By Neil Burton, Director of Product Service Strategy at Earthport.
Moving money internationally is sometimes considered an uncertain business. Senders rarely know what the total transaction costs are, or when funds will arrive. Beneficiaries may not know what the received funds are for, leaving them with significant administrative and financial costs in reconciling receivables with deliverables. More often than not, it isn’t that banks don’t want to share the information, but rather that the information itself isn’t visible across the multiple transactions it takes to make one simple cross-border payment.
To address these issues, for retail senders at least, the US policy makers are enforcing transparency through Section 1073 of the Dodd-Frank Act. The regulation requires banks providing cross-border payments services to US consumers to commit upfront to all fees, the delivery date of funds and more. It came into force in October 2013.
Transparency is the future
Lack of transparency inhibits choice. Consumers and corporates informed of transaction costs, delivery dates, and so forth are best placed to choose the right service for the type of cross-border payment they are making.
For beneficiaries, especially businesses, there are still major challenges. Getting paid is good, naturally, but it’s not as good as you might think; if you don’t know what you’ve been paid for, and by whom (which might happen if a payment is an aggregated amount made on behalf of multiple subsidiaries). There’s still a lot of work to do.
Is there a solution?
It’s simple enough to visualise a solution when considering two parties to a single transaction; but it’s harder when multiple senders and beneficiaries are involved.
The ideal system needs to work for all parties. In a networked industry, this is most likely to be achieved through operational transparency where the network is merely a conduit for information, not a filter, creator or barrier.
The solution must also be ubiquitous. Nationally, domestic payments schemes usually have good predictability and reach, and initiatives such as the IPFA are helping to interlink them by setting standards, but most ACHs provide only a component of a payment (the clearing). A truly ubiquitous service requires more. This is the domain of the regulated payments services providers, who provide settlement to banked beneficiaries across many countries. IPFA’s members today provide predictable services to more than half the world’s banked population. Services including fixed end-to-end fees per transaction – the FX rate are fixed on send, and there is 100% predictability on all fees (other than taxes) and 100% predictability value date.
The opportunity – and the challenge – therefore exists for a transparent global payments scheme that has the provision to carry the context along with the transaction. In an era where this is the ultimate goal, transparent payments services will come to be seen as an area of collaboration between banks and regulated non-banks.