By Pratik Shah & Ranadurjay Talukdar

In a world where economic and social ties transcend borders, cross-border payments are the backbone of international trade and global finance. For India, which receives the most remittances, these transactions are crucial to the country’s economic fabric. In 2023, India received $120 billion in foreign remittances, with over 20% coming from the US and 18% from the UAE, per World Bank data.

Beyond personal remittances, payments also include services provided by Indian professionals and business remittances. However, beneath the impressive figures lies a somewhat inadequate payment infrastructure, marked by slow processing times due to intermediaries and high transaction costs. To maintain competitiveness in the global market, India must address these challenges through regulatory reform and innovation.

More to cross-border payments

In FY24, India’s IT exports welcomed $199 billion, while foreign domestic investments (FDIs) into India totalled $70.95 billion, per data from India Brand Equity Foundation. These figures underscore the need for an efficient payment infrastructure that can support growing cross-border transactions. Outbound payments also face challenges, from regulatory hurdles to inconsistent infrastructure, which must be addressed to enhance the country’s global competitiveness and digital growth.

Modernising regulations and payment systems 

India’s cross-border payments face two major challenges—stringent regulations and outdated payment infrastructure. While these regulations aim to prevent fraud and money laundering, they often slow down legitimate transactions. For instance, non-bank Payment Aggregators (PA-CBs) face strict capital requirements, including an upper cap of Rs 25 crore by 2026, which poses challenges for smaller startups. The transaction caps also restrict larger business operations from scaling up their cross-border dealings. However, recent Reserve Bank of India (RBI) draft guidelines on forex correspondents (who will be able to conduct business via an agency model) are likely to further strengthen the inward remittances ecosystem. 

Infrastructure-wise, India relies heavily on traditional systems like Society for Worldwide Interbank Financial Telecommunications (SWIFT) and wire transfers, which are slow and costly. To stay competitive, India must adopt newer technologies. The domestic success of Unified Payments Interface (UPI) offers promise for international scaling, though issues like interoperability and currency exchange must be resolved. Blockchain and Central Bank Digital Currency (CBDC) initiatives also hold potential for enhancing speed, security, and cost in cross-border payments.

In 2021, RBI partnered with Open Financial Technologies to develop a blockchain-based payment system to enhance transparency, security, and fraud prevention. However, scalability during high transaction volumes requires solutions, like Layer 2 technologies, for efficiency.

India’s CBDC, eRupee, is another key project aimed at real-time settlement of cross-border transactions. By reducing reliance on intermediaries, eRupee could lower transaction costs and improve security. However, this will require interoperability between central banks across jurisdictions, which poses its own challenges. 

These efforts promise significant economic benefits. Blockchain-based payments could save Indian banks millions annually, while reducing the number of intermediaries could open international markets for smaller enterprises.

Scaling UPI for global use

UPI has transformed domestic payments, but scaling it globally requires addressing challenges like system interoperability and currency exchange. UPI’s daily transaction cap of Rs 2 lakh limits larger international transfers. The UPI-PayNow partnership between India and Singapore expands UPI’s reach, though further collaborations are needed. Cross-border P2P payments will also require KYC and Anti-Money Laundering (AML) checks, making real-time transfers unlikely and necessitating a deferred settlement model.

Learning from the ‘Wiser’ 

Traditional cross-border payment methods like SWIFT remain dominant but incur high costs and slow processing times. The UK-based fintech Wise has disrupted this space by providing faster transactions at lower fees using real exchange rates in its P2P model. Indian fintechs could adopt similar P2P models to enhance international transfers. 

India’s modernisation of cross-border payments hinges on regulatory reforms and technological innovations. Amidst all, interoperability between domestic and international payment systems is key to creating a seamless global ecosystem. While blockchain, CBDC, and UPI are promising, other methods should be explored to ensure cross-border payments are fast, secure, and affordable. RBI is actively working on balancing the risks of rapid technological changes while facilitating easier transactions, showcasing its commitment to fostering innovation in the payment landscape. With such efforts, India is well-positioned to enhance its leadership in global cross-border payments.

The writers are respectively financial services leader, and partner and payments sector leader, EY India.

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