If someone had asked this question in 2002, most of us would have felt certain that cross-border payments would be sorted out by 2022. While customer offerings for both cross-border transactions and FX have improved significantly in the past 20 years, thanks to a revolution in the digital economy, I don’t think we would say the issues are resolved. Far from it, in many areas.
The reality is that the unprecedented evolution of global e-commerce has left cross-border payment solutions struggling to keep pace with industry expectations, despite rapid innovation across the financial ecosystem. FX and cross-border payments are much faster and cheaper than they were in 2002, but they still do not meet the needs of businesses and their payment providers in today’s fast-changing and highly competitive global market. Banking Circle is receiving increasing numbers of requests to help payment services providers (PSPs) to scale globally by providing them with solutions to the challenges of operations and FX volatility.
The obstacles are not going away by themselves.
What are the issues?
Most global e-commerce businesses are continuing to expand into new geographies and are keen to offer a consistently optimal customer experience as they do so. They want to provide their customers with a familiar checkout process, in the right language and with the right payment methods available to suit local preferences. They also want to offer payments in the customer’s local currency, but this brings with it FX volatility risk and operational inefficiency, deterring many businesses – especially those with smaller cross-border sales volumes or thin profit margins where the impact of high costs would be felt more keenly.
A lack of transparency in costs and charges remains a significant stumbling block, especially when using credit cards or offline payment methods across borders. In this instance, rates can change significantly before settlement is complete – meaning someone is losing out, whether it is the sender or the recipient of the payment.
Another common issue, when payments are handled via the traditional correspondent banking network, is that the payment can incur unnecessary and unexpected costs and delays. Depending on the location and currency of each bank handling the payment, the transfer may attract multiple FX charges as well as cause adverse financial impact due to poor FX rates and delays associated with the various regulatory obligations within the journey.
What is the answer?
Knowledge is the most powerful tool available to businesses seeking to improve their international transactions service. The latest Banking Circle whitepaper, Optimising FX and Cross-border Payments, offers insights as to how businesses and their payments partners can successfully improve their cross-border offerings.
To get past the longstanding topical roadblocks, the most important activity businesses can do is to make sure the relevant teams fully understand the FX process within the value chain. Knowing who or which business is involved in the transaction, where they and their bank accounts are based, and all regulatory requirements that will apply, will help businesses and their payment specialist partners select the best process for the transaction. This will also give a clear idea of the transaction settlement times and risks in order for them plan accordingly.
In a commoditised payments world, businesses should be looking for payments partners that add value through transparency around costs and fees, and they should ensure a clear commercial agreement is in place with their financial counterparty regarding currency conversion.
The cross-border future
As the market continues to develop and competition increases still further, it will trigger better pricing and improved offerings from banks and non-bank FIs. Businesses processing higher values and increased volumes of cross-border payments should see new technology enable more customised solutions, tailored to individual operational requirements and credit risk.
New technology as well as new payment methods such as open banking are increasingly enabling faster transactional processing – through account-to-account payments, instant payments and RtP among other new solutions. With the list of payments solutions growing, legislation is being updated and extended to keep up with developments. The consultation on PSD2 is just one example of regulation being reviewed to cover a wider range of payment activities, including cryptocurrencies, buy now, pay later (BNPL), and digital wallets.
While legislation that keeps up with industry change is vital, it will not reduce exposure to unnecessarily high FX fees and charges. Therefore, businesses and their payments partners must invest the necessary time to fully understand the FX and cross-border payments process and select the right partners to ensure they are not paying too much for those transactions or putting themselves at risk of FX volatility or payment delays.