“your fat margin is my opportunity” is a quote from a very smart entrepreneur called Jeff Bezos.
Cost in cross border payments comes from 4 sources:
– Fees. This is the most visible cost.
– Foreign Exchange. This often exceeds the visible Fees, but has been opaque in the past; it can be as much as 10%. This cost is becoming less opaque due to the work of companies such as Revolut and Transferwise and regulators in some jurisdictions.
– Hassle aka lost opportunity cost. For example if it takes an hour of my time and an hour is worth $400 to me, the cost is $400. Hassle usually relates to KYC which typically is just enough to annoy the honest customer but not enough to catch the criminal.
– Time value of money. $100 now is worth more than $100 in a few days time.
Each of the legacy cross border payment rails has different costs on these 4 axes:
USD on a plane.
This is only a viable option if you are a criminal who cannot afford a KYC makeover to enable laundering money via a bank. The costs of USD on a plane are of course highly variable.
– Fees. 2.9%
– Foreign Exchange. As much as 10% (and merchants have little control over this).
– Hassle aka lost opportunity cost. Almost zero as this is frictionless for both parties.
– Time value of money. Zero as merchants get paid instantly.
– Fees. Fairly low in range $35-$85 (for both recipient and sender).
– Foreign Exchange. Recipients can keep costs down by using low cost FX services. Much lower than Credit Cards.
– Hassle aka lost opportunity cost. Low but more than Credit Cards.
– Time value of money. It varies but most international transfers take 1 to 4 business days. The SWIFT wire process and costs depend a lot on the relationship you have with the bank. Wealthy people have a good relationship with the bank, but most people suffer from delays.
These are perfect on cost but suffer from the reach problem compared to these other methods.
PrePaid Apps use today’s technology. They may face competition in future from cross border payments done using stablecoins. Stay tuned for next week’s post in this series – cross border payments part 3: stablecoins is the nearly but not quite yet disruptor.
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