This 4-part series on cross border payments starts by describing how the legacy competition works today as a way to segue to part 2 which describes why it is so expensive today. Part 3 looks at 4 types of Stablecoin disrupters. Part 4 looks at the adjacent markets for monetisation in the event that cross border payments fees go to zero.
The remaining three posts will be published one week apart:
Part 3:Cross border payments part 3: stablecoins is the nearly but not quite yet disruptor. 9 November
Part 4: Cross border payments part 4: opening the door to adjacent markets. 16 November
US Dollars on a plane
You can call this “Gucci Mule” if you are a fan of movies about drug smugglers and money launderers. Elevator pitch for this method:
- Dogs cannot smell paper.
- Paper is fairly light.
- Our early adopter market loves this method. It is often faster than a SWIFT payment and yes it is expensive but far cheaper than alternatives (such as paying tax or going to jail).
- Everybody loves those Yankee Dollars. That is why we date this from Bretton Woods in 1944 (which established USD as the global reserve currency); paper money in America dates back to 1690, but you need globally accepted paper for this to work.
Although you can date this back to the 1920s, when they were limited to the outlets of individual firms, we chose 1950 when the first universal credit card that we know today was introduced (Diners Club). Since then, Credit Cards have gone global and recent innovations by Stripe and PayPal have made Credit Cards easy to use digitally. They are only plastic cards in “card present” physical stores. For cross border transactions, you use “card not present”.
They are expensive because they provide credit to the buyer and as soon as you extend credit you have risk of default and fraud and both are expensive.
Back in my Misys days we would call SWIFT the Society for Wrangling International Free Trips and had expense paid fun at SIBOS.
SWIFT is 1970s technology and a tutorial about how it works is beyond the scope of this post. You would need to learn about Vostro/Nostro accounts and the difference between Correspondent Banks and Intermediary Banks (knowledge that is not much use unless you toil in the core banking engine room of banks). The key thing to understand is that SWIFT is an agreed messaging protocol between banks; you do not move money, you exchange messages between banks that credit and debit different bank accounts as per those messages.
Today you use Credit Cards/Paypal for smaller transactions or SWIFT for larger transactions.
Although it is less exciting for movies, the modern money launderer will pay a bank to move money through SWIFT (and the bank when caught pays a fine as a cost of doing business).
The Prepaid Card has been around as long as the Credit Card. It is cheaper for one simple reason – no credit risk.
The plastic Prepaid Card is still in use in physical stores. However it is the digital version (what we call the Prepaid App) which has the potential to disrupt the cross border payments market. We date this from 2010.
Companies selling Prepaid Apps also sell plastic Prepaid Cards. For example I have Revolut in both my wallets – plastic in my leather wallet and digital app on my phone.
I am using Revolut as an example because I use it and it is scaling fast. Revolut have a go big or go home strategy that could give both HSBC and Facebook Libra a run for their money.
Revolut, with far lower costs than a legacy global bank can afford to be disruptive on fees.
If Revolut can pull this off, we may see free cross border payments become a reality. Compared to the huge costs of legacy cross border payments rails, that is a very very big deal. As with any go big or go home strategy, there is risk and they will face completion from Stablecoins which we will cover in the last two posts in this series.
First see next week’s post – cross border payments part 2; your fat margin is my opportunity.
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