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.
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
NatWest to exit Ireland, tumbles to 2020 loss
By Iain Withers and Lawrence White
LONDON (Reuters) – NatWest said it would wind down its Irish arm Ulster Bank, as Chief Executive Alison Rose continues to slash away at underperforming parts of the state-owned lender after it swung to a loss in 2020.
The bank will exit Ireland following a strategic review, plans to sell 4 billion euros ($4.8 billion) worth of loans to Allied Irish Banks, and discuss selling some assets to mortgage lender Permanent TSB, NatWest said on Friday.
NatWest reported a pre-tax loss of 351 million pounds for the year, better than an average of analyst forecasts of a 418 million pound loss as bad loans came in below expectations.
The move to sell Ulster Bank is the latest by NatWest CEO Alison Rose to strip out costs and simplify the lender since taking the helm in late 2019, after cutting back trading unit NatWest Markets and axing digital venture Bó just months after its launch.
Ulster Bank has served customers in Ireland for more than 160 years and is the country’s third largest lender with a 20 billion euro loan book and 2,800 staff.
The decision follows a months-long review and sparked immediate criticism in Ireland, where the government and regulators have expressed concerns over shrinking banking competition.
Irish Finance Minister Paschal Donohoe said on Friday the banking landscape would be poorer as a result of NatWest’s decision.
“I won’t say the Irish government welcomes this decision, they do not. But it is supportive of the plans to dispose parts of the business to AIB and the discussions we’re having with Permanent TSB,” NatWest chairman Howard Davies told reporters.
Rose said the exit – which does not cover NatWest’s Northern Irish unit – would take a number of years and would be done “in a very considered way”.
NatWest shares were up 1% at 9.48 GMT, after initially rising as much as 2.5% in early trading.
“Alison Rose is making a name for herself as a no-nonsense leader, keeping the core business healthy by adding to its core business and chopping off the gangrenous limbs,” said Freetrade senior analyst Dan Lane.
“That ruthless streak will serve her well in a year that’s likely to be even harder than the last.”
Despite posting a loss, NatWest announced it would pay a dividend of 3 pence per share, after the Bank of England gave lenders the green light to resume investor payouts.
The bank remains 62% taxpayer-owned as a legacy of its state bailout in the 2007-09 financial crisis, meaning the government will receive 225 million pounds of the overall 364 million pound pot.
It pledged to increase shareholder returns in future years by distributing at least 800 million pounds per year from next year up until 2023.
British banks’ profits have all been squeezed by near-zero central bank interest rates and a spike in expected loan defaults due to the pandemic.
But unlike rival Barclays, which reported robust profits on Thursday, NatWest could not count on a surge in revenues at its own much smaller investment bank NatWest Markets to prop up its earnings.
Overall, NatWest’s impairment charges for expected bad loans came in at 3.2 billion pounds for 2020, below the bank’s guidance of a minimum 3.5 billion pounds.
The lender has granted around 14 billion pounds of state-backed loans to struggling companies so far in the pandemic.
It maintained one of the strongest capital ratios among its peers, up to 18.3%.
The bank said by 2023 it would aim to reduce its capital buffer to 13-14%, hit a return on tangible equity of 9-10% and reduce costs by 4% a year.
Rose’s pay was 1.8 million pounds, after she voluntarily gave up a quarter of her fixed pay for 2020.
($1 = 0.7156 pounds)
($1 = 0.8271 euros)
(Reporting by Iain Withers and Lawrence White; Editing by Rachel Armstrong and Emelia Sithole-Matarise)
ECB plans closer scrutiny of bank boards
FRANKFURT (Reuters) – The European Central Bank plans to increase scrutiny of bank board directors and will take look more closely at diversity within management bodies, ECB supervisor Edouard Fernandez-Bollo said on Friday.
The ECB already examines the suitability of board candidates in a so-called fit and proper assessment, but rules across the 19 euro zone members vary, so the quality of these checks can be inconsistent.
