How Digital Wallets and Payment Apps are Disrupting Cross-Border Transfers?

Cross-border money transfers have long been a pain point for consumers and businesses alike. Traditional banks and money transfer operators like Western Union and MoneyGram have dominated this space for decades, charging high fees and exchange rate margins. 

But over the past few years, a new breed of digital wallets and payment apps has emerged to challenge the status quo.

The Rise of Digital Wallets

Digital wallet solutions such as PayPal, Skrill, and Neteller have been around since the early 2000s. But it's only in the last 5-10 years that they've taken off as mainstream options for cross-border payments. The global adoption of smartphones has been a huge catalyst, allowing consumers to access their digital wallets on the go.

Some key advantages that digital wallets offer over traditional providers are

Lower fees - Digital wallets leverage the power of the internet to reduce overhead costs. This enables them to charge much lower fees, often just a percentage point or two of the transaction amount.

Better exchange rates- Related to lower fees, digital wallets generally offer better exchange rates compared to banks and traditional money transfer operators. Rates are close to mid-market interbank rates. This can make a big difference compared to a bank or Western Union exchange rate that may be 5-10% worse than the mid-market rate once all fees and margins are accounted for.

Speed- Digital wallet transfers are often near-instantaneous or settle within 1-2 days. This is much faster than most bank wire transfers, which can take 3-5 business days or longer when sending money abroad. The delays with traditional providers frustrate consumers and businesses.  

Ease of use- It's quick and easy to set up a digital wallet account online or via a smartphone app. Once registered, sending or receiving funds domestically or internationally is seamless. Most apps allow you to easily add bank accounts or debit/credit cards.

Multi-currency capabilities- Digital wallets allow users to hold funds in different currencies, reducing the need for FX conversion. Users can exchange currencies in-app at competitive rates. This flexibility is useful for global commerce.

The Emergence of Payment Apps

In recent years, we've seen an explosion of smartphone payment apps that take advantage of the possibilities created by digital wallets:

PayPal and Venmo

The Closed-loop wallet, PayPal acquired the peer-to-peer payments app Venmo in 2013, and it's proven to be a huge success. Venmo has developed a passionate community of millennial and Gen Z users who enjoy the app's social feed where they can view friends' activity. 

PayPal has integrated Venmo capabilities into its mobile app, allowing free instant transfers between PayPal and Venmo users. Venmo helps attract younger demographics, while PayPal provides a full-suite financial services option. This combination provides a nice payment combo.

Square's Cash App

The Cash App by Square started as a peer-to-peer payments app focused on the US market but has since branched out into cross-border transfers. Its major advantage is the ability to send funds instantly and fee-free (for now), linked to a Visa debit card.

While the app currently caters mostly to American consumers, Square has global ambitions. It recently launched a Cash App in the UK, allowing cheap cross-border payments between the US and the UK.

Revolut 

One of the most buzzed-about fintechs in the cross-border space is Revolut. The UK-based company offers multi-currency accounts with low-cost currency exchange and free international money transfers. 

Revolut has rolled out slick mobile apps paired with prepaid debit cards, allowing users to easily spend abroad in supported currencies at the interbank exchange rate. This avoids costly foreign transactions and ATM fees charged by traditional banks.

Revolut has expanded across Europe and into markets like Australia, Canada, Singapore, Japan, and the US. It's aiming to be a global financial services app.

How Digital Disruptors Are Reshaping Cross-Border Transfers?

So how exactly are these digital disruptors reshaping the landscape for cross-border payments and transfers?

Consumer-focused user experiences

Digital wallets and payment apps have invested heavily in consumer-focused design. Their mobile-first experiences are seamless and intuitive for users. 

Things like instant domestic transfers, free transfers abroad to other users, flashy debit cards, transaction notifications, and balance snapshots make moving money not only cheap but fun. The user experience competes with leading consumer apps.

Transparency

Traditional remittance and bank wire fees are often opaque - digital disruptors offer complete transparency. Users can see exactly what is being charged for currency conversion, sending, receiving, card spending, etc. This builds trust.

For example, Wise clearly shows the mid-market rate to compare against their rate. Transferwise charges a small transparent margin on top for the transfer. This level of transparency is unprecedented in the industry.

Speed and access

Digital apps allow anyone with a smartphone to instantly send and access funds globally 24/7/365. Contrast this to locating a traditional agent like Western Union, filling out forms, and then waiting days for money to arrive at the destination.

Apps like Remitly, WorldRemit, and Xoom also target immigrant/migrant communities, providing fast convenient remittances.

Interoperability 

A major innovation has been enabling different payment apps to work together. For example, a user can transfer funds instantly between PayPal and Cash App accounts. This interoperability improves flexibility and convenience for consumers.

Regulatory compliance

Digital remittance apps have invested heavily in compliance to prevent money laundering, terrorist financing, and other illicit activities. This includes identity verification of users.  

The result has been an environment of enhanced security and control compared to opaque cash-based systems. However, regulators will need to closely monitor these apps as adoption grows.

Cryptocurrency integration

Some digital wallets like Skrill and Revolut have started integrating cryptocurrency capabilities. This allows users to convert crypto to fiat and send it abroad cheaply or exchange it for foreign currencies.

While still in its early days, cryptocurrency integration provides an alternative remittance channel for tech-savvy users. The regulatory treatment of crypto remittances remains a gray area.

The Path Forward

While digital wallets and payment apps have disrupted the cross-border payments industry, there is still room for growth. Wider smartphone adoption in developing countries will naturally expand the reach of these platforms.

A pivotal development would be for central banks to develop their digital currencies for more efficient and transparent global currency exchange and settlements. This could cut transaction costs compared to the existing correspondent banking system.

But even without central bank digital currencies, companies like Wise, PayPal, and Revolut are proving that consumers want efficient, mobile-first international money transfer experiences. Traditional remittance and FX fees look increasingly antiquated.

The platforms, technologies, and business models now exist to facilitate cheap, instant global payments and transfers. As smartphone penetration continues growing, expect digital disruptors to further unbundle cross-border transactions and expand financial access.