Managing Cross-Border Payment Costs, Risks and Efficiency
by Ebru Pakcan, Global Head of Payments, Citi Transaction Services
Globalisation is accelerating the flow of people, goods and services, capital, energy and information across country borders. For a multinational corporation, the impact of globalisation extends further than the opportunity to expand into new markets: it involves new ways of doing business, creating strategic and operational challenges and opportunities. Treasurers have a pivotal role in facilitating their company’s global expansion and supporting changing business models, creating the backbone for supplier and customer engagements by enabling efficient, cost-effective payments and collections. Innovations in cross-border payments are a prime example of how business trends are changing. In a growing number of businesses, traditional treasury mechanisms for facilitating cross-border trade no longer support these emerging business models effectively, necessitating new techniques and approaches.
Increased costs, reduced efficiency
Cross-border payments are typically considered by treasurers as a challenging but necessary condition for doing business. These challenges include:
Cost. Cross-border payments are more expensive than domestic payments, and it is often difficult to assess and deduce charges incurred through multiple correspondent banks, leading to a loss of value and a lack of visibility and auditability.
Information. As payment messages are transferred between banks and across borders, information held on the payment may be truncated or the detail lost, making payments and collections more difficult to reconcile.
Complexity. As companies work with a growing number of suppliers worldwide, the number of accounts that the company has to open and maintain frequently proliferates, resulting in growing administration and control issues.
Risk. By maintaining multiple foreign currency accounts, the company is exposed to FX risks and may need to exchange currency to fund supplier payments, which adds cost and administrative effort.
Changing nature of supply and demand
These challenges directly controvert treasurers’ and finance managers’ objective to achieve cost-effective, highly automated end-to-end payments processing. Traditionally, companies have tried to mitigate some of the challenges of international payments by paying suppliers in their base currency or another major currency such as USD, therefore minimising the number of currencies and accounts they need to maintain. However, as new business models emerge, the nature of supply and demand is changing dramatically for certain industries. For example, in the past, suppliers to a large technology company may themselves have been medium- or large-sized companies, with a similar degree of financial sophistication. Today, distributed development of applications for mobile and tablet devices and the growth of open source development means that suppliers could be micro businesses or individuals located in any part of the world. These companies or individuals may not be in a position to accept foreign currency payments. Furthermore, it would be prohibitively expensive and administratively intensive to collect bank account details (which may only be used once or on an ad-hoc basis), maintain local accounts and/ or make cross-border payments to these suppliers, often for very small amounts.
A similar challenge relates to collections. In many industries, companies have historically adopted a distributor model, so collections are typically large, regular amounts received electronically from distributors or agents. Increasingly, companies are engaging more directly with the end customer, such as through eCommerce models. This means that companies increasingly need to be able to manage smaller collections through a wider variety of payment methods and currencies. This includes domestic payment methods, which may be cash or manual payments but increasingly new forms of electronic payments such as mobile payments.