Why partnership between Fintech and traditional banks is a winning proposition for cross-border payments

As our society becomes more globalized, there will soon be no limits to capital. Globally, the amount of money sent as remuneration has seen significant growth as a direct result of increased migration as well as expanded business activity worldwide.

Many developing countries receive a significant economic boost from remittances sent home by their citizens. A year-long benchmark study indicated that these payments are equivalent to more than 10% of the GDP of emerging nations. These payments are of the utmost importance, not only for the expansion of national economies, but also for the global economy.
Considering these developments, banks’ decision-makers should be aware of the changing needs of account holders, whether they are individuals or small/medium enterprises. Today, consumers and businesses have increased expectations and want to match payments with their fast-paced, 24/7 environment.

Overall, the expansion of digital ecosystems, adjustments in regulatory guidelines and an increase in customer adoption are some of the factors driving the development of cooperation between banks and Fintech companies. Going forward, banks should consider partnering with Fintech to implement faster, cheaper techniques for processing cross-border payments.

Background for traditional banking procedures

Historically, banks have relied on conventional payment systems, which involve a network correspondent bank offering settlement and payment services. However, these traditional procedures are expensive and time-consuming. Many times they have obscure fees, including currency exchange charges.

As traditional cross-border transactions are routed through a network of correspondent banks, each of these stops must be paid for, resulting in additional expenses. There is no doubt that the digital experience that lacks fast payment is often poor, fails to meet consumer expectations and puts merchants at a disadvantage.

Given the current paradigm of movement of capital from other nations via traditional banks, this partnership between banks and Fintech companies has been more robust. Also, there can be complexity and a lack of cost and timeline clarity regarding payments. Due to the potential use of multiple intermediaries and standard services, there is a risk of unknown taxes until the money reaches its destination.

image via Freepik

Currently, Fintech companies pose a threat to banks by adopting more efficient techniques to conduct cross-border transactions. Customers, individuals and businesses alike are attracted by affordable and fast payment/transfer options.

Exploring the rise of Fintech

The fintech sector is not only expanding, it is increasingly focused on payments as part of broader financial services responsibilities, or as part of a digital “platform” strategy that merges multiple services into a single digital offering.

Furthermore, there are no indications that the rapid convergence between the finance and technology industries will slow down. According to CB Insights, there were 2,745 large Fintech companies worldwide in 2020, an increase of more than two-thirds over the previous five years.

Uncover the benefits of partnerships between banks and Fintech

By forming partnerships between innovative Fintech companies and traditional banks, we can significantly reduce the time it takes to bring a new product to market and realize cost savings throughout the value chain. To date, the alignment of these two domains was prompted by the need for a flexible and secure service for the transfer of funds from individuals based abroad, whose families depend on this transfer, which they would normally consider as part of their income.

Therefore, traditional banks should investigate the possibility of entering into agreements with Fintech entities that today have an extensive network of payment channels and nations. Completing a single integration allows access to hundreds of different marketplaces and channels. In this way, the requirements to handle multiple settlements and complicated reconciliations will be eliminated, and customers will be able to benefit from affordable and fast international payment services

Fintech provides a viable option for remittance companies and clients to choose how to receive payments from abroad. In addition, the banks will have a clearer picture of the money’s path, without hidden fees or expenses. Another ground-breaking development is that the technology companies can provide account validation to ensure that the recipient will receive the funds. In addition, the financial flow can be accelerated so that the beneficiaries receive the funds when they need them most.

For banks looking for a cross-border partner in the Fintech industry, here are some important characteristics to consider:

1. Global Reach: How many nations, currencies and payment options will be made available to your consumers and how quickly will they get their money? Traditional bank accounts aside, are mobile wallets also capable of receiving cash deposits? Are rare currencies readily available for purchase?
2. Payment Gateway Application Programming Interface: How do you plan to connect with the partner? Can the service be delivered under your brand, and if so who is responsible for the price to the end user? Are there settings at your disposal that allow you to take command of the user experience?
3. Compliance capabilities: Does the partner follow the same strict procedures as your financial institution? How does the partner work with regulatory bodies located around the globe to guarantee that its financial network complies with international standards?
4. The partner’s stability: How long has the partner been involved in cross-border payments? What is their operating cash flow? Can they manage the amount your institution is expected to send via the rails?

Important takeaways

Fostering partnerships between Fintech and remittance companies can accelerate this process while providing far more attractive pricing and, most importantly, improved customer service.

Ultimately, banks have two main reasons for working with Fintech startups. Customers have become accustomed to a smooth digital experience and want the same from their bank, a service few institutions can offer. Moreover, as a result of the use of these one-stop points, Fintech companies have moved from offering a single service to offering a range of services.

Developments in Fintech, partnerships with traditional banks and further digitization in the money transfer industry will lead to an expansion of this source of income for migrant families. This, in turn, will help to reduce poverty and inequality and increase their access to financial services. Women who are young and educated, live in vulnerable homes, and in rural areas will benefit the most.

Featured image credit: Edited from Freepik here and here and Unsplash