Foreign Exchange International Payments
Current trends in the cross border payments sector include the popularity of cross-border instant payments and more M&A activity, while future trends in the industry include the profitability of one-dollar transactions and enhanced artificial intelligence & machine learning.
US CROSS-BORDER PAYMENTS INDUSTRY - INSIGHTS
- Cross-border payments industry leaders like SWIFT are faced with ferocious competition from fintech challengers.
- As a result, the success of companies like SWIFT is dependent on "their ability to transform the customer journey to match the effortless efficiency, transparency and convenience of top consumer brands like Amazon, Walmart and Alibaba."
- New fintech companies are providing domestic and international payment solutions. These businesses are also broadening their services to include banking, thus disrupting the cross border payments sector and making services more affordable than traditional banks.
- Fintech startups like LightNet, for example, are disrupting the cross-border payments market by "focusing on the millions of unbanked remittance workers who depend on the outdated, fragmented, and costly service providers."
- Through its open-source, global exchange platform that allows parties to make transactions securely and in less than four seconds, Ripple is disrupting the cross-border payments sector.
Rising Consumer Expectations
- Due to digital transformation, the expectations of retail, corporate, and banking consumers in the cross border payments space have increased.
- These consumers want an effortless experience while making cross-border payment transactions.
- In the US, consumers want innovative systems that can process their foreign exchange international payments in a more reliable, seamless, and secure way than ever before. They are increasingly demanding transparency, especially in "request to pay" and trade to disbursement transactions.
- Examples of services that customers in this sector value, include different preferred payment methods, the ability to track exchange rates, reliable payment delivery, and the ability to schedule payments.
- Retail and corporate customers in the cross-border payments space prefer "transactions to be adapted to the use cases and the contexts to which they are applied."
Growing Role of SMEs
- Small and medium enterprises have historically made up a lower share of cross-border payments than their GDP shows.
- While size is still a challenge for the international presence of these businesses, "breakthroughs may be on the horizon as SME’s access to affordable international payments improves."
- These businesses stand to see the most advantages from the simplification and convergence of cross border payments, especially since larger enterprises have had access to these features for long.
- Products like Mastercard's B2B Hub and SWIFT's gpi are offering more foreign exchange international payment options that are suitable for SMEs.
- Despite the sluggishness, exorbitant cost, and complexity of outdated correspondent banking systems like SWIFT, Visa, and MasterCard for international payments, banks continue to use them. However, emerging technologies like blockchain are expected to change things for the better.
- As digital wallets, mobile banking, and e-commerce gain traction in the US, banks are having to rethink their correspondent banking system of making cross-border payments.
- The advent of technologies like blockchain has significantly disrupted cross-border payments, making banks revamp their products.
- Blockchain is solving the issues of correspondent banking in several ways, one of which is by providing increased transparency. Businesses that depend on making and receiving international payments consider transparency important.
- A survey by SWIFT revealed that "lack of payments traceability, invisibility on banking fees, and amount discrepancies are the key concerns in cross border payments."
- Blockchain solves these problems and eliminates any chances of manipulation by ensuring that no correspondent intermediaries are involved. By getting rid of intermediaries - which charge fees, blockchain reduces the cost of transactions as well. The technology secures all transactions with cryptography, thus facilitating safe payments.
- Combined with regulation, cloud technology is reshaping the cross-border payments industry.
- Cloud technology is facilitating new models of technology provision that easily work across borders. When businesses virtualize their computer resources, they no longer need to buy hardware in bulk to support temporary demand.
- Cloud technology allows increased demand to be handled by a third party, resulting in no need for a bank to develop its own data centers. Technology-enabled suppliers are leveraging this model for banks and corporates with services that have immense flexibility and strength.
- The evolution of application programming interfaces, or APIs, has "enabled very different systems to exchange data between one another, with no loss of information."
- APIs allow banks to have better analysis of their services, thus improving their processes. This technology also allows for a more effective, "quantitative understanding between counterparties and customers, lending itself to adjusting and improving service quality."
- In summary, cloud-based services enable cross-border payment processes to be faster and more transparent.
Losers - Medium Sized Banks
- Technological and regulatory factors, among others, are creating pressures on the traditional business models leveraged by banks.
- According to BCG, international payments make up 5% of transactions, but "generate 12% of banks' payment revenues." Banks are now facing increased competition from sub-sectors like fintech, pricing pressure, and little to no profits (due to higher costs and reduced revenues).
