Domestic payments have undergone a complete transformation in recent years and cross-border payments have started to move in this direction. Traditionally, cross-border payments have been subject to various challenges—long and uncertain funds transfer timings, lack of cost transparency and high transfer and conversion costs. Correspondent banks have cut-off times and deadlines for same-day processing after which payments are processed the next day, so at the point of initiation, exchange rates remain unknown.
Transaction fees might also be deducted from the principal amount, so the beneficiary remains uncertain about the amount which will be credited. Payments need to be routed through many banks before they reach their destination, causing delays and accruing fees. Also, financial institutions have had to devote considerable headcount and efforts to manage liquidity and foreign exchange (FX) risk and to respond to customer enquiries, track status and investigate exceptions.
These long-standing inefficiencies have afforded the opportunities for players including fintechs to provide innovative and customer-centric services in the market. UK-based fintech TransferWise has devised a peer-to-peer solution for money transfer (see Figure 1). Using a matching model where money is redirected to another recipient of an equivalent transfer in the opposite direction, the company avoids costly currency conversion and cross-border fees. This also allows TransferWise to charge between 0.5 and 2.5 percent in fees depending on the currency. Because of this cost benefit, close to two million people use TransferWise to transfer approximately £1 billion from 42 countries each month.
Another FX start-up, Revolut, provides an application that can convert or send money, as well as help users pay for products and services around the world or online. It is like creating a virtual bank account in three different currencies: USD, EUR and GBP. For minimal fees, users can top up their accounts in any of the currencies using a debit or credit card or via bank transfer. Currently, Revolut has nearly one million customers, acquiring 3,000 to 3,500 users every day.
SaxoPayments’s Banking Circle provides opportunities to fintechs, acquirers and payment service providers (PSPs) to offer their merchants the facility to perform immediate cross-border bank transfers and set up local settlement accounts worldwide for their customers quickly and at very low cost. Visa has also come up with a cross-border B2B payments solution called Visa B2B Connect, which uses distributed ledger technology and leverages Visa’s existing global network of 15,000 financial institutions to create a private permissioned network. It offers speed and visibility of the payment from origination to the receiving end. Other fintechs like CurrencyFair, WorldRemit, Traxpay have also built cost-effective cross-border payment solutions and are rapidly gaining market share from traditional money transfer providers.
However, traditional money transfer providers such as banks cannot afford to keep losing market share to fintechs and new, emerging banking players. The cross-border payments market constitutes a very large portion of payments revenues (close to US$24 trillion per year) and is growing more as boundaries disappear for e-commerce.
Banks such as Santander and Fidor have partnered with Ripple to offer a blockchain-based payment network that can complete cross-border transactions in a matter of seconds. Instead of using fixed correspondents, Ripple implements an automated instant auction for liquidity provision and FX to ensure the best price execution, removing liquidity and settlement risk from the process. Ripple has been able to combine payments messaging with funds settlement, which was previously unavailable for cross-border payments (where messaging is typically separate from the operation of the nostro and vostro accounts used for settlement). Ripple allows customers to keep their money with banks or other financial institutions as opposed to new start-ups and fintechs.
In parallel, the existing cross-border messaging network SWIFT has also launched its new network Global Payments Innovation (GPI). This new solution combines real-time payments tracking and the certainty of same-day settlement for its network banks. It introduces a unique end-to-end transaction reference number (which was missing earlier) to enable unique transaction identification and tracking of the lifecycle of transactions. Now, SWIFT is collaborating with various fintechs to build overlay services on top of the global payments innovation (GPI) platform.
There is a likely emergence of real-time cross-border payments as global banks or other market infrastructure providers begin connecting domestic real-time infrastructures to improve their customer offerings.
Fintechs have taken significant market share from traditional banks in this space and several banks have started to fight back. Banks have begun building new cross-border payment interface and mobile applications, repricing FX and transfer costs, collaborating with fintech players to enhance offerings, and in parallel trying to improve the back-end infrastructure to create a competitive offering. Is this a wake-up call for players who are still in a state of denial?