Recent headlines are revealing just how challenging it is to send cross-border payments into emerging markets. Nowhere is this more apparent than in the case of sending low-value mass payouts for business.
Consider the example of a job marketplace for freelancers such as Upwork, Fiverr and Innocentive, many of which have large percentages of freelancers based in emerging markets. With projects being completed by freelancers around the world and around the clock, these job platforms are responsible for processing and sending thousands of low-value payouts into developing nations, such as India, Bangladesh and Pakistan -- three of the top global receive markets for job marketplaces.
What stands in the way of completing these transactions is a costly and strenuous payments system that is riddled with country-specific licensing requirements, ever-changing FX and archaic funds flow.
Let’s examine a few of the challenges of paying into emerging markets:
Regulations. Funds sent internationally are subject to a number of regulatory and compliance standards, beginning in the originating market, then to the landing country and ultimately the end recipient. While the EU’s SEPA and China’s latest SAFE standards aid in facilitating money movement within these countries, many developing nations lack clear-cut standards.
This is particularly challenging for B-to-B and B-to-P payments, where businesses sending funds need to balance regulations for several markets while ensuring that it is not at the detriment of their business, as was the case with PayPal. This regulatory juggling is one of the key contributors to the high cost of sending international payments through wire transfers, as banks often pass those costs to the sending entity in the form of transaction fees.
Currency Exchange. Hand-in-hand with regulations is currency exchange. Businesses sending cross-border payouts through wires are often at the mercy of market volatility and FX spreads, making them unable to predict the amount that will reach the end recipient. This effect is amplified for emerging market payments, with high costs prevalent in the buying/selling of non-liquid local currencies.
Capital control markets like Brazil and Nigeria also add another level of complexity, as most of these countries influence funds movement with imposing licenses and restrictions to maintain FX reserves for commodity buying.
Transaction Transparency. Business payments are also at high risk of being lost when sent to emerging markets, asthe majority of cross-border payouts are truncated and transferred as messages through a correspondent bank-to-bank network with little visibility to track payments along the way. Even funds bound for eWallets or prepaid cards, pass through multiple clearinghouses and landing banks, with each intermediary adding to the potential for payments being delayed or lost.
As global businesses continues to bring new opportunities to and from emerging markets, these latent payment hurdles stand in the way of the last mile, settling payouts to an end recipient. And while recent years have seen a boom in Fintech that rivals legacy wire transfers, what will truly solve emerging market payments is a solution that bridges the gap between the burgeoning digital economy and stable payment options.
Nagarajan Rao is a senior vice president at Transpay.