The Evolution of Cross-Border Payments in Latin America: What’s Next
By Alfonso Rojas and Alejandro Safdie
In the first installment of this blog series, we covered what’s been happening to date in the cross-border payments space, both globally and within Latin America specifically.
And now it’s time for some predictions based on what we’ve seen so far.
Here are three hypotheses on specific changes that could take place in the coming decade that could redefine how the industry operates.
1. Payments Cost Efficiencies Will Follow Domestic RTP Trajectory: Low Cost and Value-Added Services
In many markets, domestic real-time payments (RTP) will become widely accepted and virtually free due to a joint effort among payment players in the ecosystem and regulators. Regulators will have recognized the positive impacts on local economies—such as financial inclusion, convenience, safety, and efficiencies—and support the implementation of cross-border RTPs.
Recognizing this trend, most players will focus on developing services to build their brands around the value they add to their customers’ operations, rather than just the exchange of money (which would lead to a race to the bottom for lower FX rates and thinner margins). This shift will make cross-border payments a low-cost commodity in the medium term, leading to price competition that benefits the customer and improves their overall user experience.
Consequently, the most relevant players will be those adding value beyond payments. Larger players are likely to offer a one-stop-shop solution for all banking and payment needs while smaller players might focus on niche needs or significantly superior user experience through multiple channels. Key services to observe include fraud prevention, KYC, platforms, FX hedging, cash management tools, ERP, and travel & entertainment management.
2. Central Banks Will Create Widespread “Regional Payments Corridors/Areas”
Given the success of domestic real-time payments, regulators understand the importance of digitizing and making payments broadly accessible, including cross-border payments. There have been successful cases of regional payment area pilots, which have improved the payments ecosystem, as described in part I. Newer pilots such as IXB (US - Europe corridor) could have a huge impact. Additionally, financial institutions will migrate from SWIFT MT to ISO 20022 by 2025 for financial messaging, facilitating exchange, increasing security, and significantly reducing messaging errors.
Depending on the implementation regulations, incumbent banks could benefit the most due to their existing position (AML/KYC compliant, existing relationships with Central Banks, etc.), as seen in the linkage established between UPI and PayNow, where Indian banks and FIs’ users can send money in real time to Singapore, thanks to the central banks’ collaboration. This shift would push the entire industry away from profits coming from payment fees and high FX rates. High volume bilateral corridors, such as US-Mexico, could see the greatest positive impact to end users and overall innovation.
The biggest questions remaining are: how fast will regulators promote the widespread existence of bilateral or multilateral RTP corridors? How will global geopolitics affect these agreements? How will regulation affect incumbent players? From our perspective, investing in startups with a clear roadmap of value-added services beyond the payment rail itself becomes critical.
3. Fintech Innovations Won't Replace Legacy Rails, They Will Coexist
SWIFT will take an active approach to improving the conditions under which cross-border payments are conducted through incumbent banks, promoting the adoption of the ISO 20022 standard and launching new networks such as SWIFT GPI. Legacy rails such as card payments are unlikely to disappear due to the robust regulatory and compliant network they have built globally and the advantages they provide in terms of speed, dispute management, and fraud prevention, despite higher costs. Even if Decentralized Ledger Technology payments are fully adopted, stablecoins need banks to store the underlying fiat assets backing the cryptocurrency, and banks simultaneously need to fulfill SWIFT volumes as part of their core business (correspondent banking agreements).
For certain transactions, some rails make more sense than others, which is why a successful cross-border payments player will act as an orchestrator, developing a proxy that sends specific transactions to the best available rail. Accepting this coexistence means that more partnerships will be established among players operating through multiple rails. Startups that can efficiently orchestrate payments based on transaction type will be well positioned for the future of cross-border payments. However, legacy players such as incumbent banks and Mastercard/Visa will play a crucial role in shaping partnerships and acquiring fintech companies.
Analysis of Sub-Sector Opportunities
B2B Cross Border Payments involve the transfer of funds between businesses in different countries, facilitating international trade and commerce by allowing businesses to pay overseas suppliers, vendors, and partners. These transactions typically involve larger payment amounts, complex workflows, and compliance with regulatory requirements across multiple jurisdictions.
Key tailwinds driving demand for cross-border payment solutions include the globalization of businesses expanding their operations globally, digital transformation offering efficiency, transparency, and security, regulatory changes promoting open banking and financial integration, and growth in emerging markets as businesses seek new shores to sell their wares.
