Cross Border Payments - changing roles of traditional banks & fintech's
Cross-border payments have traditionally been dominated by banks, many fintech are slowly trying to enter this market and capture a significant share. One of the most prominent use-case for Cross-border payments, which are usually not the focus area of the traditional banks, are payments below $500 which has become the target segment of fintech.
The biggest challenge for all players is compliance with global regulators and probably that is one of the reasons why most of the fintech operate in a few limited corridors despite calling themselves global.
Types of Cross-border Payments are:
Significant Cross-border Payment Regulations in India:
RBI’s Liberalised Remittance Scheme (LRS) is a process that allows residents individuals to remit or send money to another country for investment, academics, buying property, and expenditure purposes during a financial year.?
Transaction Limit- USD 2,50,000 (per person) annually
The Liberalised Remittance Scheme of RBI defines a comprehensive list of purposes against which residents' individuals can remit funds. The list has been divided into two categories,
???????Current Account Transactions-These account for those types of transactions that do not pose any change in the assets or liabilities of a person.
???????Capital Account Transactions-These are those that bring about a change in the assets and liabilities of a person. Capital account transactions allowed under LRS are as follows:
Rupee Drawing Arrangement (RDA) is a channel to receive cross-border remittances from overseas jurisdictions. Under this arrangement, the Authorized Category I banks enter into tie-ups with the non-resident Exchange Houses in the FATF-compliant countries to open and maintain their Vostro accounts
An upper cap of Rs.15.00 lakh for trade-related transactions under RDA. For MTSS, A cap of USD 2,500 has been placed on individual remittances under the scheme.
Online Export-Import Facilitators (OEIF) earlier referred to as Online Payment Gateway Service Providers (OPGSPs) are Payment Aggregator (PA) or Payment Gateway (PG) that facilitate on-line remittances for small value export and import of goods and digital products through e-commerce.
???????Import limit- $2,000 USD
???????Export Limit-$10,000 USD
Significant Cross-border Payment Players:
India has recorded a whopping $87.5 billion alone in inward remittances. According to RBI data, private banks account for 52.8% of remittances, followed by public sector banks (39.4%) and foreign banks (7.8%).
Federal Bank leads this with around 21% of the inward remittance owing this to multiple reasons such as:
1.??????Major remittance corridor in India is Kerala-Middle east and they have been a dominant player in this market. They focus on corridors consisting of countries that do not offer permanent citizenship & people are most likely to return to their homes.
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2.??????To withstand the invasion by fintech players, they have adopted technology such as blockchain & partnered with various aggregators.
In the Middle East alone, the Bank has rupee-drawing arrangements with around 90 Banks and Exchange Houses for remittances to India. Apart from the Middle East, the Bank has direct arrangement with remittance companies in USA, Canada, UK, Australia, New Zealand, Hong Kong, Singapore, Japan and Malaysia. While UPI was available only for residents during the launch, in 2019, NPCI made it available to non-residents as well and opened it up for inward remittances. Federal Bank was an early adopter of UPI for Foreign Inward Remittance and has already integrated the UPI FIR services to our remittance platform.
Cross-border payment has seen the emergence of multiple home-grown fintech as well as the entry of certain global players in India. Fintech maintains Nostro accounts prefunded with foreign currency in different geography depending on areas of operation. When a customer initiates a transaction, the fintech passes the payment message over the SWIFT network with beneficiary details & transaction amount. The fintech can now debit its Nostro account & transfer an equivalent amount to the beneficiary account.
The fintech usually operates leveraging bank APIs and works on an aggregator model. Such fintech partners with traditional banks utilizing their cross-border payment infrastructure both for SWIFT messaging as well as payment settlement. The development of API has opened new revenue sources for the incumbent banks as it helps them acquire more customers through partnerships with fintech aggregators. Across the globe, regulators have mostly kept the control in the hands of the traditional banks and still not allowed fintech direct access to settlement systems. Hence Fintech’s focus remains on providing a smooth customer experience and working on use cases that were not a focus area for the traditional banks.
About the Author:
Juhi Sharma is a payment enthusiast with 9+ years of experience in payments and product management. Before joining IBM, she worked for banks such as HSBC, Credit Agricole Corporate & Investment Bank & ICICI Bank.
Juhi has done her post-graduation from Welingkar Institute in Marketing & B.E ( Electronics & Telecommunications) from Mumbai University.
Note- The views and opinions expressed or implied in this post are my own.
#Payments #crossborderpayments #remittance #swiftpayments #swiftservicebureau #paymentfintech #internationalpayments #rupeedrawingarrangement
References
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