of a village where payments and transfer of monies can be exchanged within a few minutes. 

Despite these efforts, the financial regimes of countries have rendered their productivity underwhelming. They can take the form of data protection laws, counter-terrorist financing and anti-money laundering laws, foreign exchange (FX) laws, and payment services laws, which govern the licensing and operations of financial institutions. This situation presents a dilemma, as governments try to protect their citizens from fraud and scams. They set payment safety requirements that could act as roadblocks to the swiftness of cross-border payment processing: these laws and regulations are necessary evils, as they affect the speed, cost, and accessibility of cross-border payments. As the World Economic Forum (WEF) identified, there is a gap between the rate at which cross-border payment technologies are growing and the current regulatory frameworks installed by countries to guide them.  

There is imperative for financial institutions and stakeholders such as the Financial Stability Board and the Basel Committee on banking supervision to come together and work towards the harmonisation and standardisation of the legal and regulatory framework governing cross-border payments. One of the ways to achieve harmonisation is by leveraging bilateral and multilateral agreements. Countries with strong diplomatic relations and political ties should design a singular legal and regulatory framework for cross-border payments. 

Infrastructural deficiencies

The operational systems adopted by most financial institutions for cross-border payments leave a lot to be desired. It is responsible for most of the challenges facing cross-border payments globally. The current banking system by the Society for Worldwide Interbank Financial Communications (SWIFT) is quite costly and lacks much-desired transparency in the processing of transactions. 

As a result of this, there is a dire need for innovation in the cross-border payments processing industry.  A popular alternative to the SWIFT system is blockchain and cryptocurrencies. The proponents of this technology claim it tackles most of the frustrations experienced under the swift banking system. Blockchain technologies operate for 24 hours each day and are more transparent and secure than other cross-border payment processing systems. More importantly, blockchain transactions are about nine times faster than their counterparts on traditional banking systems. 

Intermediary banks

As the popular saying goes, “Too many cooks spoil the broth.” The global cross-border payment system is wired in such a way that it involves intermediary banks. In the traditional cross-border payment flow, correspondent banks serve as middlemen, and they handle activities such as FX conversion. In blockchain-based cross-border payments, intermediaries (such as banks) typically handle activities like on-ramping and sanction screening. While these intermediary banks play an important role in the current payment process, they are not essential. In fact, eliminating them can make cross-border transactions faster and more cost-effective.

This is why financial institutions across the world are working towards bank-generated stablecoins. JP Morgan recently integrated euro-dominated payments to its network; Standard Chartered is on the verge of launching a Hong Kong dollar-pegged stablecoin. The introduction of these stablecoins eliminates the need for intermediary banks and makes cross-border payments faster and more direct. In summary, “bringing all those things together, providing more enhanced customer services at lower cost [and faster speed] is a challenge for all insitutions,” said Fennell.

Acknowledging that it is not enough to just identify the problems with cross-border payments processing, Fennell recommended increased collaboration between traditional banks and fintechs. “Really, [banks need to be] the best bank they can be for fintechs, and to embrace the challenge of being able to offer services to them in real time through application programming interfaces (APIs),” thereby enabling fintechs and distributors to deliver to their customers.

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The goal of making cross-border payments faster, cheaper, and safer is no longer a distant dream thanks to emerging technologies like AI. As more financial institutions embrace AI, longstanding issues around standardisation and compliance in international transactions could soon be a thing of the past.

But for this vision for the future of cross-border payments to be fully realised, proactive engagement from all stakeholders is essential. After all, the efficiency of global money movement underpins international trade, and with it, international prosperity.