Cross-border payments don’t need to be so complicated and expensive

Community banks in rural Mexico cannot participate in money transfers between the U.S. and Mexico, which is one of the largest pipelines for remittances in the world, transferring a whopping $66 billion in 2023 alone. This is because these smaller, often independently owned banks don’t have the clearing and transfer technology needed to accept or process payments across country borders.

This has not only created a cash-based ecosystem in which money bypasses banks altogether, but one where communities are missing out on capital that could otherwise fuel innovation. Namely, financing for improved civil infrastructure, better micro-financial support for local businesses and more robust small enterprise development.

As a result, residents of these communities are looking for economic opportunities elsewhere, putting small towns in Mexico at risk of depopulation. Meanwhile, U.S.-based senders are forced to rely on costly bank and direct wire transfers with processing fees as high as 20%.

This problem isn’t unique to Mexico — and it’s not limited to just cross-border payments, either. An estimated 1.4 billion people worldwide don’t have access to financial services as fundamental as digital checking and savings accounts, or secure payment transfers. 

The good news is that the building blocks for solving these challenges already exist. In Mexico, for example, a handful of international and local fintechs are introducing digital infrastructure that will provide local banks with the technology they need to offer cross-border payments to their customers.

The same blueprint that these organizations are following to democratize cross-border payments can be applied globally to other communities facing similar shortcomings. It comes down to three main steps.

First, identify a single financial use case that will have a disproportionately significant impact on local institutions and their communities. 

In rural communities where access to digital financial offerings is limited, there are a number of challenges to getting systems up to speed with those in more established markets. For example, without a federal commitment to introducing a countrywide digital public infrastructure, or DPI, such as Pix in Brazil or UPI in India, trying to fill every financial gap simultaneously is not realistic. In lieu of that, organizations try to create workarounds for antiquated payment networks, but this approach simply isn’t cost-effective.

There are also other barriers to entry to consider, including regulatory restrictions, processing costs and currency conversion fees. 

What several organizations are finding, though, is that focusing on even one financial capability — such as cross-border payments — can be a catalyst for much bigger economic growth. 

In the case of the U.S.-Mexico payments pipeline, this is taking shape through People’s Clearinghouse, a social sector tech platform that services community banks and savings co-ops. By enabling a network of 140 rural banks in Mexico to power international remittances, the resulting funds flowing in and out of these banks will create opportunities to improve the overall financial health of the entire region. For example, infrastructure improvements, job programs, subsidized housing, small-business loans and more.

Whether the goal is to implement cross-border payments or solve another piece of the payments puzzle, there are typically at least two infrastructural challenges that need to be addressed next.

At an organizational level, many banks need internal infrastructure that has kept them from offering these services in the past. In Mexico, the necessary infrastructure was a clearing and transfer system for directly depositing remittances into recipients’ accounts.

While fintechs can provide this technology on banks’ behalf, they need open, interoperable infrastructure that enables them to access the markets where these banks are located. Attempting to integrate into closed-off networks that stand between banks and their ability to offer cross-border payments and other digital financial capabilities is neither easy nor cost-efficient. 

This is where governments can play a huge part. Even countries that don’t have regulated DPI frameworks in place can introduce open-source, neutral financial transfer protocols that enable fintechs and other organizations to introduce innovation to their financial systems.

Connecting multiple markets worldwide through more accessible financial infrastructures takes tremendous time and resources. It’s not an overnight process. But by building each new cross-border payments solution with global interoperability in mind, organizations will lay the groundwork for global interoperability.

This approach will eventually set up local financial institutions to take part in the bigger global financial ecosystem, rather than remain disconnected and closed until DPI projects launch. 

Organizations can take the lead on this by following DPI standards as they build new systems. This will not only ensure that the resulting technology can interact with any existing and future interoperable systems, but give financial institutions a head start on integrating with DPI-compliant markets and new capabilities as they emerge. 

This “DPI-compliant” approach comes down to a few key components. First, building individual, modular capabilities on open frameworks makes future integrations more cost-effective, accessible, flexible and scalable. From there, organizations will ultimately create a Lego-like structure in which each new innovation is a building block that enriches the financial system at large. 

“Zero trust” security protocols are another fundamental aspect of DPIs, ensuring that each participating system knows as little as possible about others in the network to protect customer’s privacy and their payments. 

There will always be challenges along the way to developing any global system, especially depending on how far a given financial ecosystem has progressed toward a DPI. But by starting from the most critical financial use case and building out from there, organizations can begin to make impacts on shorter timetables while preparing for a future where financial inclusion and access are the norm for everyone in the world.