The correspondent banking model that sees banks sub-contract or source from each other for the global movement of money serves the industry well and has stood the test of time.
However, under changing market conditions the payments component of it, though strong for high-value transactions, is less suitable for regular, low-value cross-border payments.
It’s true that correspondent banking developed at a time when there were relatively few such transactions. Since then, mass migration of labour, explosive growth in global trade, economically active migrants, the unstoppable rise of digital commerce and the widespread adoption of smart devices has led to a growth in demand for more retail-oriented functionality.
Senders and beneficiaries making international payments today expect the service they use to be akin to that for domestic payments. They are now used to digital services and almost real-time payments delivery.
They don’t see why payments made cross-border shouldn’t be simple, predictable and why they shouldn’t be kept informed of the progress of the transaction. They expect the payment to be transparent, in other words for the sender and beneficiary to be provided with information that identifies who made the payment and possibly other additional information too, such as the reason for the payment.
The backbone of global commerce is organisations and individuals having the capability to make payments for goods and services.
The rise of Internet shopping and digital commerce has fundamentally changed global trade. 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, 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 that is decades-old and 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 – for which there is growing demand – this is a challenge for the payments industry.
Transactions like cross-border pensions payments and regular, high volume small payments on behalf of expatriate workers sending money home aren’t easily served by inter-bank transfers. It is expensive and complex for banks, and other institutions to maintain relationships with banking partners 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 the institution sending the payment to be clear on when the funds 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.
Senders often don’t know when their payment will be received at the other end, the foreign exchange rate that applies and how much will be received by the beneficiary after fee deductions.
Beneficiaries 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. Any errors that occur during the process can require manual intervention, which is an overhead for the financial institutions involved, adding both cost and time.
In fact, sending parcels around the world has arguably more predictability and transparency than sending funds electronically, and in today’s digital world – one where commerce is increasingly online and on mobile – this 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 payments for international transactions. Money transfer companies have for some time been carving out their position in the market. With a focus that is solely on the international payments business they have a lower cost base, are able to rapidly add new routes to their offerings and market their services on the strength of compelling price comparisons.
The market for payments therefore is increasingly competitive with established players, start-ups and newcomers jostling for position. People and companies making international payments are not short of options.
Money transfer companies have built a business around aiming to meet customer needs of speed, ease of use, reliability and cost. However, a financial infrastructure still underpins these transactions.
Payments start-ups shake-up the payments industry with a focus that is essentially ‘front-end,’ at the customer facing level. It is with the ‘back-end’ systems and infrastructure – where the money is moved and the payment actually happens – where the complexities lie.
The infrastructure of banks is incredibly complex, having been built up and added to over time and supporting wide-ranging product portfolios. Making changes to it to meet evolving market demands can be difficult and expensive. Add to that the need to comply with a complex range of in-country and regional regulations that themselves evolve, and innovating to stay ahead is a challenge.
Customers of payments services – senders and beneficiaries – care about the outcome, in their own terms; they don’t care about the underlying complexities of cross-border money movement. Payments are becoming commoditised and the ability to make them increasingly embedded – unseen – into digital channels. Customers value timely and useful information – including the status of their payments – and smart devices make obtaining and presenting this information possible.
Rather than tweak existing models and solutions to meet customer needs, the approach to servicing low-value cross-border payments can be redefined around meeting today’s market demands. This, of course starts with understanding customer needs and being able to respond satisfactorily to their questions. When will my payment arrive? How much will it cost? How will I be kept informed? How will I have the ability to interact with the process? How will the beneficiary know I made the payment and what it’s for?
Understanding market needs for an established customer base that is already making use of payments services is one thing, but payments service providers are also turning attention on growth markets. It is the banked community that is served by established financial institutions, generally in developed economies. In growth markets there is a different challenge – that of meeting the market need for services that include remittances and emerging global trade in economies where there remains billions of unbanked.
Here, we see ‘technology leapfrogging,’ where a market misses out whole stages of technological development, going straight to a modern-day solution that other markets have spent decades building up to. It’s likely that many people living in emerging markets today will never have a bank account. They will skip the services that need traditional banking infrastructure and systems and go straight to mobile wallets and other ‘instant,’ digital financial solutions.
Those solutions will develop to offer more and more financial services to meet their needs. Undoubtedly there are growth opportunities here and for market disrupters focusing solely on payments services there is no legacy banking infrastructure to contend with, so innovators are likely to lead the way.
The financial technology industry, capitalising on cloud-based technology solutions, can bring about a new era in the way cross-border payments are facilitated and evolve the way cross-border payments are handled to meet the clear and growing need.
In redefining their payments solutions, established institutions will themselves look for speed and simplicity. It may be a costly and time-consuming process to open up a connection with a partner correspondent bank in order to add a new payment route to a portfolio; alternative solutions to this approach will fail if they themselves are expensive and lengthy. Rather, they need to be quick and easy to implement, work with existing systems and be adaptable to new opportunities and change.
A global payments network ‘hub,’ that can achieve efficiencies similar to those enjoyed by domestic payments, clearing payments locally in countries across the globe that is simple to connect into can streamline the back-end infrastructure for payments service providers.
By sourcing a technology solution to the challenge of moving money cross-border, service providers can meet the need for an efficient infrastructure for clearing international payments. This supporting infrastructure impacts costs that are passed on to customers, the length of time it takes for payments to reach their destination and the service levels customers receive.
Through a single connection into an efficient system that takes care of the practical side of money transfer, payments service providers can be freed up to focus on what matters to their business – managing relationships with their customers.