By Mayank Goyal, Founder and CEO, moneyHOP
Banks are the nucleus of the financial ecosystem. They are the facilitators for various financial services such as opening bank accounts, borrowing, receiving and sending money, buying stocks and mutual funds, etc. However, banking services have traditionally been limited to the geographical boundaries of a particular country. With increased globalisation, banks have started offering international banking services so that customers can use their accounts in foreign countries.
However, due to varied reasons, cross-border transactions still involve a lot of hassle, paperwork, and time. Moreover, the international transfer is quite expensive compared to domestic. This is where neobanks come in. A neo-bank offers a digital banking solution, typically mobile-first and branchless, which is attempting to disrupt a specific segment of financial services in a customer-centric and technology-driven manner. The primary driver of this disruption is the usage of technology to better the user experience of the end customer.
While during the initial phases of the neo-banking revolution, the focus was on solving domestic banking problems such as digital account opening, purchasing insurance, lending, stock investment, etc, as the customers are becoming more global, several neo-banks have started focusing on the cross-border banking needs of these customers. Below are some examples.
According to the World Bank since 2016, remittances have increased multifold, nearly tripling in the last four years. All thanks to the technology and the availability of multiple digital payment options.
Automation of processes
The most underrated shift for consumers has been the elimination of the need to physically visit banks. With the emergence of neo-banks, there is no need to stand in long queues at the bank branch to send money abroad. The transaction can be initiated in 5 minutes, also giving you the real-time ability to track the status of your transaction, all in the comfort of your home. Furthermore, technology has enabled the neo-banks to conduct the KYC, AML check, etc. in a much more robust manner by digitizing the whole process.
How have APIs impacted the industry
Payment system operators are now using APIs for a large range of functions in payment processing and value-added payment services. API stands for Application Programming Interface and is a way in which two programming systems interact with each other. This has resulted in financial services becoming more modularized whereby each financial technology company focuses on building only the part they specialise in and consuming the rest of the services from other providers via APIs.
A major reason for the adoption APIs in the industry is the awareness in terms of how APIs can help overcome various challenges in international money transfer. APIs help in overcoming challenges with respect to speed, access, and cost of payment processing.
Security in terms of Technology
When there are fewer intermediaries involved in your transactions the cost of remittance typically reduces. The neo-banks use technology to automate most of the processes and hence reduce the cost of transactions.
Blockchain technology facilitates cross-border payments
Blockchain technology in cross-border transactions can enable secure transfers between an infinite number of bank ledgers. This allows one entity to bypass banking intermediaries who usually are the middlemen that help transfer money from one bank to another. In this way, the transaction is secure quick, and cheap. It also provides end-to-end visibility anywhere in the world.
Banks vs Online Money Transfer Services
Now the question is that what service should you choose for international money transfers? Here are a few factors for you to keep in mind when choosing between banks and other online money transfer portals.
Exchange Rate
One of the factors to consider when transferring money abroad is the exchange rate being offered by banks or international money transfer portals. This is one of the primary revenue streams for the service providers and hence the markup charged might differ based on the business model.
A markup fee is an amount that international money transfer service providers charge their customers when a foreign currency transaction is made. This is the difference between the interbank rate (or purchase price) and the exchange rate offered to the customer. Markup fee is also known as ‘currency conversion fees. So, you must do your research before choosing who you use to send money abroad.
Transfer fee
Transfer Fees/Bank Fee refers to any charges imposed by financial institutions on their customers for routing money to an international beneficiary. Traditional currency transfer service providers charge a transaction fee for every international fund transfer.
Nostro Fees
A Nostro account is an account that banks use for holding foreign currencies. For example, an Indian bank opens an account in a foreign bank (say: JP Morgan) to route all its $ transactions through. In this case, the foreign bank is the facilitator bank. In short, Nostro accounts help in simplifying the process of settlement of foreign currency transactions.
When we send money abroad, banks process the transaction through their Nostro accounts. They charge the users a Nostro charge for facilitating this transaction. Nostro charges may vary between $15- $30 per transaction.
Transfer Speed
Some banks take more than 3 days in sending money abroad while some service portals take less than a day to transfer money abroad. Check the transfer speed being claimed by the portal and the feedback that previous customers have given before going forward.
Conclusion
It’s important to investigate all your options to find the best deals for international money transfers. Through the new approaches mentioned above, businesses have simplified and sped up payments, reducing the costs associated, while ensuring safety and security.