Introduction

As we sat down to discuss and put our thoughts down for this article on cross-border money movement, news came trickling in that Nepal and India are set to sign an agreement for cross-border digital payments using e-wallets. This real-time payment system is meant to boost tourism and enable payments for larger digital goods. A decade ago, no one would have thought this possible.

Cross-border payments have traditionally been a long-winded process with lots of paperwork and, in most cases, a neutral currency as a go-between (e.g., USD). The need for trusted networks located across the globe with existing regulatory measures and technical infrastructures made banks (and a few other parties) the natural choice to carry out cross-border transactions. But the increase in cross-border trading, along with the rise in tourism, the need for faster and seamless payments, changing customer demands, and the pandemic have accelerated changes in the cross-border payments landscape. Terms like STP (Straight Through Processing) are coming into the sphere of cross-border transactions too. Who knows, we may actually see the demise of other terms like VOSTRO and NOSTRO.

FinTechs are leveraging technology to provide faster solutions that will help individuals, SMEs, and corporates. UPI’s domestic success in India has caught the world’s attention and opened up opportunities. RBI’s LRS (Liberalized Remittance Scheme) has been a game-changer, and the Indian government has been steadily working towards the internationalization of the Indian rupee. 

According to the World Economic Forum, global remittance to low and middle-income countries is estimated to have risen by almost 5% in 2022. There are two main classifications of transactions in international trade and money transactions – Capital account and Current account. The capital and current accounts comprise the two elements of the balance of payments. Capital account transactions cover cross-border investments, loans, and the transfer of wealth. Current account transactions include business transactions, short-term banking, credit facilities, etc. A country with a current account deficit will have a capital account surplus and vice versa.

In this article, we explore the potential and opportunities in this space for startups when it comes to cross-border money movement for citizens. However, we have explicitly excluded all COMMERCIAL cross-border transactions (i.e., trade finance/B2B payments & receipts) as we believe that deserves a separate article and space of its own.

What is India’s existing remittance structure?

Outward Flow:

For Indian citizens (non-corporates), LRS is the main mechanism for transfer from India to abroad. LRS currently allows individuals to freely remit up to $250,000 per financial year for any current or capital account transaction. When introduced in 2004, this scheme had a limit of $25,000 but has been revised in stages. Outflows hit an all-time high of $19.61 billion in 2022, aided by overseas education and international travel. This is expected to rise in the first two quarters of 2023 in spite of the newly announced 20% TCS (Tax Collected at Source) by the Union budget on outward foreign remittance under LRS (except for medical and education purposes)

Inward Flow:

India’s foreign inward remittances stood at $89.12 billion in 2021-2022, which is the highest ever received in a single year. A large portion of these remittances were received from the US, UK, Singapore, UAE, and Saudi Arabia. 

Until recently, expatriate Indian workers (whether in Singapore or the ME) had to pay several charges just to send money home. These charges added up to 6-10% of the amount sent. But the tie-up between India’s UPI and Singapore’s PayNow is a boon to workers who don’t have to pay a transaction fee and will find the transfer process more straightforward. However, this does not solve the currency conversion issue. To solve for an end-to-end seamless flow, we believe the new “rails” being developed will pull all of these into one single STP process.

India’s existing remittance structure involves remittance models such as SWIFT, MTSS (Money Transfer Service Scheme), RDA (Rupee Drawing Arrangement), and postal channels. These traditional models are costly and cumbersome and, in the instant world that we live in, have led to the proliferation of non-bank providers. In our opinion, they deserve to be “retired” and new digital infrastructure enabled.

The disruptions in India’s remittance space

The remittance ecosystem is growing with alternative options to the traditional remittance models. RBI has piloted and introduced several measures and schemes over the last few years, opening the floodgates for cross-border payments. 

The LRS provides an opportunity for third-party providers and FinTech companies to identify alternative cross-border payment solutions. 

India’s real-time transaction volume is relatively high due to UPI’s minimalistic interface and user-friendly experience. RBI also announced that it would allow UPI access for international travellers starting with G20 nations by issuing a Prepaid Payment Instruments (PPI) wallet. The NPCI (National Payments Corporations of India) has plans to allow NRIs from 10 countries to digitally transfer funds from their NRI/NRO account using the UPI platform. The recent partnership of NPCI’s international arm with UK-based digital payments infrastructure provider PPRO for enabling UPI for international e-commerce will truly make UPI global. This will likely reduce the reliance on SWIFT or other models that take longer to process payments. 

FinTech companies, with the help of RBI, are moving quickly to leverage technology and provide quick, easy, affordable, and reliable cross-border payment solutions. While some are using existing rails and infrastructure to provide their services. Others are looking at newer technology and infrastructure to support them.

What do these disruptions mean for startups in India? 

UPI’s global expansion provides several use cases and case studies to explore and ponder over. The foray into other countries for direct payment (like Singapore, UAE, Nepal, UK, etc.) offers an opportunity to assess whether we can duplicate the platform’s success on foreign soil. This success could open the door for other countries in the neighbourhood. 

There is demand for alternative cross-border payment rails, and the NPCI is toying with the idea of building a SWIFT alternative. This will be a game-changer as it will help payments flow between India and the global market on its own digital payment rails. 

RBI’s launch of CBDC (Central Bank Digital Currency), also known as the digital rupee or e-rupee, is a pilot covering the wholesale and retail segment. It is currently being run with a closed group of participating customers and merchants. Digital currencies are exactly like bank notes but in digital form, making transactions quick and easy.

At July Ventures, we see all of these as great opportunities to re-imagine the future of money movement across nations. These span digitization of traditional but timeless concepts/regulatory aspects like KYC, AML, cross-currency, treasury operations, etc., as well as newer and emerging technologies such as “fractionalized offerings,” CBDC, and Crypto. 

Conclusion 

According to the World Bank, India holds the first position with remittances exceeding USD 100 Billion in 2022. This is significantly ahead of China and Brazil and shows the vast possibilities that startups can explore. 

Cross-border remittance (both inward and outward) is growing at a fast pace. This growth is fuelled by individual (citizen) and commercial (corporate) transactions. As one of the fastest-growing large economies in the world, India has the opportunity to establish new platforms (and digital rails/infrastructure) that have the potential to be the global de-facto standards. We at July Ventures believe that today’s startups will drive this change – both with innovation and agility. 

The future of cross-border payments looks bullish, and we are excited to be part of it.