A roadmap to frictionless cross-border payment

You can track your Uber driver or pizza delivery in real time. Why can’t you do the same with the money you send abroad?

It may seem unlikely, but it’s true. If you ask your bank how many euros will arrive when you send $100 to Paris, they likely won’t be able to tell you. The process could take days, and on average, you will spend 7% in fees.

For most, this represents a rare inconvenience. But for those who make regular cross-border transfers—people who send money to relatives abroad, companies that export and import goods—it is a major, costly headache.

It also represents an opportunity for providers

Trillions of dollars are sent internationally every year. Global revenues from cross-border payments come to $200 billion a year, according to McKinsey. When will costs and transaction times come down? When will we be able to track our payments the same way we track an Amazon delivery?

There are many parts to a cross-border transfer, and traditionally, each has been regulated by the governments of at least two countries: small wonder, then, that it has taken so long for this sector of payments to be disrupted by fintech. But change is coming. In order to streamline the process and deliver cross-border payments that are truly frictionless, the following hurdles must be cleared:

Let’s walk through a cross-border payment to see what’s changing and which areas still need work.

Know your customer. “Payments compliance” may not be the sexiest words in the English language, but they are critical for banks and other money transfers. Just ask HSBC, who had to pay $1.9 billion as a penalty for money laundering violations.

For that reason, banks run know-your-customer(KYC), anti-money-laundering (AML), and combating the financing of terrorusm (CFT) checks every time you put money into your account. It’s the same if you use a cash drop-off location to wire money overseas.

There are many parts to a cross-border transfer, and each is regulated by the governments of at least two countries. Small wonder, then, that it has taken so long for this sector of payments to be disrupted by fintech.

KYC, AML, and CFT involve several steps, but the essence is verifying that you are who you say you are, as well as monitoring for suspicious transactions. For example, a UK bank recently observed that suspiciously high volumes of cash were being deposited in a few of its local branches and then transferred elsewhere. Police followed the money and discovered a highly-organized money laundering operation.

Until recently, compliance checks were one of the slowest parts of cross-border payments; but digital processes are speeding them up. Today, details can be quickly cross-checked against online databases, and araft of online startups are increasingly offering compliance services.

More can be done. In the future, blockchain and other emerging technologies are likely to improve digital dentification and authentication processes, making compliance even smoother.

After compliance checks are complete, the payment is converted from one currency to another. Unfortunately, this is less straightforward than it may sound.

For example, xe.com tells you that your $100 is worth €88.8—but head to the bank, and they might only offer you €87.46. The reason is that the bank or the currency converter is setting themselves a favorable exchange rate and keeping the difference. Once you factor in currency exchange fees, the final amount is often significantly less than that suggested by a commercial exchange rate. Why?

Banks will tell you that it’s a risky business. Currencies (mostly) trade freely in the market, and in the past, trades could take several days. If the market happened to move during your trade, you could end up losing a fair amount of money. Banks account for this risk by hedging—paying to insure themselves against adverse price fluctuations—but that comes at a cost, one they pass along to consumers.