Globalization has brought the world to our doorsteps. We just need to reach out and grab it; finance is no exception either. Globalization is changing how we think about finance and the scale of what we consider ‘global’.
This article explores that change in thinking and how things have evolved, with a specific focus on global payments.
People used to think of finance as something local until it became global; they thought about national currencies being the only means through which transactions could be done until the Euro came along.
We are now entering a phase where there are multiple currency options, payment systems, and even money transfer service providers around the world. As long as you have a phone, you can make or receive payments from anywhere in the world. Before we look at how far we’ve come, let’s understand the basics of global payments.
Global payments are just like domestic payments involving your monthly paycheck, bills, and shopping, except that they involve currency conversion and money transfer between countries.
Some services handle only currency conversions while others handle transfers as well. You need to separate money that you use for living expenses, which you only move about locally, from money that is intended for investments or travel that may be earned in one country and spent in another.
Globalization is putting pressure on the current infrastructure of the global financial system. Before we look at how things have changed, let’s look at what the current system is actually.
The Current System:
It is important to understand that a byproduct of globalization and the ease of doing business has been the growth of a parallel economy— a shadow financial system.
This system operates on cash and comprises hawala, hundi, and the black markets. It started because the formal banking system was not available to everyone; it excluded many people, especially in developing countries. On top of that, there were high costs involved with the use of banks (and the poor lacked collateral), while some others preferred anonymity.
This shadow financial system has grown exponentially and is estimated by some to be 10 times the size of the official financial system.
Informal methods aside, there are also issues with some digital payment systems. The most common example of digital payment is PayPal. Since it is easy for anyone to open a PayPal account and begin transactions right away, cybercrime, drug trafficking, and terrorist financing are facilitated.
This is why these regulations surrounding registration, transaction monitoring, reporting suspicious activity, and taxation are used to counter these activities. These regulations have created a barrier for many people who want to or have to use PayPal.
Some argue that this has led to the rise in alternative payment systems, private companies that provide similar services to PayPal, but with fewer restrictions. Moreover, there is an increase in demand for private banks, financial management services, and offshore accounts.
Evolution Of Global Payments:
Country-specific, or national currency of a country, gains primacy as a global payment system. Euro provides a good example. Countries in Europe adopted the Euro as their national currency because they believed it gave them more clout in the global economy.
This is why there are companies that list prices of goods and services in Euros instead of U.S. Dollars, Japanese Yen, or Swiss Francs, even when they are operating entirely within one country.
This brings us to another way in which global payments have evolved – dual pricing or bilingualism. Prices are displayed in two currencies at once so that the customer can see the price in their currency of choice as well as the default currency. In this system, currency conversion is automatically performed when the payment is completed.
This not only applies to brick-and-mortar stores, but also to airlines and online retailers that display prices in multiple currencies. However, the problem with this method is that it charges customers extra.
Use Of Credit Cards:
There has been another change with the increase in the use of credit cards. Initially, credit card companies worked with banks to create cross-border networks that allowed people to make payments between different countries.
With advancements today, you can find credit cards issued by most major banks around the world that are accepted internationally. As all international trade is now documented electronically, it’s relatively easy for these companies to track and process transactions.
Payments With Mobile Phones:
With the advent of digital wallets, you can make payments using your mobile phones in many countries around the world without having to use a credit card. Digital wallets usually store money from your bank account or debit card and make transactions. The most popular of these wallets are Alipay and WeChat Pay.
Today, digital wallets and mobile payments are the most efficient way to transact with people in other countries. The problem with credit cards is that they’re expensive and often require you to go through hoops just for international transactions.
A new system called Blockchain now allows for payments to be made between people who don’t trust each other using a public ledger. Consequently, digital currencies such as Bitcoin are also beginning to play a role in global payments, but they’re still not widely accepted by merchants yet.
The first step towards making transactions across countries easier was reducing the barriers that prevented people from doing it in the first place, reducing or eliminating currency exchange. The second step was using two languages side by side to give customers a choice of currency when making transactions.
All in all, as time has gone on people have found better and more efficient ways to make international transactions so that it is easier for businesses and individuals to take advantage of the world economy. This results in a richer culture with greater diversity where big markets can grow faster.