Payment rails are the invisible system undergirding digital payments. While domestic payments are often near-instantaneous, the international payments system is still far too expensive, slow and risky—deterring some businesses from international markets and charging high fees. But after years of stasis, the rails are being revolutionized—and the opportunities that are unlocked could be huge.
It goes from A to B. It runs on infrastructure. And, when you use it, you’re subjected to both costly tolls and interminable traffic jams. No wonder, then, that the payments infrastructure is compared to a transport system.
It goes like this: Once a store has been connected to the infrastructure by acquirers, who also verify buyers and their funds, the money starts moving. That’s where rails come in: whether bank-to-bank, mobile wallet or card payment.
As long as you stay within your borders, everything is fine—in most advanced economies, local rails are fast, cheap and secure to use. But move money internationally, and you quickly run into obstacles. International payments are harder to reconcile, demanding long international bank account number (IBAN) codes or SWIFT numbers. Foreign exchange will eat into the transferred funds. Fees are sometimes 10 times (or even a 100 times) higher than domestic transfers. Even if you are willing to pay, don’t expect the money to move fast. Settlement times are slowly dropping but are still frustratingly long.
And accessing them isn’t always easy. In 2020, The Economist described the system as a “deeply entrenched payments oligopoly,” reflecting the dominance of a few big players who make billions from everyday transactions. The Committee on Payments and Market Infrastructures (CPMI) acknowledged that “cross-border payments do involve more risks, complexities and rules than domestic payments.”
The risk is higher, and so is the number of middlemen, each of whom takes a cut. As the number of corresponding banks grows, so too have the fees, many of which are hidden. Often small businesses are simply priced out. Waiting two to five days for international payments is much less palatable if it causes cash flow problems. If you don’t have the capacity or cash to put up with this system, it’s just not worth it.
Our payments infrastructure isn’t capable of moving funds at “internet speed.” In an increasingly digital world, this is no longer acceptable. International payment rails are built on legacy technology that is hampering digital progress. They’re often limited to business hours, and their associated transaction fees are comparatively high. For example, the SWIFT Network processed an average of 19.8 million payments a month in 2022, each taking a couple of days to clear.
Many firms that move their money across borders are frustrated by local banking hours. Freelancers receiving international payments can only watch as double-digit fees sap their hard-earned cash. No one thinks this system is optimal; we tolerate it because it seems to be the best option—for now. What we really want is real-time, instantaneous bank transfers, domestically and internationally. Some, like my colleague Barry O’Sullivan, believe that eventually the world will converge upon one rail, removing the onerous effort involved in connectivity and interoperability between different systems. Others reckon a “rails-agnostic” system is more likely: The various rails remain but with frictionless interoperability enabled by application programming interfaces (APIs) facilitating messages among creditors and debtors.
Either way, the opportunity is huge. Some estimate that the market for business-to-business (B2B) payments will reach over $41 trillion by 2026. ACI Worldwide reported a 7.8% increase in SaaS and PaaS fees year over year to $205.8 million. Some innovators have already proven the potential rewards. In 2021, payments startup Stripe became America’s biggest-ever unlisted firm when it was valued at $95 billion. Businesses at all maturity levels need fast, cheap, transparent payments, and consumers are becoming increasingly sensitive to the hidden problems of the payments system.
Real-time cross-border payment rails are being built. According to Visa, over 50 real-time payment systems are already live—with more in the pipeline. Legacy systems basking in business-as-usual risk being abandoned. A rails-agnostic future also means that businesses and individuals can access any rail they need wherever they need them. But that’s going to take embedded finance companies that can bind together all these disparate systems and provide access through a single API.
Faster, cheaper cross-border payments are quickly becoming the norm. But there’s still a way to go. What we need is a rails-agnostic system that’s interoperable with legacy bank rails and new rails like blockchain-based payments. That demands easy, frictionless connection, regardless of the players involved, optimizing transfer fees and exchange rates. This also requires maintaining balances in local currency across an international network of accounts.
Innovations in blockchain-based global payments are particularly interesting. Distributed ledger technology (DLT) could revolutionize cross-border remittances, making them faster and more secure and transparent. Using bidirectional messaging and validating transactions using a decentralized database before transferring the funds, DLT offers both speed and security. And the payment journeys that can be built on top of DLT are remarkably efficient.
Some cryptocurrencies have the advantage of being both currency and payment rail rolled into one. But things are going still further. Other projects are currently looking at how stablecoins can be used to facilitate the international portion of a payment, without requiring conversion into a third-party asset like a particular cryptocurrency. Stablecoins could be the direct proxy in a straight USD-GBP transaction, avoiding any conversion into cryptocurrency. Already, blockchain-based tokens are changing expectations of what’s possible. As technology proliferates elsewhere in society, its widespread use in international payments is only a matter of time.
There’s a long road ahead. But things are finally speeding up.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
Originally published at Forbes.