At the end of the Cold War, many countries opened up their economies to make international trade easier. This started a new era of globalization wherein goods manufactured in one country were easily exported to other countries with minimal restrictions. Also, legal provisions were put in place allowing foreign companies and individuals to invest in overseas businesses and stock markets. However, the major hurdle faced by enterprises was the lack of a formal financial mechanism that would help in monetary settlements. To fulfill this need, the concept of cross-border payments emerged, allowing banks and other such organizations to complete international transactions.
Digital technologies creating new growth opportunities in the industry
Recently, Allied Market Research published a report on the cross-border payments market which states that the industry is expected to make significant gains in the 2022-2032 period. The growing volume of global trade in goods and services has played a major role in helping the industry flourish. Over the years, the rate of adoption of cross-border payments has increased immensely. As per a study, more than 70% of US companies frequently engage in international transactions.
In the last few years, the threat of cyberattacks has increased, thereby discouraging companies from engaging in cross-border monetary transactions. Hence, to rebuild the trust of businesses in digital foreign payments, many banks are integrating blockchain technology into their service offerings. The innovative technology is based on decentralized ledger mechanisms which helps in streamlining operations and improves overall transparency and security. Reputed investment banking companies such as JP Morgan have launched blockchain-based platforms for financial settlements. In June 2023, the company unveiled a real-time interbank monetary transaction system through its flagship Onyx platform in Gujarat International Finance Tec-City (GIFT City), India. Six of the major players including ICICI Bank, IndusInd Bank, Axis Banks, and HDFC Banks have joined the pilot project, thus providing a major boost to the initiative. Studies done in this sphere have shown that such solutions aid in clearing the dues faster at a cheaper rate.
The advent of central bank digital currencies has also impacted the industry positively. Countries such as China have launched digital versions of their currencies, viz., yuan to facilitate smooth transactions without the need for any intermediary. The bypassing of any broker and middlemen substantially brings down the cost of settlements and improves the credibility of the entire process. Also, many nations have passed legislation to regulate digital payments. The emergence of CBDCs has helped in achieving harmony across different jurisdictions, thus reducing the complexity associated with international trade settlements and helping companies comply with domestic laws.
Cross-border payments enabling governments to achieve financial inclusion
Since the past decade, governments in developed and developing countries have been emphasizing on achieving financial inclusion of vulnerable and marginalized sections of society. The idea of cross-border payments helps in accomplishing the aim by connecting local businesses and artisans to multinational corporations. For instance, in countries like India, micro, small, and medium-scale enterprises account for around 40% of the total exports. In such a scenario, mechanisms allowing financial transactions between village-based manufacturers and global organizations help in improving the earnings of regional players.
Here, it’s worth mentioning that the COVID pandemic resulted in huge mismatches in supply-demand which disrupted the established networks of different manufacturers, wholesalers, retailers, and consumers. Almost all stakeholders, hence, needed a comprehensive monetary settlement mechanism that could restore harmony among different industry participants. In the post-pandemic period, the ability of cross-border payment systems to connect companies in remote areas with international supply chains has proved to be extremely important in reviving the global economy.
Judging from its role in helping countries achieve the goal of financial inclusion, the G20 countries released a cross-border payment roadmap in July 2024. The project was jointly initiated by the Financial Stability Board and the Bank for International Settlements. The main aim of the scheme is to adopt a flexible approach toward international monetary settlements and establish frameworks for adjusting to the changing dynamics of global trade. Apart from representatives of member nations, the conference was also attended by eminent economists and experts in the field of financial management. In the seminar, the participants achieved an overall consensus over issues of interoperability, regulatory supervision, data exchange standards, and payment infrastructure development. Many companies in these countries have welcomed the initiative stating that such a system will help them in capitalizing the opportunities available in different regions across the world.
To sum it up, the emergence of cross-border payment systems has promoted the idea of globalization by helping connect different industry participants. Additionally, by helping MSMEs link their businesses with global supply chains, it has also helped countries achieve the goal of financial inclusion. With the integration of technologies such as blockchain, the industry is expected to receive a major boost in the near future.
