Innovation within payments and commerce is increasingly centered on fostering global financial interoperability and inclusion.
Already, the first half of 2024 has been particularly action-packed for the payments industry, marked by significant technological advancements and strategic initiatives aimed at reducing transaction costs as a key way to spur greater interoperability and financial inclusion.
“There are two ways you can increase revenue: either by charging a customer more, or by reducing your costs. And the use of technology in reducing costs is something that is easier to do than trying to charge the customer more,” Ram Sundaram, COO at TerraPay, explained to PYMNTS during a discussion for the series “What’s Next in Payments: The Halftime Report.”
The World Bank’s Sustainable Development Goals (SDGs) mandate a reduction in the cost of cross-border remittances, which currently stands at around 8%, underscoring the importance of cost reduction as an innovation pillar within payments.
Sundaram said that TerraPay’s mission aligns with this goal, aiming to bring down these costs further to enable low-value transactions without prohibitive fees. This reduction in costs can unlock new use cases for cross-border services, thereby expanding revenue streams for financial institutions and service providers.
“If you do a $10 transaction today, you’ll probably spend a very significant part of that $10 as fees. And we need to get to a point where that base fee is something that you don’t have to think about, so that you can do low-value transactions at scale — that could change the landscape of cross-border payments and remittances,” he added.
“Apart from that, the way that you generate more revenues is that you create new use cases,” Sundaram said.
Embedded payments, which seamlessly integrate financial services into various non-financial platforms, are revolutionizing user experiences with commerce and payments. This growing trend is not only enhancing convenience but also significantly reducing transaction friction in both retail and business-to-business (B2B) contexts.
According to Sundaram, the key to this innovation lies in embedding financial services where they are most needed — at the point of sale. This approach, exemplified by the growing popularity of buy now, pay later (BNPL) services, ties financial transactions directly into consumers’ daily activities, making them more accessible and user-friendly.
“There are very few financial services that we consume standalone … that’s why embedding them is the better user experience,” Sundaram said.
The backbone of these embedded payments innovations is the robust development and deployment of application programming interfaces (APIs), he added.
APIs facilitate the integration of diverse financial services into various platforms, enabling seamless interoperability between different financial instruments like wallets, bank accounts and cards.
Still, Sundaram highlighted the challenges in API development, particularly the standardization of data and harmonization of financial regulations across countries. As TerraPay itself operates in the cross-border space, navigating these challenges is crucial for ensuring compliance and scalability.
One of the more important strides in this area is the adoption of ISO 20022 messaging standards, which are becoming increasingly important in the cross-border payments ecosystem. With regulatory mandates pushing for this transition, financial institutions are upgrading their systems to support these standards, enhancing the efficiency and reliability of international transactions.
“Obviously, there’s a lot of work to be done on traditional financial institutions’ backends. Their systems need to be upgraded. They need to build these capabilities in, and that’s cost. So, there are challenges, but uptake is increasing exponentially,” Sundaram explained.
In an ecosystem where financial services are ubiquitously embedded, robust compliance and risk management strategies are increasingly becoming paramount as operational table stakes.
Payment innovators are addressing these challenges by leveraging extensive data to ensure seamless compliance and risk mitigation, Sundaram said. By connecting directly to financial institutions and reducing the number of intermediaries, payments companies can access and utilize critical data more effectively. This approach not only enhances financial transparency but also aligns with global regulatory standards, balancing the need for data privacy with the demand for financial transparency.
“Balancing it all out is a significant challenge, and it needs to be done at the platform level … compliance and risk management are about data. The more and better data that you have, the more seamless your compliance and risk management can be,” Sundaram said.
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