Cross-border payments are financial transactions where the accounts of the payor and payee are based in different countries, the Payments Canada team explains.
Cross-border payments are typically “more complex than domestic payments as they involve different national legal and regulatory frameworks, more than one currency, multiple time zones and often need to be facilitated through intermediaries and financial market infrastructures (FMIs).”
These transactions are essential to “support international trade and economic activity, as well as in the movement of funds between people across the world.”
However, these payments are not frictionless.
The Financial Stability Board (FSB) has “cited four challenges of cross-border payments globally:
- High costs;
- Low speed;
- Limited access; and
- Insufficient transparency.
Depending on the jurisdiction, these challenges can “have implications for economic growth, international trade, global development and financial inclusion.”
Additionally, this has impacts “on the lives of consumers who seek to send or transmit payments internationally, whether this is sending remittances to friends and relatives in other countries, making payments when traveling or in the purchase of goods and services abroad.”
The FSB categorizes cross-border payments “into three main segments: wholesale, retail and remittances.”
Wholesale cross-border payments represent “the majority of cross-border transactions by value. They’re defined as payments between financial institutions (including banks and non-banks). Generally, these payments are used by financial institutions to support their own and their customers’ activities, including borrowing, lending, foreign exchange (FX) transactions, etc.”
Retail cross-border payments are “those between individuals and businesses. Typically, retail cross-border payments are low-value, high-volume transactions, representing the majority of cross-border transactions by volume.”
This sector “includes cross-border traditional commerce and e-commerce, tourism, bill payments to providers abroad, electronic transfers and payments between individuals.”
Remittance payments are “a subsection of P2P retail payments. Remittances are primarily sent to receivers in emerging markets and developing economies. Major service providers include international money transfer operators, commercial banks, post offices (outside of Canada) and mobile money operators.”
Cross-border payments are the method “by which money moves between countries and, therefore, sit at the heart of international trade and economic activity. In 2020, North American cross-border payments represented USD$43 billion in revenue.”
Further, cross-border payments “represent one-sixth of all transaction values globally, and is estimated to increase to over $250 trillion in value by 2027.”
Several factors have been attributed to this projected increase:
- Expanded supply chains across borders.11
- Increased asset management and global investment flows.12
- Growth in international electronic commerce (e-commerce).13, 14
- Increased remittance flows to low- and middle-income regions.15, 16
Payments Canada is guided “by its mandate outlined in the Canadian Payments Act (CP Act) to establish and operate national systems for the clearing and settlement of payments; facilitate the interaction of its clearing and settlement systems with other systems; and facilitate the development of new payment methods and technologies.”