The ECB plans to ask banks to undertake a suitability assessment before making appointments, and they will put greater emphasis on the candidates’ previous positions and the bank’s specific needs, Fernandez-Bollo said in a speech.
The supervisor also plans more detailed rules on how it will reassess board members once new information emerges, particularly in case of breaches related to anti-money laundering and financing of terrorism, Fernandez-Bollo added.
Fernandez-Bollo did not talk about enforcing diversity quotas, but he argued that diversity, including diversity in gender, backgrounds and experiences, improves efficiency and was thus crucial.
“Supervisors will consider furthermore all of the diversity-related aspects that are most relevant to enhancing the individual and collective leadership of boards,” he said.
“Diversity within a management body is therefore crucial … there is a lot of room for improvement in this area in European banks,” he said.
(Reporting by Balazs Koranyi, editing by Larry King)
Where are we with Open Banking, and should we be going further?
By Mitchel Lenson, Non-Executive Chairman, Exizent
Open Banking has the power to revolutionise the way we manage our money, but most (65%) consumers are still not aware of it, while many financial institutions continue to treat it as an obligation rather than an opportunity.
For Open Banking to truly reach its potential, consumers need to have more trust in its benefits. However, this will only happen if banks and other financial institutions start to embrace it, rather than simply accept it.
Covid-19 has proven to banks that digital banking and open finance innovation is not simply a ‘nice to have’. It is vital for their own survival. With so many challenger banks now coming into the market, many of whom have entirely digital models and therefore invest heavily in technology, banks are starting to become aware that if they don’t embrace it, they’ll get left behind.
So, fuelled by a mixture of competition and Covid-19, banks are starting to realise that Open Banking is not about giving away valuable data, but it is about collaborating with third party fintechs to explore the endless opportunities data sharing can bring – to all sides.
By making open finance easier for developers, banks can not only save time and money by improving their own services but help create useful solutions that add real value for their customers.
Open Banking for all?
There is one, yet untapped area of consumer finance that could be immeasurably improved by Open Banking, and that is estate administration.
Recent research from Which? found that many executors contend with delays, errors and poor knowledge from their banks during the probate process. Our own research shows that most legal professionals admit the process does not work as it should, and the time it takes to complete probate is unacceptable.
Like the Which? survey, we found that the main issue is the administration involved, with most legal professionals saying that the time it takes for financial institutions to get back to them with the information they need is the main cause of delays.
Given that the system is not working for consumers, something clearly needs to be done. The good news is that the technology and data is already available – we just need to harness it to create a better system.
That is why we are developing the first ever platform to connect executors, legal professionals, and financial institutions to create a better, quicker, and more secure probate experience for everyone.
Our first release of the platform – a bespoke cloud-based solution to enable legal services firms to integrate directly with financial institutions making information gathering and processing more straightforward – was released in 2020. We are now building on that foundation to accelerate our development work with financial institutions to deliver additional value for all sides.
We also see huge potential in working with banks to utilise the digital financial infrastructure, powered by Open Banking, to improve things even further. But there is one, fairly sizeable issue – currently, Open Banking consent ceases at the point of death.
Is it time for legislative change?
Open Banking is not as open as is should be for those who can give consent, so we are certainly some way off from Open Banking for the deceased. However, the more that banks acknowledge Open Banking and its potential and are prepared to collaborate with third party fintechs to develop better experiences for consumers, the more likely we are to get to a point where we can tap into that potential to improve things for the bereaved.
Many of the problems – highlighted by Which? – that consumers face when managing someone’s estate could be reduced significantly if open finance continued to apply to the deceased.
Open Banking provides a huge opportunity to speed-up and reduce friction for loved ones faced at some of the hardest moments of their lives, and there is a strong argument here for the current position to be reviewed to enable better access to a deceased person’s assets.
With our current platform, we are showing how technology is playing an incredibly significant role in dealing with the complex, tangled process that is probate and the potential of open finance in radically enhancing what we are already doing cannot be understated.
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