How neo-banks are using technology to solve cross-border payment challenges

By Mayank Goyal, founder and CEO of moneyHOP

Banks are the core of the financial ecosystem. They are the intermediaries for various financial services such as opening bank accounts, taking out loans, receiving and sending money, buying stocks and mutual funds, etc. However, banking services have traditionally been limited to the geographic boundaries of a specific country. With increasing globalization, banks have started offering international banking services to allow customers to use their accounts abroad.

However, for various reasons, cross-border transactions still involve a lot of hassle, paperwork and time. Also, international transfer is quite expensive compared to domestic. This is where neobanks come into play. A neobank offers a digital banking solution, typically mobile and branchless, that seeks to disrupt a specific segment of financial services in a customer-centric and technology-driven manner. The main reason behind this disruption is the use of technology to improve the end customer’s user experience.

While in the early stages of the neo-banking revolution, the focus was on solving domestic banking problems, such as focusing on the cross-border banking needs of these customers. Below are some examples.

According to the World Bank, remittances have multiplied since 2016 and have nearly tripled in the past four years. All thanks to technology and the availability of multiple digital payment options.

automation of processes
The most underestimated change for consumers was the removal of the need to physically visit banks. With the advent of neo-banks, there is no longer a long queue at the bank branch to send money abroad. The transaction can be initiated in 5 minutes, which also gives you the ability to track the status of your transaction in real-time, all from the comfort of your own home. Additionally, technology has enabled neo-banks to perform KYC, AML verification, etc. much more robustly by digitizing the whole process.

How have APIs impacted the industry?
Payment system operators today use APIs for a variety of functions in payment processing and value-added payment services. API stands for Application Programming Interface and is a way for two programming systems to interact with each other. This has led to financial services becoming more modularized, with each financial technology company focusing on building only the part that they specialize in and consuming the rest of other providers’ services via APIs.

A key reason for the adoption of APIs in the industry is awareness of how APIs can help address various challenges in international money transfers. APIs help address challenges related to speed, access, and cost of payment processing.

Security in terms of technology

When fewer intermediaries are involved in your transactions, transfer costs tend to decrease. The neo-banks use technology to automate most of the processes, thus reducing transaction costs.

Blockchain technology facilitates cross-border payments

Blockchain technology in cross-border transactions can enable secure transfers between an infinite number of bank books. This allows an entity to bypass bank intermediaries, which are usually the middlemen who help move money from one bank to another. This way the transaction is safe, fast and cheap. It also offers end-to-end visibility anywhere in the world.

Banks vs online money transfer services
Now the question arises which service you should choose for international money transfers. Here are some factors to consider when choosing between banks and other online money transfer portals.

exchange rate
One of the factors to consider when transferring money abroad is the exchange rate offered by banks or international money transfer portals. This is one of the main sources of revenue for the service providers and therefore the mark-up charged may differ depending on the business model.

A surcharge is an amount that international money transfer service providers charge their customers when conducting a foreign currency transaction. This is the difference between the interbank rate (or purchase price) and the exchange rate offered to the customer. The markup fee is also known as the “currency conversion fee”. So you need to do your research before choosing who to send money abroad with.

fee

Transfer Fees/Bank Fees refer to any fees that financial institutions impose on their customers for transferring funds to an international beneficiary. Traditional currency transfer service providers charge a transaction fee for every international money transfer.

Nostro Fees
A nostro account is an account in which banks hold foreign currencies. For example, an Indian bank opens an account with a foreign bank (e.g. JP Morgan) to route all of its $ transactions. In this case, the foreign bank is the intermediary bank. In short, nostro accounts help simplify the process of settling foreign currency transactions.

When we send money abroad, banks process the transaction through their nostro accounts. They charge users a nostro fee for facilitating this transaction. Nostro fees can vary from $15 to $30 per transaction.

transmission speed
Some banks take more than 3 days to send money abroad, while some service portals take less than a day to send money abroad. Check the transmission speed stated by the portal and feedback from previous customers before proceeding.

Conclusion

It’s important to review all your options to find the best international money transfer deals. Through the new approaches mentioned above, companies have simplified and accelerated payments, reducing the associated costs while ensuring safety and security.

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