Here is the original Podcast with Susan Hall:
With insights from Susan Hall, formerly in correspondent banking and now at Mastercard
Opening: The Paradox
In a recent conversation with Susan Hall, who spent many years providing payment solutions to banks in the correspondent banking space and now works at Mastercard on real-time payments, we explored one of the most complex areas of the payments industry: cross-border payments.
We’ve explored how gold once flowed freely across borders under the gold standard, creating remarkably stable exchange rates. Gold was heavy, slow to transport, and required armed guards, yet the Victorian-era system somehow worked efficiently enough to support global trade for decades.
Today, we have something far better: electronic payments that move at the speed of light. No physical transport, no guards, no ships carrying gold across oceans. Just data flowing through networks. Modern cross-border payments should be faster, cheaper, and simpler than shipping gold bars across continents.
Yet somehow, they’re not.
Sending money internationally today often costs more, takes longer, and involves more intermediaries than the gold standard system did. A payment from London to New York can take days and cost significant fees, despite traveling electronically in milliseconds. Wire $1,000 to your son studying abroad and you might pay $45 in fees plus unfavorable exchange rates. The money moves instantly, yet somehow arrives days later.
This is the paradox of cross-border payments: we have vastly better technology, yet the experience often feels worse than systems from a century ago.
In essence, cross-border payments are a simple concept. You’re sending money from one country in one currency to another country, probably in a different currency. That’s it. Unfortunately, it’s probably the most complex of all payment types, because it’s not just about the payment itself. It’s all the things that go before it and all the things that come after it. And because it’s cross-border, there are regulatory requirements to adhere to, not just in one country, but in several.
Let’s explore the history of how we got here, how cross-border payments actually work today, and who does what in this complex ecosystem.
Historical Context: Networks of Trust
The history of cross-border payments dates back to the Silk Road and the Knights Templar, which always sounds very cool and exciting. These payments evolved from what we now call correspondent banking, which relies upon a network of trust.
The Trust Problem
To illustrate: if I want to trade with a merchant in China but do not know them or frankly trust them, I have a risk. But I might know somebody in France who trusts somebody in, say, Prussia, who in turn trusts the trader in China. This creates a network of trust for both parties.
The need for trading silk and spices across vast distances necessitated a reliable way to pay and be paid. Various methods were used, including bartering goods for gold and jewelry. But these commodities, while having serious value, had serious issues too.
At this time, each step in the network required an intermediary who facilitated the trade and agreed on exchange rates: my gold to your jewelry, and so on. Consequently, the longer the trade chain, the higher the cost due to the additional process fees and agreed-upon transaction costs above the actual purchase price.
The Birth of Correspondent Banking
This network-of-trust model evolved into what we call correspondent banking. Banks established relationships with other banks in different countries. If Bank A in London had a customer wanting to pay someone served by Bank B in Shanghai, but Bank A had no relationship with Bank B, Bank A would route the payment through banks they did have relationships with. Perhaps through Bank C in Paris, which had a relationship with Bank D in Hong Kong, which finally had a relationship with Bank B in Shanghai.
Each bank in the chain would take a fee. Each would apply their exchange rates. Each would need to verify the legitimacy of the transaction according to their local regulations. The system worked, but it was expensive and slow.
The genius of the gold standard was that it eliminated some of this complexity. Because all currencies were defined by their gold content, exchange rates were fixed and calculable. A merchant could ship gold directly (or more likely, transfer claims on gold held in vaults), knowing exactly what it would be worth at the destination. The gold standard didn’t eliminate intermediaries, but it did create predictability.
When the gold standard collapsed, we lost that automatic exchange rate stability. Suddenly, cross-border payments needed to navigate not just trust networks and intermediaries, but also fluctuating exchange rates. The complexity increased even as the technology improved.
What Cross-Border Payments Are
Simply put, cross-border payments are sending funds from a country and a currency to another country and, most likely, another currency. That’s the simple definition. The reality is far more complex.
Two Major Types
There are two major categories of cross-border payments, each with different characteristics and challenges:
Corporate Payments: Businesses trying to pay or be paid by their suppliers or their customers. Very much like the Silk Road example, but now involving manufactured goods, raw materials, services, and complex supply chains. From a corporate perspective, it’s complicated. They’re sourcing materials from different countries. They need to consider: do they need a banking relationship in the country of their supplier? Do they need to hold currency? What makes sense for them in terms of the flows they are experiencing?
