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Last Updated : Aug 12, 2019 09:05 PM IST | Source: Moneycontrol.com

Fintech firms looking to challenge hegemony of banks in cross-border payments

Due to capital controls and fragmented domestic banking industries, banks in Asia earn $85 billion in annual revenue - $38 billion more than cross-border transfers in North America.

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While apps like Google Pay and Amazon Pay have disrupted traditional banking methods, financial technology companies are now challenging the banks on payments that cross national borders.


Banks are known to charge high fees along with a large currency spread on these payments. As per a report by Bloomberg, citing data by McKinsey & Co., annual individual-to- individual transactions - like son sending money to his parents - amount to $400 billion a year. Individual -to-business payments - like sending fees to an overseas institution --come to another $1.5 trillion. But annual business-to-business (B2B) transfers amount a whopping $124 trillion.


The report highlights that the status quo has been affecting individuals and SMEs in Asia the hardest. This is because money transfer in Asia costs three-fifths higher than that in Europe or the US.


Due to capital controls and fragmented domestic banking industries, banks in Asia earn $85 billion in annual revenue -  $38 billion more than cross-border transfers in North America, as per the report.


Banks are making between $25 and $35 on an average per cross-border transaction globally.


Fintech firms are already here to substantially reduce this hefty transaction cost that is worsened by exchange rate spread or Bid-Ask price that has an added markup.


One such company is London-based TransferWise Ltd, that claims to be 8 times cheaper. That means they use the real exchange rate--what google will give you at a particular point-- while transferring funds globally. As per TransferWise, it is like Skype that reduced the cost of international calling, but for mobilizing funds.


TransferWise uses algorithms to perfectly match the requirement of sending and receiving currency in a way, that funds really doesn't cross borders. Moreover, mid-market exchange rates--also known as interbank rates-- that lie in the middle of what banks charge are used.


The startup is now valued at $3.5 billion, as per the report.


TransferWise has previously partnered in countries like UK and Netherlands. Asia is the new market with few partnerships for the startup already approved in Hong Kong, Singapore and Taiwan.


This will give the traditional banks a run for  money as the company is already profitable and is looking to reduce its cost per transaction further with increased volumes.


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First Published on Aug 12, 2019 08:59 pm
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