By Hank Uberoi
The international movement of payments relies on correspondent banking and while this model works well for high-value transactions, it is less suited to low-value cross-border payments.
For payments service providers and customers this is a problem as there has been an explosive growth in demand for these types of international payments. Many factors including growth in global trade, the inexorable rise of digital commerce and the global movement of labour have stimulated demand.
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The backbone of global commerce is organisations and individuals having the capability to make payments for goods and services.
Meanwhile the rise of Internet shopping and digital commerce has fundamentally changed how people and organisations buy and sell. Mobile payments, online money transfers and the advent of virtual currencies are all ushering in a new era for transactions.
This is good news for global trade and today’s consumer culture of instant gratification and the 24/7 availability of goods and services. However, supporting and enabling these transactions is an infrastructure decades-old that, arguably hasn’t moved with the times.
Banks and big companies trading internationally have well-established ways of moving large sums of money from one place to another. But for small payments that need to be made multiple times, or to multiple people, in multiple markets – totalling hundreds of billions of pounds and growing – this is where the payments industry struggles.
Cross-border pensions payments and regular, high volume small payments on behalf of expatriate workers sending money home, these transactions aren’t easily served by inter-bank transfers. This is because it is expensive and complex for banks, and other payers, to maintain relationships with other banks in all markets where customers might wish to make payments.
Predictability and transparency
With multiple links in the chain of an international payment it is also hard for banks to be clear on when money will arrive with the recipient, or even exactly how much will arrive.
- Fees are subtracted from the principal amount as it moves along the chain; whether or not this happens can depend on the route taken and is extremely hard to predict.
- Payers often don’t know when their payment will be received at the other end and how much will actually get there after fee deductions.
- Recipients aren’t always clear on who sent the payment– which can give companies matching invoices to payments a headache – or how much was deducted along the way in fees. Errors can require manual intervention, adding to both cost and time.
In fact, sending parcels around the world has more predictability and transparency than sending funds electronically, which in today’s digital world – one where commerce is increasingly online and on mobile – is an odd state of affairs.
Traditional payments service providers are more than aware of the pressure from customers for fast, efficient, reliable, transparent, cost effective payment for international transactions. They have been under siege from money transfer companies that focus solely on the international payments business, have a lower cost base and are able to rapidly add new routes and make compelling price comparisons.
Start-up companies in this space create a lot of noise in the market but their focus is essentially ‘front-end,’ at the customer facing level. In payments, it is with the ‘back-end’ systems and infrastructure – where the money is moved and the payment actually happens – where the complexities lie.
Banks have complex infrastructure, supporting wide-ranging product portfolios that has been built up and added to over time. Any changes to it to meet changing market demands are difficult and expensive to make. Add to that the need to comply with a complex range of in-country and regional regulations that they evolve, and innovating to stay relevant is a challenge.
The fintech industry, capitalising on cloud-based technology solutions, can bring about a new era in the way cross-border payments are facilitated.This is now evolving the way cross-border payments are handled to meet the clear and growing need.
A global payments network ‘hub,’ that can achieve efficiencies similar to those enjoyed by domestic payments, clears payments locally in countries across the globe.
The customer wants a simple front-end that connects them into multiple channels so they get to choose how, when and where to initiate their payment. And service providers need to continue working on how they deliver that need.
Customers don’t really care about how things function behind the scenes and, by sourcing a technology solution to the challenge of moving money service providers can meet the need for an efficient infrastructure for clearing international payments. Supporting infrastructure needs a boost as it ultimately determines how much services cost, how long payments take and the extent to which customers are kept informed.
Through a single connection into an efficient system that takes care of the practical side of money transfer, payments service providers are freed to focus on customer relationship management.
Hank Uberoi is CEO of fintech company Earthport which powers cross-border payments for financial institutions, digital commerce, money transfer companies and payment gateways. For more information visit www.earthport.com