Remittances: Individuals working abroad sending money home to their family. Whether you’re sending money to your kids or you’re a worker in Singapore sending earnings back to the Philippines, this is the remittance space. From an individual’s point of view, all the magic that banks do behind the scenes or that fintechs do these days, an individual is just making a payment. And then somehow, magically through the ether, it lands in the recipient’s account.
Why It’s So Complex
Cross-border payments are arguably the most complicated form of payments we have. When you think about it, what we’re really doing is sending our currency across a border, exchanging it for somebody else’s currency in another country for a series of goods or services. And there’s a lot of complications: our rules, your rules, my regulation, your regulation.
These regulations are there for good reasons. We want to stop money laundering. We want to stop scammers. We want to stop terrorism financing. Those processes are necessarily complicated. A payment sounds like an easy thing, money from here to there, but there are so many other things surrounding it that are complicated enough when you’re talking just domestic. When you talk about cross-border, you’re looking at two different regulatory environments, two different ways of doing governance. It makes things an awful lot more complicated.
How It Works: The Traditional Model
The traditional cross-border payment system works through correspondent banking, and understanding it helps explain why these payments are expensive and slow.
Correspondent Banking Mechanics
Let’s say you’re in the UK and need to pay a supplier in Malaysia. Here’s what happens behind the scenes:
Your bank in the UK likely doesn’t have a direct relationship with your supplier’s bank in Malaysia. So your bank sends the payment to a correspondent bank, let’s say a large international bank that has relationships in both regions. That correspondent bank might route it through another intermediary bank before it finally reaches the destination bank in Malaysia.
At each step, several things happen:
Currency conversion: Someone needs to exchange pounds for ringgit. Each bank in the chain might apply their own exchange rate, taking a margin on the conversion.
Compliance checks: Each bank must verify the payment against sanctions lists, anti-money laundering regulations, and know-your-customer requirements. This takes time and costs money.
Nostro accounts: Banks maintain accounts with each other (called nostro and vostro accounts) to facilitate these payments. Maintaining these accounts and ensuring they have sufficient balances ties up capital.
Messaging: Banks communicate through systems like SWIFT, sending structured messages about the payment. These messages move quickly, but processing them doesn’t.
Settlement: Eventually, the payment settles, often through central banks or clearing systems in multiple countries.
Why It’s Expensive and Slow
Each intermediary takes a fee. Each compliance check takes time. Each currency conversion extracts a margin. By the time the payment reaches the destination, it might have passed through three or four banks, each adding cost and delay.
The technology itself is fast. SWIFT messages travel in seconds. But the processing, compliance checks, and settlement can take days. This is why your electronic payment, despite moving at light speed, still takes three days to arrive.
Banks traditionally held onto the foreign exchange value for themselves. In defense of traditional providers, they’re doing enormous amounts of work: compliance, fraud checking, managing currency risk, handling exceptions when things go wrong. But from a customer perspective paying significant fees for slow service, it often felt like poor value.
How It Works: The New Models
Things are changing. Several new approaches are emerging to make cross-border payments faster and cheaper.
Fintech Disruptors
Companies like Wise (formerly TransferWise) attacked the consumer remittance market by being transparent about fees and offering better exchange rates. Their model is clever: instead of actually moving money across borders, they match domestic payments. If someone in the UK wants to send money to Australia, and someone in Australia wants to send money to the UK, Wise makes two domestic payments and nets them out. No money actually crosses the border, eliminating many intermediary fees.
Fintechs are good at meeting specific needs. They’ve built excellent customer experiences with transparent pricing. But as Susan Hall notes, the fun starts when there’s a problem with your transaction. How much support would you get from fintechs? Do they have the expertise that banks have in helping you? Banks could have done what the fintechs have done. It’s just that banks, unfortunately, decided to hold on to the FX value for themselves. Missed opportunity.
But fintechs do the easy bits, to be honest. The hard lifting is still done by the banks. Fintechs are answering a specific need, but without the whole infrastructure that banks put in place, the fintech could not be doing what they’re doing. It has to be a symbiotic relationship. Let fintechs do what makes sense. The customer experience is great in the fintech world. Banks can learn from fintechs in that respect. But the banks are still necessary to do the heavy lifting.
Project Nexus
The Bank for International Settlements has proposed Project Nexus, which addresses the G20’s initiative around cross-border payments: cost, speed, transparency, and accessibility. The idea is to interlink domestic real-time payment platforms. If you’ve got cheap and fast on one side, cheap and fast on the other side, join them together, and you’ve got cheap and fast internationally.
