Revisiting borderless payments
What's old is new again. By Gaby Goldberg & Bridget Harris
In recent months, we’ve seen an increasing number of projects working in and around borderless payments, from peer-to-peer solutions like Sling, Code, Ottr, and Decaf to on- and off-ramp companies like Kravata, Latamex, Koywe, and Rio.
Over the last decade, the concept of borderless payments was frequently hailed as crypto’s ultimate killer use case. Designed to operate globally from the start, crypto payments could make moving money faster, cheaper, and future-proofed against hyperinflation and corrupt governments. But for an idea arguably as old as the industry itself, we still have yet to see platforms solving this problem for consumers at scale.
Clearly, it’s not a question of demand. The traditional cross-border payments industry reached $190 trillion in 2023. In crypto specifically, lower middle income (LMI) countries show more grassroots crypto adoption than their counterparts, with Central and South Asia leading the way. Growth of retail crypto usage in Brazil has outpaced that of traditional equities markets. And Argentines largely prefer the physical US dollar as a form of savings – the peso lost 40% of its value in 2019. “Historically, things didn’t go well for those who tried to save in pesos,” said Matías Rajnerman, chief economist at consultancy firm Ecolatina. “Those who did so in dollars, did well.”
“You can walk up to any Argentinian person and ask how many pesos to a dollar, and they’ll know. As crypto adoption has grown, lots of people here will now get their paycheck and immediately put it into USDT or USDC.” — Alfonso Martel Seward, Head of Compliance & AML at Lemon
Solutions do exist, but they are small, geo-specific and fragmented. Individual markets are often served by local players (see LoopiPay in Brazil, Lemon and Buenbit in Argentina, Jambo and Yellow Card in Africa), but are limited by the regulatory confines — and subsequent liquidity — of that region. As a result, a consumer’s ability to send money cross-border is dictated by their local platform’s market coverage. This is largely why we have yet to see a dominant player emerge at scale: differences in regulation across regions make it difficult to implement offramping infrastructure that integrates across local exchanges — and there are hundreds (if not thousands!) of different regulatory environments with which companies need to comply to operate globally.
Reading these facts, it feels like the future for cross-border payments could take one of three paths:
The market largely stays the way it is now, resigned to a network of small (geo-specific), commoditized businesses that are able to serve local customers somewhat sufficiently, but incompletely.
A regional incumbent solves the regulatory bottleneck and grows market share in a meaningful way to serve a global customer base.
A new entrant successfully disrupts the category and creatively solves user acquisition and regulatory challenges to achieve global distribution.
We’re excited about development across any of these axes. Innovation gives consumers choice and control as competitors are pushed to build better products and drive prices down. This type of competition means progress. Regulatory headwinds still exist, but history has shown that the products that serve consumers best have the ability to shape regulation in their favor (see: Uber, DoorDash, Airbnb). Some of the biggest markets were built out of regulatory gray areas. This, in large part, is why we remain excited.
We’re also excited because, although borderless payments is far from a new concept, the facts surrounding its feasibility have changed as the industry has evolved. Blockchains have become faster and cheaper. Self-custody wallets have been made more user-friendly by way of account abstraction, multi-party computation, and social recovery. Stablecoin APIs have matured and their use cases have expanded. This new set of tools have provided an increasingly compelling foundation on which companies in this category can be built. Perhaps what once was old is new again.
Faster, cheaper infrastructure
Research breakthroughs and timing have played a large role in why the borderless payments category has no global winner. Only recently have blockchains reached levels of speed that can compete with (or outpace) traditional payments. Similarly, new standards within private key and account management have emerged to be more consumer-friendly, and on/off-ramp toolkits help to abstract the transition between fiat and crypto entirely. Across the infrastructure stack, we’re observing creative products emerge to simplify the cross-border flow of funds:
Wallet-as-a-service (WaaS) providers are leveraging innovative cryptographic frameworks — like Capsule with multi-party computation (MPC) and Privy with Shamir secret sharing (SSS) — to help applications onboard new-to-crypto users without need for seed phrases, while still remaining non-custodial.
Fragmentation across the onramp (fiat-to-crypto) landscape is being solved by plug-and-play aggregator products like Onramper, which enables developers to efficiently route transactions across 17 different onramps, 190+ countries, and 180+ local payment methods.
Companies like Ramp Network act as full-stack crypto toolkits for developers, with built-in compliance, support for major payment methods, and global (150+ countries) coverage.
Stablecoin APIs like Bridge have modularized an important piece of the crypto-to-fiat payments stack via stablecoin orchestration and issuance APIs, a piece of infrastructure that previously had to be custom-built for each use case.
Payments infrastructure companies like Sphere provide developers and merchants with end-to-end payments APIs for digital currencies, simplifying money movement across every major network.
Platforms like Beam — created by Eco — have created a self-custody wallet and payments product to send money to anyone in the world, regardless of whether the recipient has a Beam wallet set up or not.
From an ecosystem perspective, it’s worth noting that Solana has emerged as an attractive foundation for developers in this space, as it was largely built to be scalable out-of-the-box. Payments companies like Sling, Code, Ottr, Decaf, Boop, and Tiplink — all founded within the last two years — have chosen to build on the Solana blockchain.
