We asked Currencycloud friend and renowned financial services blogger Chris Skinner for his views on what’s next in the world of cross-border money movement. As ever, he identifies some exciting opportunities that will impact everyone from the non-banked, all the way through to SMEs and multinationals. Read on to discover more.
For centuries, people have traded around the world, using barter systems, coins, paper and now digital. Whatever the form of currency, trading globally has always had issues: how can you deal with someone who doesn’t use your currency, doesn’t recognise your laws, and doesn’t operate under your government? How can you trust them? How can they trust you?
The core issue is that we have borders. Each border then has its own currency and laws. It’s been interesting, for example, to watch the emergence of the European Union (EU) in the past fifty years or so. There are now 20 countries using the euro. But do you ever wonder about the other seven European Union countries outside the euro (Bulgaria, Croatia, Czech Republic, Denmark, Hungary, Poland, Romania, and Sweden)? Even the EU countries that use the euro act differently to each other. For example, when Europe introduced a Payment Services Directive (PSD), many EU countries had different rules and laws around standing orders, direct debits, overseas transactions and more that are still unresolved. So, what makes it so hard?
The answer is trust and transparency.
Long ago when we bartered, trust and transparency was easy. You have nine goats and I have ten sheep. You have immediate recognition of value and verification of exchange. Today, I say I’ll send you nine groats (instead of goats) and you ask: what’s a groat? How do you exchange something that has value to you but is worthless to me?
The formation of The Society for Worldwide Interbank Financial Telecommunication (SWIFT) in 1973 was one way of creating a system based on trust. SWIFT works with thousands of banks to support transactions of value across borders through messaging. The key to SWIFT is messaging. SWIFT doesn’t transact value across borders; it transmits messages between banks to allow banks to trust that value has been transferred.
Now that we are in the 2020s, is a system that was formed in the 1970s the best way to message companies that money has moved?
Many of us have been questioning this since the internet enabled us to trade and transact globally, seamlessly, in real time. The internet has now moved into our pockets in the form of a smartphone. So, we can now transact and trade, globally, seamlessly in real-time, anytime, nearly anywhere, and all of the time. Has the financial market kept up?
It doesn’t seem that way.
Often, we have to send payments through banking apps that charge high fees, and then add on exchange rates that are good for them and bad for us.
Cross-border transactions in the age of the internet are still hard, inefficient and don’t work the way they should in a world of real-time everything.
The borders between currencies – whether they be fiat, national or crypto – are the challenge that many are trying to address and resolve.
Today as we look at the not-too-distant world of the emerging Central Bank Digital Currencies (CBDCs), it’s clear that the direction of travel is a world of friction-free trade that is digital, works in real-time, across borders and has trust. The thing that is not clear is how that will be created, how it will work, who will provide the trust and who will enable cross-border trade.
Regardless of what you believe, there will always be a need to enable and manage trade and transactions. The key today is that the management and enablement of those transactions has to be global. No country is operating in isolation anymore. As John Donne said, “no man is an island”. Today, we can clearly see that no country (even when it is an island) is an island.
Everything is connected, joined-up, linked and interoperable.
So why do we still have delays in cross-border transactions? If you’re going to trade, then it should be as easy to do a cross-border trade as a domestic one. In domestic trade, I can pay now and the money is transferred in real-time. Why doesn’t this happen in cross-border trade? The answer is obvious, as it’s all about trust in trade. Fintechs such as Currencycloud were born out of a desire to address these very questions, and today help everyone, from individuals to huge neobanks transcend borders, making international payments feel local.
But then, looking to the future, could we see trading zones growing that are like the Eurozone? Could we see an Asian currency union, an African currency union and more? Will the American dollar always stay as the reserve currency of the world? Or will it be replaced by a cryptocurrency? Could bitcoin take over the world?
These are all great questions, but the likelihood is that there will be an integrated currency structure, where governments enforce legal obligations to ensure trust, but trade and transactions and currency can be operated in real-time all the time, everywhere. Oh, and in the process, with trust and belief that the person or company buying the goods is good for the money.
So, when you look at Fintech and payments and the things we are building today, don’t think that this is a transitory thing. Think of it as a transaction thing. We are moving from an insular world of domestic national government-issued currencies to integrated, interoperable global currencies. And, bottom line, one that allows you to buy what you want, when you want it, in real-time. Isn’t that the essence of what we need today in our networked world of communications? It’s why Fintechs like Currencycloud exist: to make sure these transactions happen instantly, securely and seamlessly - whether it’s opening up the world of banking to the unbanked, giving neobanks the solutions they need to delight their customers, or providing market-leading FX rates to brokers and travellers alike. The future is closer than you think.