The Nexus idea is that each country puts in place a gateway. To connect to another country, you just connect those gateways. Makes things a lot easier than establishing correspondent banking relationships everywhere.
Whether instant is needed in all cases is a whole other issue. The ECB is looking at non-time-critical approaches. Maybe half an hour is sufficient. Who knows? Maybe there’s too much emphasis on the instant.
Bilateral Connections
What we’re seeing a lot at the moment is more bilateral connections being put in place. Singapore is particularly leading in this space. To make this concrete: somebody from the Philippines goes to Malaysia on holiday. They’re standing in a shop and want to buy a coffee. Rather than using their credit card, they use their domestic bank app or wallet that they use at home to scan the QR code the merchant has. The merchant gets money in local currency and the person’s bank account or wallet is debited.
That becomes a whole new version of cross-border. Traditionally, we talked about corporate trade-related payments and remittances. This is almost a third version, the e-commerce or consumer cross-border payment. And we’re seeing a lot more of these bilateral links, which make sense because there are certain corridors that make sense for a country.
But if every country tries to connect on that basis, then the whole thing explodes exponentially, which is where Nexus comes in. Maybe Nexus isn’t getting the attention it needs at the moment, but it is something that’s getting focus from major players like Mastercard.
Instant Payment Corridors
We’re seeing instant payment corridors being discussed. The EBA’s RT1 SEPA Instant into The Clearing House in the US, connecting euro to dollar instant payments. They’re saying they want to do it, they’ve got plans. But that’s instant to instant, and frankly, two bodies that are very interested in working together. That’s not the complicated bit. There are a lot more complicated currency pairs than dollar to euro.
Who Does What
The cross-border payments ecosystem involves many players, each with specific roles.
Traditional Banks: The Heavy Lifters
Banks still do the heavy lifting in cross-border payments, especially for corporate clients. While we haven’t gone into the real detail of the corporate side, it’s extraordinarily complex once you’re not just moving dollars to euros between two companies. The services that banks provide to corporates are really extraordinarily complex. And it’s very little about just sending the actual transaction that’s important to their clients.
When you’re the CFO of Siemens Europe, you might have a very different view of whether you use some of these fintechs because of the other services banks provide. Banks handle:
Treasury management
Currency hedging
Trade finance
Complex compliance across multiple jurisdictions
Exception handling when things go wrong
Relationship management
The bigger banks have traditionally been the backbone of correspondent banking. But you’re seeing them now starting to look at what makes sense for them to do, depending on their customer base, depending on the flows, depending on which countries their flows are going to. If you’ve got a high volume of low-value payments going into a particular country that has a real-time payments platform, it may make sense to plug that into your ecosystem.
Banks are very much starting to look at what makes sense in this overall picture. On one hand, it makes it more complicated because you’ve got to maintain many different variations as opposed to just maintaining your network of correspondent banks. But on the other hand, it offers so many more opportunities for banks to service their customers better.
This is what people are calling Correspondent Banking 2.0.
Fintechs: The Sweet Spots
As fintechs do, and as new entrants to the market do, they go after the sweet spots. They go after the higher fees and the easiest things to do. The customer experience is great in the fintech world. They’ve shown that transparency in pricing is possible and valuable. They’ve demonstrated that technology can make the process smoother for consumers.
But without the whole infrastructure in place that banks provide, fintechs couldn’t do what they’re doing. It has to be symbiotic.
Infrastructure Providers
Companies like Mastercard are in the real-time payments area, looking at account-to-account solutions. They’re seeing things from a whole other perspective, looking at real-time and batch payments. The movement at the moment is looking at how to link real-time payment platforms worldwide, triggered by the G20 proposal around improving cross-border payments.
Mastercard is a leading player in domestic switches, hosting or supporting real-time payments platforms in 11 different countries, 12 if you include their batch one. They’re looking at things like Project Nexus because connecting these platforms is a natural extension of their infrastructure role.
Regulators: The Gatekeepers
Regulators play a crucial role in cross-border payments, and their role is getting tougher. We’re not just talking about payments: money laundering, AI, operational resilience, cybersecurity, you name it. Looking at two different regulatory environments, two different ways of doing governance, makes things an awful lot more complicated.
The G20 initiative is looking to drive down the cost of workers’ remittances, giving those who don’t have the benefits that others might have access to more control over their funds. Financial inclusion and accessibility are very important. The question is: who’s going to pay for this?
Key Considerations
Several critical issues shape how cross-border payments work and where they’re heading.