- As a result, some of these banks - especially those that are lagging behind trends like emerging technology — are having a difficult time surviving amid the increased competition and regulation.
- Larger banking firms are experiencing the least difficulty with these constraints, while small/local banks are increasingly outsourcing "subscale international payment operations to larger players." Mid-sized banks on the other hand, are affected the most by these pressures because they do not have the scale of larger operators and still operate expensive branch networks.
- As cross-border payments become more popular, instant payments within this sector is slowly gaining traction, due to the increased need for corporations to instantly settle international payments globally.
- Cross-border payments are known to be slow and expensive, which results in inefficiencies and higher costs for companies to do transactions around the world.
- Instant payments is the solution to these issues and new entrants in the cross-border payments sector are beginning to offer these solutions, since traditional banks have fallen behind.
- A 2019 study by CGI showed that corporate "client satisfaction with main banking services providers has fallen below 50% for the first time since the survey began seven years ago. " These corporations are now requesting for digital best performing products and services that banks are unable to provide.
- Fintech companies in the US such as Payoneer and Transferwise now have the ability to offer instant money transfer services globally at less expensive rates.
- Although most of these fintech companies focus on customer to customer services, there are B2B opportunities in the $22 trillion cross-border payments space that businesses like World Remit are capitalizing on, and similar companies are following suit.
Traditional Banks & New Technologies
- In response to the disruption by fintech money transfer companies, traditional banks are fighting back and trying to retain their corporate customers by utilizing new technologies or striking partnerships with fintech firms to increase the speed and reduce the cost associated with international transactions.
- In 2017, the Clearing House's Real Time Payments (RTP) initiative was introduced in the US to encourage and support quick cross-border payments.
- In April 2019, JPMorgan was the first US bank to provide SEPA Instant services through RT1 clearing.
- With standardization "across [JPMorgan's] payments business in the US and Europe, via a single API, accessing multiple global instant payment systems is simplified."
- Through SEPA Instant, JPMorgan can now use the same instant payments approach in the US and Europe. The bank has plans to expand its real-time payment solution to regions like Asia, to support the needs of corporate clients worldwide.
- Industry operators in the cross-border payments space are partnering with, merging with, and acquiring fintech startups that are disrupting the sector.
- In 2019, some of the most interesting deals in this industry occurred. FIS acquired Worldpay for $35 billion to combine technology and expand its product offerings.
- Fiserv bought out First Data for $22 billion to expand its capabilities and footprint. Global Payments acquired TSYS for $21.5 billion to increase its scale.
- PayPal bought iZettle for $2.2 billion to adopt products and services for SME customers.
- MasterCard acquired two companies: Transfast to increase its cross-border payment capabilities and Transactis to reduce inefficiencies in payment experience.
Enhanced AI & ML
- By the end of 2020 and beyond, artificial intelligence (AI) and machine learning (ML) are expected to transform the cross-border payments sector.
- One way these technologies could restructure cross-border payments is by solving multi-currency or non-uniform pricing issues faced by retail and B2B service providers while selling their products or services internationally. Cross-border payments that offer "AI ML-based Dynamic Pricing solutions to users help customers identify the best pricing for optimized sales and profitability."
- Leading financial services companies like Morgan Stanley, Citi, BNY Mellon, JP Morgan, and Goldman Sachs are partnering on emerging artificial intelligence and machine learning platforms such as Red Hat and OpenFin.
- Through artificial intelligence and machine learning, financial institutions will be able to fully address the universal cross-border payments processes at an unmatched pace.
- These technologies are also expected to increase the adoption of "Real-time treasury management for cross-border B2B payments."
Profitability of One-Dollar Transactions
- Transaction costs for international payments are faced with increased pressure, "mimicking to some extent the recent trajectory of domestic payments."
- Currently, a lot of cross-border payments carry price premiums, validated by regulatory pressures and value-added services like FX. Experts predict a point where the base price of international payments will keep on declining, with "even micro payments being executed profitably."
- A few financial technology companies are moving toward the $1 target already, albeit for "narrow solution corridors that may be difficult to scale."
- The $1 direction is possible if the price of offering international payments can be diminished to a level similar to domestic payments, especially in areas like claims and treasury.
- Another condition that has to be actualized is related to higher "price points persisting for specialized or out-of-norm transactions, with extra charges applying for premium service levels." The share of clean transactions will increase as cross-border payments rapidly grow.