Staying relevant in the buoyant cross-border payments market
In the era of digitalisation, corporations expect more than an instant transfer from country A to country B. Corporations’ treasury departments need better predictability, transparency, cost control and an easy road into emerging countries and currencies. Therefore, it becomes important for banks and fintechs to continue investing in innovation to provide the best service to their customers. A number of innovations will become key to staying relevant in a market that is growing at around 5% compound annual growth rate (CAGR) a year and tipped to top US$156 trillion by 2022.
Historically, cross-border payments were seen as a complex, inefficient, costly, and time-consuming activity that gave serious headaches to bankers and CFOs the world over. In most cases, the transfer of money from one country to another meant that multiple banks were involved, most of them working not in real time but rather as batch processes that operated only during business hours. This tended to make the timing of transactions uncertain and with non-transparent fees, exchange rates between different currencies were unknown before the transaction and local taxes were applied. Due to these factors, cross-border payments were for many years perceived as expensive, slow, and lacking transparency with limited visibility of the execution status.
Nevertheless, cross-border payments are the centre of international trade and economic activity, and as a result, there is a demand for better cross-border payment methods. Over the years, cross-border payments have become less expensive (in some cases instant) and provided greater status transparency, detailed costs, and additional execution data. In recent years, the changing marketplace has driven innovation and standardisation towards global and regional initiatives. Consumers, SMEs, and corporations don’t expect differences between domestic and cross-border payments. It’s their expectation that money should be transferred instantly from one country to another, increasing trade with emerging markets and payments digitalisation in e-commerce and mobile.
Wholesale vs. Retail
To better understand prevailing initiatives, there are two types of cross-border payments:
- Wholesale – typically between financial institutions to support their own banking or customer activities and over the SWIFT network as an intermediate between payer and payee banks.
- Retail – typically between consumers and businesses. Most commonly through card payments, bank transfers and alternative payment methods, such as e-money wallets and mobile.
Cross-border payments opportunity
Within the total global cross-border payment forecast of US$156 trillion for 2022 (source Ernst & Young) the breakdown is as follows:
- Business-to-Business (B2B) transactions make up the largest share by far, expected to account for US$150 trillion.
- Consumer-to-Business (C2B) transactions, such as cross-border e-commerce and offline tourism spend, are forecast to reach US$2.8 trillion.
- Business-to-Consumer (B2C) transactions, which include wage salaries or interest payments, are expected to amount to US$1.6 trillion.
- Consumer-to-Consumer (C2C), or remittance payments, contribute the least – expected to reach US$0.8 trillion.
The current size and growth potential of the cross-border market means that fintechs are constantly launching new innovative business models to attract a larger share of what was traditionally the playground of the banks. Today, fintechs are mainly focused on the low-value transactions (historically not the focus of banks) providing specialised services to a specific segment.
As an example: fintechs organise cheaper and quicker remittance services for foreign workers to their home countries in direct competition with traditional money transfer companies. Money is mostly sent to the unbanked in emerging countries, so the pay-outs are often organised as an integral part of financial inclusion programmes. Fintechs win market share through innovative pay-in and pay-out capabilities as we see with mobile wallets. The same scenario is happening for low-value B2B transactions like payroll payments where mobile wallet and virtual cards are often used as innovative pay-out methods.
Regulatory opportunities and pressures
ISO20022 migration is due in March 2023 and unlocks huge opportunities for financial institutions, including boosting operational efficiency, enhancing the customer experience, and enabling innovative new services. This open, global messaging standard for financial information provides consistent, rich, and structured data that can be utilised in every kind of financial business transaction.
Central Bank Digital Currencies (CBDC)
Banks will come under further pressure once Central Banks start to issue CBDCs. Cross-border payments via CBDC will take away the complex chaining via intermediate banks and increase speed of transfer at a lower cost. It also means that payment settlement and foreign exchange (FX) will be done in the Central Banks’ CBDC ledgers. It remains to be seen if CBDC will become a mainstream method of money transfer, but it would fundamentally change the wholesale banking and money transfer market.
Innovations to create winners
A number of innovations will become key to staying relevant in the cross-border payments market:
- Virtual accounts – an alternative to direct deposit accounts in different countries with different banks. Allows treasury to manage cashflow across different currencies via a centralised account structure. Gives companies the flexibility to transfer and/or concentrate their balances held in one account and currency to another account in another currency, or fund local payments using a centralised account. It provides a better view on global liquidity and makes sense for businesses.
- APIs – through real-time FX rates that are made available to treasurers, APIs can be easily integrated into the treasury infrastructure. Treasurers can manage currency exposure and risks, improve reconciliation with continuous availability of FX rates and lock rates to get the best conversion rate between the client currency and base currency.
- Connectivity – with better connectivity to global settlement systems, new technologies like SWIFT gpi and other API connectivity provide greater visibility and transparency on payment transactions. From seeing the FX rates upfront to real-time payment status tracking, APIs will provide better predictability on when the payments will be received on the bank account.
- Strategic acquisitions – Mastercard and Visa saw the potential and performed several strategic acquisitions to support cross-border payments. Both Mastercard Send and Visa B2B Connect are making use of their global network and PANs (primary account numbers).
- Partnerships – through partnerships, cross-border payment providers can offer more possibilities to perform real-time payments in different countries and different currencies in an almost frictionless way.
By evolving from a monopolistic bank activity to a lively fintech opportunity, cross-border payments have undergone a positive transition towards digitalisation. It is expected that in the coming years, more innovative products will be launched by banks to defend their dominant positions and fintechs to take market share. Keywords for every innovation are ‘instant’ and ‘API-driven.’ This means that not only banks and fintechs, but corporations too, will need continuous investment in IT infrastructure to support the digital transformation of cross-border payments.
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