Advances in technology like ISO20022, DeFi, AI, and APIs enable startups to develop innovations for faster processing, lower costs, and enhanced security. Partnerships between fintech startups, banks, payment networks, and regulatory authorities facilitate development and adoption, while data analytics enables fintech to optimize payment flows, identify trends, and offer value-added services like FX risk management and liquidity optimization.
Investable themes in this space include value-added services such as fraud prevention (KYC/KYB), FX hedging, ERPs, travel and entertainment management, and working capital management.
C2C Remittances involve the transfer of funds between individuals—typically migrants—located in different countries. These payments are often made to provide financial support and improve family well-being, playing a vital role in developing countries by serving as a stable and counter-cyclical source of income.
Key tailwinds driving the demand for remittance services include global migration trends fueled by economic opportunities, employment, and reunifications, financial inclusion efforts by governments and NGOs that increase the reach and adoption of remittance services, and digitalization providing access to digital remittance solutions, reducing costs and wait times.
Investable themes in this space include loyalty programs and value-added services to avoid a race to the bottom in fees and FX spreads, clear distribution channels to promote efficiency and scale, orchestration by integrating multiple payment rails and optimizing transactions, strong partnerships with legacy players to promote access and interoperability, and scalability to expand and reach global volumes beyond specific low-volume corridors.
Challenges and Opportunities
Despite the promising trends, the cross-border payments landscape in Latin America faces several challenges and there are still multiple pain points experienced by stakeholders. Traditional cross-border payments are often expensive, with high fees and unfavorable FX rates, so reducing these costs is crucial for driving adoption. Additionally, many cross-border transactions still suffer from slow settlement times and limited transparency, causing delays and inefficiencies that undermine the end user experience. Addressing these pain points presents significant opportunities for fintech startups. By developing solutions that focus on enhancing the (1) front-end and payment delivery, (2) processing infrastructure, and/or (3) value-added services, these companies can innovate and capture a growing market share.
Players that provide a one-stop-shop for banking and payment needs, integrating various services like KYC platforms, FX hedging, ERP systems, working capital management, etc. are likely to gain a competitive edge. These solutions not only enhance user experience but also drive customer loyalty. For instance, fintech companies that offer integrated platforms can streamline financial operations for SMEs, reducing the complexity and cost of managing multiple financial services providers. By providing a holistic solution, these companies can attract a broader customer base and increase retention rates. Fintech companies that focus on human necessities—beyond the exchange of funds—such as financial emergencies, cash flow management, or services payments (phone, utilities, etc.) can attract and retain users that increasingly send money back home to their families.
Moreover, underserved segments represent a large opportunity. There is significant potential in addressing the needs of SMEs and individual consumers who are often underserved by traditional banking systems. Solutions that simplify international trade for SMEs or offer affordable remittance services through friendly channels (e.g., social media platforms, WhatsApp, etc.) for individuals can capture substantial market share. Finally, in order to be better prepared for changing future scenarios, players need to explore modular solutions that will help them prepare for the future of cross-border payments, incorporating payment options through stablecoins to harness the power of blockchain, engage with nascent regional initiatives with regulators, and more.
Conclusion
Cross-border payments in Latin America continue to grow and transform, with the future likely favoring startups that develop value-added services rather than relying solely on payments. Remittances and B2B cross-border payments are large markets with growing volumes in Latin America, driven by migration trends and the underpenetrated B2B sector. Regulators will play a crucial role in defining cross-border corridors, directly affecting both incumbents and startups. Increased competition will reshape the landscape, requiring players to optimize their user experience and fees. Value added services will provide an advantage for customer retention and revenue diversification, while the adoption of blockchain technology could redefine the industry.
The future of cross-border payments in Latin America holds immense promise. As the industry continues to evolve, staying ahead of trends and leveraging the latest technologies to complement existing rails will be key to unlocking opportunities and driving growth in the fintech space. This is a space we’re actively looking at globally, and particularly in Latin America.
What do you think? Do these hypotheses resonate with your thinking on how cross-border payments will play out in Latin America or beyond? Please let us know your thoughts in the comments!
…And if you’re a founder in the cross-border space, get in touch! We’d love to learn more about what you’re doing.
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