Regulatory headwinds: “The Gatekeeper”
A lack of regulatory clarity has made it particularly difficult to scale a company in this space — but for the same reason, it provides a window of opportunity for new entrants. Incumbents like Venmo and CashApp, who’d otherwise be well-positioned to win here, would need to take huge risks (including headline risk and wasted engineering resources) if they decided to lead the charge for peer-to-peer crypto payments. These larger players would be entering fast-growing but vaguely-defined markets at a stake potentially too high for their comfort. This gray area makes the industry attractive for new, smaller entrants with a higher risk appetite than incumbents.
Interestingly, as we’ve outlined, onramping has largely been solved, but offramping is the harder problem due to bank restrictions (and their general hesitancy towards integrating crypto), regulatory compliance (to ensure the offramp isn’t facilitating money laundering), and limited liquidity (to get out of crypto and into fiat). From the bank’s perspective, onramping money from fiat to a crypto exchange is simpler, as it is viewed as a standard outbound transfer. To offramp, however, users are liquidating a digital asset and transferring money from a crypto exchange, so banks view these incoming funds with more stringent policies and regulatory scrutiny.
Because companies have to repeatedly integrate with so many nuanced local regulations to support cross-border payments at scale, this undertaking becomes exponentially complex. Think of it this way: If Airbnb is a 2-sided marketplace (hosts and guests) and DoorDash is a 3-sided marketplace (consumers, drivers, and restaurants), cross-border payments companies are effectively n-sided marketplaces.
Regulations can often act as a barrier to growth and efficiency improvements from new technologies; cue Bill Gurley: “The reason Silicon Valley’s been so successful is because it’s so f**king far away from Washington DC.”
Shifting consumer behavior
There have historically been two ways to generate meaningful revenue as a consumer business in crypto: build for the 1% of users who drive 99% of transaction volume, or build for the 99% of users who represent 1% of transaction volume. This tradeoff is particularly exemplified in cross-border payments: developing nations have a greater need for crypto at the retail level, but developed ones — who don’t need crypto as urgently, as financial infrastructure is well-established and understood — produce much more meaningful volume.
“I think a lot of Westerners want to think of developing-world uses as a boring sideshow, and highlight Westerners trading monkey gifs as the only part of crypto worth talking about. But about 66% of crypto users live in the developing world… If nothing’s wrong with your country’s financial or political system, then you don’t need crypto.” — Scott Alexander, Why I’m Less Than Infinitely Hostile To Cryptocurrency
This has created somewhat of a chicken-and-egg problem for the space, as developers are incentivized to build products for the 1%, and consumers in emerging markets (with real need for new financial systems) are left largely underserved. We don’t believe it has to be this way. Building for this untapped market is not only good for the world, but good for business. As David Phelps writes, “If crypto succeeds long-term, it will do so with massive retail users who are more price-insensitive and represent a gigantic future market.”
One of the biggest use cases for consumers to send money cross-border is remitting to family back home (global remittance flow value reached $830 billion in 2022), but it is a massive undertaking to educate and convert new-to-crypto users onto blockchain rails. Many of these consumers and their recipients use existing platforms like Moneygram or Western Union. Fees on these platforms are often exorbitant (see for yourself with Western Union’s fee calculator), but switching costs remain high. This is primarily due to the fact that shifting consumer behavior around money is difficult, because there is a greater trust buy-in than that of non-financial products. Because the stakes are so high when money is involved, consumers often resign to sticking with what “works,” even if a better alternative might exist. Markets aren’t always efficient — and this is particularly true for users onboarding to anything crypto-related.
Larger players like Chime and Revolut have a head start in terms of distribution, education, and awareness, making it even more difficult for competing products to enter the space. Similarly, buy-in from local banks and regulators can supercharge the viral growth engine of new products and help them reach market dominance more quickly. For example, Kenya’s largest cellular phone provider, Safaricom, launched the mobile money wallet MPesa in 2007. By 2010, MPesa became the largest mobile money network in the world, and is now responsible for transacting around 60% of Kenya’s GDP. New entrants without these affordances are faced with a steep uphill battle to launch their products and shift consumer behavior.
However, this doesn’t mean newcomers aren’t finding creative ways to break into the category. For example, out of Argentina’s 5 million active crypto users, 2 million of them are on Lemon — largely credited to flexible product options, like a debit card that allows users to pay with crypto at accepting retailers, who receive fiat with Lemon’s infrastructure on the backend. Crypto integration toolkit Ramp recently made an aggressive push into Latin America and added 40 new fiat currencies to the platform. Peer-to-peer payments app Sling allows users to send money in any currency to 39+ countries, even if the recipient doesn’t have Sling installed. And blockchain-based microlender Jia uses lending as a wedge to gain distribution in emerging markets. The market is becoming increasingly dynamic; users are getting on board.
Laying the groundwork
Those who work in crypto know how frustrating it can feel — a concept like borderless payments is about as old as the industry itself, and yet we still have so far to go. But let’s not forget how far we’ve come, too. We believe the progress over the last few years, from infrastructure improvements to global regulatory advancements to new ways of reaching consumers, will underpin what’s to come for this category. We’re optimistic that 2024 and beyond will usher in even more companies who are building on the foundation of what consumers need. Of course, the future remains unknown. But that is the exciting part.
This piece is a working thesis, and we welcome your feedback to shape our perspectives and help us learn. Thank you to Joey Krug, Arnold Lee, and many others for informing our thinking on this piece. If it resonated, we would love to hear from you! You can reach us via Twitter DMs — Bridget here and Gaby here.
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