Decoding Cross-Border Transactions

Feb 20, 2025

$190 trillion—that’s the total amount of capital businesses and individuals transfer across borders each year. These transactions come with a hefty price tag—$193 billion paid in fees each year. Whether you’re shopping online, booking a vacation, paying freelancers overseas, or donating to international charities, you’re likely contributing to those fees. But cost isn’t the only issue—speed and security are equally concerning when it comes to cross-border transactions.

While domestic transactions clear in an hour, international transfers can take up to 33 days. Worse, the current transaction messaging system used in the banking space also known as SWIFT that facilitates these global transactions is vulnerable to cyberattacks. In 2016, hackers sent transaction messages through this system, convincing the Federal Reserve Bank of New York to transfer $80 million from the Central Bank of Bangladesh to unknown accounts. The funds, routed through the Philippines, were ultimately lost. This incident raises a pressing question: are our current cross-border transaction systems truly safe?

Beyond security concerns, these systems are fragmented and lack the interoperability we desperately need. Today, each geographic region operates its own cross-border transaction system: in the U.S., SWIFT, FedWire, and CHIPS work in tandem; Europe relies on TARGET2 and SEPA; and China uses CIPS. Getting these systems to communicate with each other is a risk that is yet to be addressed and leaves us with a patchwork of millions of hops that a transaction must take to get across the border. Think about it: if an email can travel from the U.S. to Singapore in under 10 seconds, why does moving money along the same route still take hours and in some cases days? 

Why are our global capital rails so outdated, fragmented, and fragile? What can we do to ensure both consumers and businesses can make transactions across the border in real-time, and in a secure manner? Before we answer this question, we need to understand how cross-border transactions have evolved over the years and the risks they inherit.

Evolution of Cross-Border Transactions - 4 Core Types

Generation 1A: Correspondent Banking 

The first cross-border transaction system, SWIFT, dates back to 1977—and it’s still in use today. At its core, SWIFT is a messaging system that allows banks in different countries to exchange information and coordinate before transferring funds. Once this coordination is done, funds are cleared through settlement systems like CHIPS in the U.S., TARGET2 and SEPA in Europe.

The problem? SWIFT connects banks across more than 200 countries, but only a few banks are directly linked. Most banks rely on intermediaries also known as correspondent banks to complete transactions, which means money has to pass through multiple banks in a chain. This adds time, costs, and complexity, making it harder to trace transactions. So, while SWIFT provides global coverage, its reliance on intermediaries makes it slow, expensive, error-prone, and vulnerable to cyberattacks.

Generation 1B: Money Transfer Operators (MTOs)

In response, agent-based cross-border payment systems like MoneyGram and Western Union emerged. These systems cater to individuals without bank accounts. For example, someone in Country A can deposit cash with an agent i.e local storefront, and the recipient in Country B can pick it up from a local agent i.e storefront after verifying their identity. While this improves accessibility, these systems still rely on SWIFT under the hood and inherit the same risks.

Generation 2: Transaction Aggregators

Next came the second generation of cross-border systems—transaction aggregators like Wise. These fintech companies maintain local bank accounts in multiple countries. Instead of sending money across borders, they work around the system. For example, if someone in the U.S. wants to send 1,000 INR to someone in India, Wise debits the sender’s money locally in the U.S. and credits the recipient’s money locally in India. In this case capital does not necessarily cross borders per transaction. While this approach is faster and more efficient, it’s far from perfect—these companies still need to deal with compliance in every country they operate in and hold enough capital to manage liquidity risks.

Generation 3: Blockchain-Based Systems

We’re now witnessing the third generation of cross-border payment systems with the rise of Central Bank Digital Currencies (CBDCs) and blockchain-based networks. These systems convert national currencies into tokenized assets and offer a range of benefits. Transactions are validated across hundreds of servers, making them virtually hack-proof. And since every bit of capital is digitized, money can move at the speed of light, enabling real-time cross-border transactions. You may ask, so what are the risks tied to these systems?

Each country is developing its own CBDC system using varied distributed ledger technologies supported by platforms such as Ripple’s XRP, Bank for International Settlements’s (BIS) mBridge, Europe’s Digital Euro, and China’s Digital Yuan. Enabling interoperability amongst these systems is one of the biggest risks here. Second, for this system to work, central banks, commercial banks, and intermediaries need to overhaul their infrastructure entirely, upgrading both hardware and software across more than 44,000 banks worldwide. The question is: do all countries have the resources—and the capital—to make this shift possible in the next few years?

Each generation of cross-border payment systems has exposed new risks, making it clear that incremental fixes are no longer enough. This raises a critical question: what would it take to build a global transaction system that is both interoperable and robust for consumers and businesses alike?

Generation 4: Next-Gen Cross-Border Transaction (XBP) Systems

While no single solution can address all these risks, a three-phased approach is what we need to transition to the 4th generation of cross-border payment systems—one that can effectively mitigate vulnerabilities and help us meet the needs of both consumers and businesses.

First, banks and governments can team up with transaction aggregation platforms  to cater to consumers and businesses, who currently spend over $200 billion annually on international transaction fees. These aggregator platforms provide an effective interim solution to streamline payments and lower costs. The second phase involves integrating these payment aggregators with mobile payments infrastructure, such as India’s UPI, the U.S.'s Zelle, and the BIS’s Nexus, enabling users to make seamless peer-to-peer cross-border payments directly from their mobile accounts. Finally, banks and governments can transition to blockchain-based infrastructure by collaborating with technology providers to upgrade systems, roll out digital currencies, and adopt standardized digital currency routing platforms like BIS’s Icebreaker or Visa’s VTAP (Visa Tokenized Asset Platform). This would enable a secure, real-time global payment network.

To make this vision a reality, banks, governments, regulators, fintech companies, and technology providers must work hand-in-hand at every stage. Without decisive action and unified efforts, billions of people and businesses will continue to bear the $200 billion annual burden imposed by outdated transaction systems. A fast, affordable, and secure cross-border payment system isn’t just critical for global commerce—it’s a lifeblood for over a billion people navigating global economies in search for a better future.

Cheers,

Prathamesh

Disclaimer: This blog is for educational purposes only and does not constitute financial, business, or legal advice. The experiences shared are based on past events. All opinions expressed are those of the author and do not represent the views of any mentioned companies. Readers are solely responsible for conducting their own due diligence and should seek professional legal or financial advice tailored to their specific circumstances. The author and publisher make no representations or warranties regarding the accuracy of the content and expressly disclaim any liability for decisions made or actions taken based on this blog.