Cross-border payments, a market once dominated by banks, has become a highly competitive space as fintechs look to capitalize on modernizing international money transfer technology.

One way fintechs are entering cross-border payments is as bank partners. The aim of this strategy is to help banks modernize their cross-border payment tech stack to reduce the number of parties involved in the transaction.

Another way fintechs are competing in cross-border payments is by building apps that facilitate transactions between senders and receivers. Banks can opt to white label the app or the fintech can market it to end users.  

“There can be multiple players involved in a cross-border transaction, which adds to the complexity and cost of the transaction,” Mark Majeske, fintech Alacriti’s senior vice president of faster payments, said in an interview this month.

Regardless of how a fintech enters the international payments realm, the aim is to reduce the number of parties involved in the transaction, each of which earns a fee for touching the transaction.  

The traditional cross-border payment model requires banks to have a correspondent bank relationship in the country where the money is sent. If the recipient does not have an account with the correspondent bank, the correspondent bank then routes the money through another correspondent bank within its domestic network to get the funds to their final destination. In some cases, that can mean routing money through multiple local banks, each of which earns a fee. 

One way that fintechs are helping banks fill in a cross-border payments technology gap is by enabling the use of stablecoins for payment. Unlike the correspondent bank system, cross-border payments funded with stablecoins are sent directly between the sender’s and recipient’s digital wallet in real-time. Doing so reduces the number of parties involved in the transaction, which lowers fees and speeds the transaction. 

“Improving the recipient experience is key,” said Majeske, who is also chairman of the U.S. Faster Payments Council’s cross-border work group. That group spearheaded an August report on bridging interoperability issues in cross-border payments. “The goal is to make the experience better, faster and easier for the recipient.”

Reducing the number of parties handling a cross-border payment can also help senders get a better handle on the fees they will be paying. 

Another benefit of using stablecoins for cross-border payments is that the transaction is recorded on the blockchain, an immutable, up-to-the-minute public record of any stablecoin transaction at any given time. Part of the appeal of the blockchain to cross-border payment users is that it makes money movement more transparent. 

“The blockchain centralizes money movement on a single ledger,” Aaron McPherson, principal of AFM Consulting LLC, said in an interview this month. “It’s why Swift and other [systems such as Swift] like blockchain solutions.”

The Swift network, based in Belgium, is a secure global messaging system that enables financial institutions to send and receive information about international payments.

Stablecoins are also viewed as a good payment option when sending money to countries with high inflation or where the value of the local currency often fluctuates, because the digital currency is typically valued in U.S. dollars, according to Enrico Camerinelli, a fintech strategic advisor for Datos Insights.

Many small and mid-sized banks are turning to fintechs not only to enable cross-border payment, but to do so using stablecoins, according to Bo Berg, a technical strategist and innovation leader for Avenue B Consulting and chairman of the U.S. Faster Payments Council’s digital assets work group.   

“Banks rely on fintechs to lift the archaic infrastructure often associated with cross-border payments,” Berg said in an interview this month. 

While stablecoins can speed cross-border payments, banks still have to be ready to accept them. “There is still a perception of risk around digital assets and that impacts how ready recipients are to accept stablecoins for cross-border payments,” Camerinelli said in an interview this month. 

Another area where fintechs can help modernize cross-border payments is the digitalization of paperwork around the transaction, such as invoices, which can be sent with payment. “Attaching documents with the payments is less complicated and more efficient,” Camerinelli said. 

Improved sharing of data for cross-border transactions can also help senders have a firm understanding of the fees they will pay. 

One issue with multiple hands touching a transaction is that handling fees are not always clear, which means senders can’t always see the full cost of the transaction before initiating it. “This is where fintechs come in,” said Debbie Buckland, a senior director analyst for the research firm Gartner. “They help figure out how to get the money moved in as few hops as possible,” whether they partner with a bank or facilitate the transaction themselves, said in an interview this month.

While fintechs are carving out a larger share of the cross-border market, banks still have inherent advantages: They own the customer relationship, can move money in local currencies and are compliant with local and global money movement regulations. 

“Banks are still stronger in these areas,” Matt Higginson, distinguished partner and global leader of blockchain and digital assets for McKinsey & Co. said in an interview this month. “The question is when will fintechs be able to challenge banks on these fronts.”