Know Your Customer and Compliance
If you don’t know who the recipient is, then the bank that’s sending it has the problem. KYC (Know Your Customer), sanctions checking, and AML (Anti-Money Laundering) are not just necessary paperwork. There’s a lot here that we need to adhere to so that good people don’t get scammed.
One thing people don’t necessarily realize is that once a scam’s done, getting the money out into a different environment, a different country, a different currency, is the aim of all these scammers. This is why KYC becomes even more critical in cross-border payments than in domestic ones.
We’ll explore KYC in much more detail in a dedicated post, but for cross-border payments, the key point is this: you’re not just dealing with one country’s KYC requirements, you’re dealing with multiple. That’s difficult enough when you’re talking domestically. When you get into cross-border, it becomes a lot more complicated.
The Fraud Challenge
Real-time payment is basically real-time fraud. The faster the payment, the greater the amount of fraud. It’s difficult to cope with in one country. As soon as you go over a border, it becomes a lot more complicated still. Connecting real-time payment platforms between countries might be great in terms of time, might be great in terms of cost, but it will also be amazing in terms of fraud opportunities. In a negative sense.
The Wallet Question
There’s the question of the unbanked, people using wallets on their phones. This is not corporate stuff, but high-volume payments in exotic currencies where people haven’t got bank accounts but do have a phone. There are other ways of doing this that are not so obvious.
One has to be concerned about the funds being transferred. Somebody doesn’t have a bank account, they have money, they go into a shop, they load money onto their wallet, and they can then use that wallet to transfer funds either domestically or abroad. Where has that money come from? That becomes a weak spot in all the work that banks and other institutions are doing around KYC, sanctions checking, and AML. It opens up opportunities for funds to be transferred that maybe are not legitimate.
Cultural and Operational Expectations
If you’re connecting real-time payment platforms, that becomes a whole other area of complexity. Domestically, you’ve got your own standards. Every bank in the country doing domestic payments operates according to a known set of rules. In the destination country, they operate according to their own known set of rules. All of a sudden, you’re going from one domestic platform to another domestic platform, but you’re not operating according to the same rules.
That’s why the complexity is not in just connecting these platforms. It’s in that whole regulatory and governance space. But it’s also in the cultural space. Your cultural expectation is that your payment will get to the beneficiary in 10 seconds. But let’s say in another country, the standard is 20 seconds. Do you add them up? Does it take 30 seconds? But that’s not what you expect because you expect 10 seconds, and so on. It becomes really very complicated.
The G20 Initiative
The G20 initiative looks to address four key areas: cost, speed, transparency, and accessibility. These are the right goals. But achieving them requires balancing multiple competing concerns:
Speed vs fraud prevention
Cost vs compliance
Accessibility vs security
Innovation vs regulation
Whether it’s someone sending money to their kids, back to their family, or a corporate dispersing funds across the world, it’s a complicated world. Cross-border is the most complicated transaction type out there.
Closing: Adult and Complex
Cross-border payments are, in many ways, the adult and complex version of payments. They really are a lot more complicated than they seem on the surface.
We can talk a lot about payments and transactions, but when it comes to cross-border, it’s not just about the payment itself. It’s everything before and after. The compliance, the currency conversion, the intermediaries, the regulations in multiple jurisdictions, the fraud prevention, the exception handling.
There are rich pickings in this space. Fintechs have shown that better customer experiences and transparent pricing are possible. New infrastructure linking domestic real-time platforms promises faster, cheaper payments. The G20 initiative is pushing for improvements.
But the fundamental complexity remains. You’re operating across regulatory environments, across currencies, across different banking systems. That complexity creates costs. The question is whether new technology and new approaches can reduce those costs significantly while maintaining the security and compliance that cross-border payments require.
We’ve talked a lot from a Western point of view, but it’s not always the case. We need to be aware that other parts of the world have very different views on how it should work and how it can be afforded.
The regulatory steps are getting more numerous, not fewer. Banks are rethinking their approaches. Fintechs are attacking sweet spots. Infrastructure providers are building new connection points. It’s an exciting time, perhaps in both the English point of view and the Chinese way of thinking about exciting times.
The paradox we started with remains: we have vastly better technology than the gold standard era, yet cross-border payments often feel more complex. Understanding why, understanding the history, how it works, and who does what, helps explain why that paradox exists. And perhaps, eventually, how we might resolve it.
Coming Next: We’ve reached the end of the second section of Payments 201- The What. So now we have covered The Who and The What. We are now going to start on the final section of Payment 201. Which is the rules and the context!!