Empowering Economies: The Role of Cross-Border Payments

We live in a world where new fintech apps are constantly emerging. Many of these apps compete with each other and have raised large amounts of money. Some have become a part of our daily lives, and we use them almost like everyday words. However, a serious issue remains: millions of people around the world, especially in developing countries, do not have access to basic banking services and are excluded from the global financial system.

Despite significant progress in recent years, financial exclusion remains a global challenge. A recent study found that by the end of 2023, over 200 million migrants sent an estimated US$656 billion in remittances to at least 800 million people in low- and middle-income countries (LMICs).

And here’s another trivia-worthy fact: the digital remittance market was last valued at $19.8 billion in 2023 and is only projected to grow from here. The same study suggests a staggering compounded annual growth rate (CAGR) of 14.7% to reach $43.26 billion by 2028. However, many of these recipients lack access to formal financial services, limiting their ability to fully leverage these funds for economic advancement. To put this into simple terms, most of these recipients do not even have access to a bank account.

Critics might argue that technology alone can't solve this problem. They’re right – in a way. But they're missing the point.

See, Technology was never meant to solve the problem in its entirety. Its job is to catalyze this change. And we’ve seen this work in multiple cases.

Take, for instance, the Reserve Bank of India's (RBI) proactive stance in promoting digitalization. They combined cutting-edge tech with forward-thinking policies, enabling fintech participation in remittance flows. This serves as a blueprint for how regulators can foster innovation with compliance.

And the data backs it up. According to recent reports, India accounts for half of global payment volume with a staggering 50% CAGR from 2017-2024, involving 164 billion transactions worth 510 billion in 2023-24 alone. India has also taken a localized approach to this. They’ve managed to embed fintech into the India Stack, including biometric identification, the unified payments interface (UPI), mobile connectivity, digital lockers, and consent-based data sharing. And they’re not alone. China, too, is emerging as a major player with its Belt and Road Initiative. With apps like WeChat Pay and AliPay, China is expanding its digital payment ecosystem to those who are most in need of it.

However, despite Technology’s potential impact on fostering financial inclusion, we still face regulatory hurdles. According to GSMA's 2024 State of the Industry Report on Mobile Money, there are still regulatory barriers that limit the full potential of digital remittances in Africa, with several African countries maintaining restrictions on sending remittances to mobile money accounts. And then there’s high costs. Sub-Saharan Africa saw an average cost of 7.39% for a $200 transfer, significantly higher than India’s 4.95% for the same period (Q3 2023) High costs are partly due to limited competition, regulatory barriers, and underdeveloped financial infrastructure in the continent. But there’s hope we can address this in the very near future and we’re witnessing some pretty transformative trends as we speak.

Machine learning has come a long way and with public access to Gen-AI APIs, we can solve most rudimentary problems through software. Take, for instance, KYC and onboarding. Previously, these tasks required significant manpower and involved heavy paperwork. However, with the advent of KYC automation, the landscape has transformed.

AI-driven biometric verification enhances security by ensuring the person onboarding is who they claim to be, streamlining the process. And for the cases where extra validation is needed, we can include a human-in-the-loop (HTIL) to make sure we’re not sacrificing compliance. AI has gotten to a place where most models can be trained to pretty much replicate most human actions - look for patterns, and anomalies and flag respective accounts where data is inconclusive. This should significantly bring down the cost of adoption and foster a competitive environment.

With the advent of open banking, and over 100 billion APIs accessed globally, we’re transforming how financial services are delivered, particularly to underserved communities. Moreover, digital lending apps like Tala provide micro, small, and medium enterprises (MSMEs) with instant credit facilities without the need for collateral.

However, there’s more work to be done. Concerted efforts are needed to fully leverage the potential of mobile money and digital remittances. We need to work towards a more unified regulatory environment to facilitate cross-border and interoperable instant payment systems. This will require support from both the public and private sectors. Enhancing digital infrastructure, including mobile networks and internet connectivity, is crucial for progress. It is essential for governments and regulators to facilitate the development and scaling of new technologies. This can be achieved through the establishment of innovation hubs, and public access to funding.

In conclusion, achieving financial inclusion presents both a challenge and a chance. It urges regulators, innovators, and the global community to work together, making certain that technology is utilized not only for efficiency but also for fairness.