Author(s):
KoreFusion
In 2023, growth in cross-border payments outstripped that seen in payments as a whole by almost two-to-one (13% vs 7%) and is projected to continue at double digits out to 2027 for cumulative growth of around 55% between 2025 and 2030.
These figures will come as no surprise to observers of the global economy. In addition to soaring cross-border commerce – both physical and online – in recent years, we’ve also seen a migration surge and an associated increase in worker remittance payments. In Saudi Arabia, for instance, migrant workers made remittances of $45 billion in 2022 – around 4% of that country’s total GDP.
“On average, cross-border payments cost 6.2% of transaction value, with some transactions costing as much as 12%”
Remittances have the connotation of being used to support family and pay for bills and services at home. In this regard, the remittance providers are usually banks and Money Transfer Organizations (MTOs), both of which have long been chastised for being cumbersome and expensive. But in the digital age, personal remittances are also the way SME owners pay other SME owners for cross-border trade, and how gig-workers, such as programmers and designers, get paid for sub-contracted services from abroad.
If personal remittances were already expensive before the surge in digital payments and gig-economies, they are more so today. The World Bank notes the “persistently high cost” of remittances and other cross-border payments: their figures suggest the average cost of cross-border payments stands at 6.2% of total transaction value (TTV) world-wide, with transfers to some markets costing as much as 12% of TTV.
From Correspondent Banking to Digital
At present, banks dominate the cross-border remittance market using SWIFT or bilateral host-to-host models, with a minority of transactions executed through fintechs or exchange houses. However, new platform solutions that leverage API connectivity are dramatically lowering costs and altering the competitive landscape via cost reductions, better traceability and faster transaction and settlement. This is also facilitating the growth of new players and allowing incumbents to transform themselves.
“Correspondent banking functions may be described as functional – albeit with low levels of bank control, higher costs and relatively poor transparency for end users”
For decades, banks’ domination of cross-border remittances was underpinned by the international correspondent banking network. Defined by the Bank of International Settlements (BIS) as “an arrangement under which one bank holds deposits owned by other banks and provides payment and other services to those banks”, the correspondent banking model may be described as functional – albeit with low levels of control from the initiating bank and relatively poor transparency to end users. Running across this arrangement are payments and financial service networks. These messaging networks help banks settle the balance and coordinate the payment instructions between nostro and vostro accounts. The best known and most widespread is the11,000-member cooperative known as SWIFT.
This arrangement involves having multiple banks involved in the process, like an international game of payments hop-scotch that is often spread across two or three players. The messaging redundancies and delays create high costs for banks and contribute to the total cost of the transaction being high, with each participant taking a margin of between 1 and 20 basis points and foreign exchange costs levied multiple times, adding an extra 1% to 3% for each forex deal. For many clients, such costs can make bank transfers prohibitively expensive, as the sequence below demonstrates.
From Nigerian Naira to South African Rand Through Correspondent Banking
Source: KoreFusion Analysis
Alternative ACH (Alt-ACH): A Lower Cost, Resilient Alternative for Global Remittances
One of the most interesting new alternatives to correspondent banking is the “alternative Automated Clearing House”, or “alt-ACH” model, which bypasses the requirement for correspondent banking by using an Application Programming Interface (API) to connect multiple open accounts across markets.
“Alt-ACH enables banks to realize cost reductions of up to 80% while improving transparency and the user experience”
Based on the ISO 20022 messaging standard due to complete roll-out by end 2025, alt-ACH enables the efficient exchange of rich information related to sending and receiving entities, end users, fees, forex rates and more – all in a real-time environment. This model is also able to leverage pooled funds, giving banks access to additional liquidity where needed.
ALT-ACH: A challenger to SWIFTGPI for banks, PSPs, MTOs and corporates
Source: KoreFusion analysis
This adds up to an attractive proposition for banks, money transfer operators (MTOs), and even businesses, which are able to realize dramatic cost reductions of up to 80% compared to established practices while improving transparency and the user experience. Because transfers and settlements are usually instant, treasury costs are also reduced and reconciliation is more efficient – including real-time liquidity monitoring.
Such significant cost reductions enable banks to improve margins in their remittance business, giving them room to pass on savings to end users. At the same time, the alt-ACH system is well understood by regulators and offers the end-user transparency, faster transfers, and the potential for ubiquitous reach between any markets they choose.
Despite Potential, Challenges Lie Ahead…
The global remittances market is projected to hit a total value of more than a trillion dollars by 2029. Despite such promise and the strong value proposition behind alt-ACH, there are signs that growth may be an uphill challenge in the near term. This is in part because banks have historically dominated in this segment, making it hard for market entrants to communicate their lower costs and successes and establish a substantial user base.
That said, some newer players such as STC Pay, Thunes, Nium, are solidly breaking into the bank-dominated market. Their ranks are swelled by the less new but equally tech-savvy old guard players such as UniTeller (owned by Mexican bank Banorte) and Dandelion (owned by Ria and Euronet) that have reinvited themselves. Recognizing the benefits and pressure created by this phalange of players, banks and MTOs are also beginning to partner with alt-ACH players as a cheaper, faster, and more transparent proposition for their end users.
Looking ahead, we can expect to see significant downward pressure on pricing for end users, with the UN targeting sub-3% costs for migrant remittances by 2030 as a base case. If achieved, this would represent a cost reduction of over 50% from today’s averages. We should also expect alt-ACH players to consolidate and improve their own networks – as we’ve already seen with Euronet’s purchase of Ria and use of their Dandelion API layer to integrate services between their client banks and access pooled funds.
As the advantages of alt-ACH transfers become apparent, competition will increase. First as a consequence of improved costs and pricing, and next as an ever-expanding number of new and old players leveraging these improvements. An example of this is already unfolding in South Africa, where the MTO Mama Money partnered with Access Bank and the fintech Paymentology to offer new bank card service with the use of WhatsApp banking.
In KoreFusion, we believe successful companies will be those that leverage new technologies and lean into the API-driven platform business models that are agile and build upon partnerships to target customers with new products and services while improving the same for existing client.
KoreFusion knows and optimizes payments across 80 countries. We help banks, brands, and fintechs develop cross-border payments solutions backed by effective strategy. Please reach out to information@korefusion.com if you need further insight.
