What Is Keeping Fintechs From Going Global
Financial industry digitization is as rapid as the entertainment industry, but it needs to catch up with globalization. An OTT platform is accessible from anywhere in the world, but it is not possible to access your fintech app worldwide. Hardly any global fintech dominates or runs across the globe. Even global e-commerce platforms have to build national platforms to adhere to the regulatory requirements of domestic payment and transaction systems.
The old system of plastic cards and foreign banks with SWIFT as the backbone is the only payment system that is global in nature — it is also interconnected, inefficient, and expensive. It is not only an oligopoly that keeps the competition out but can also shut out entire countries. During the Russia-Ukraine war, the U.S. barred transactions through the SWIFT network, effectively shutting down countries' transactions with Russian banks and enterprises.
This risk or weakness in the global payment system is not only debilitating for the global economy but also shows that innovation and growth of commerce are being subverted in the global south. This is an essential issue as India leads the global leadership of G-20 countries in 2023. One of the most important tracks for discussion among the G-20 counties is the digital track (D-20).
The critical area for D-20 is to unshackle global commerce from antiquated systems of the past to realize its full potential and unleash the power of digital entrepreneurship to reduce the cost of transactions and increase the penetration of digital commerce.
This is only possible if the world has a real-time global payment system. One that is built on open standards and can be rolled out easily across the globe.
Second attempt
This is not the first time that the issue of global cross-border systems has come up. In 2020, G-20 tasked the Financial Stability Board with studying and reporting on improving and easing the flow of cross-border payments.
With due respect to the FSB, it has been studying this issue and has issued a couple of reports on the way this could be done. But as it is mainly made up of representatives from the banking sector, they would not likely suggest a system that will take away their hegemony over these payments.
Breakthrough innovation is unlikely to come from the system, which benefits from the status quo.
The FSB coordinates the work of national financial authorities and international standard-setting bodies at the international level. It develops and promotes the implementation of effective regulatory, supervisory, and other financial sector policies in the interest of financial stability. It brings together national authorities responsible for financial stability in 24 countries and jurisdictions, international financial institutions, sector-specific international groupings of regulators and supervisors, and committees of central bank experts. The FSB also conducts outreach with approximately 70 other jurisdictions through its six Regional Consultative Groups. The FSB Secretariat is located in Basel, Switzerland, and is hosted by the Bank for International Settlements.
In October 2022, FSB identified three priority themes to focus on in the next phase:
- Payment system interoperability and extension
- Legal, regulatory and supervisory frameworks
- Cross-border data exchange and message standards
While the areas identified by FSB seem obvious enough, the target date set by it to achieve the ‘biggest impact’ is 2027. Clearly, FSB is in no rush, as five years is a generation in today’s world and five generations in the AI world.
The case for UPI
The world has already moved rapidly since this committee for payment and market infrastructure was tasked with improving cross-border payments. One of the weaknesses of the SWIFT system is now visible to the world. Second, and more important, is the rise of digital public infrastructure in the form of UPI (Unified Payment Interface), a real-time 24/7 payment interface that is gaining fast adoption worldwide. There are more than 20 countries that have adopted UPI, a system developed in the non-profit world by a group of volunteers led by Nandan Nilekani and Pramod Verma. Currently, the system is free and adopted by any regulator or government.
Hence, by default, the standard for payment system interoperability will not be set up by a banking body but will happen organically by adopting a system in the digital public good domain. The fact that it is DPG or a digital public infrastructure would also have several added advantages. One, the infrastructure costs can be zero or negligible for all players. Second, because DPGs follow almost all the tenets of open source systems, it has open APIs and thus, the cost of integrating them with existing and new systems is quicker. This itself is a big thing as the cost of deployment and security of the system is of the highest level making it ideal for a global system.
While UPI is easily deployable inside a country as the regulatory structure is one and the same, the foreign exchange conversion is missing.
The financial transaction jigsaw
As a rule of thumb, fintech players have gained a share by building propositions around four factors: pricing, speed, convenience, and native digital flexibility. All these four factors are missing from the current world of cross-border payments.
Pricing is not just high — it is non-transparent as the foreign exchange costs are buried and sometimes not revealed for every transaction. The speed is slow and not always reliable in a world where time is money and the time value of money is high, the time taken for a cross-border transaction to happen. Cross-border transactions take days instead of technologically feasible real-time. This time cost of money is high if we look at the billions or trillions of dollars that flow through the cross-border payment system. The bankers have a name for the time the money remains with them — ‘float.’ This float earns the net for the banking system, which is what fintech can reduce and make the process more efficient for the consumer.
This would require that the third piece of the jigsaw, which is the legal, regulatory and supervisory system promotes and approves this.
What is more likely to happen is that the system and technology will get integrated, and the regulatory process will catch up sooner or later. This should be the endeavor at the D-20 track confabulation in G-20.
Yatish Rajawat is the founder and public policy researcher at Centre Innovation in Public Policy, a think tank based in Gurgaon. His area of research includes everything digital affecting policy, people, and the biosphere. Feedback or contact at [email protected].
Image credit: iStockphoto/alphaspirit
