Reducing Friction in International Payments

20th February 2023

Critical Steps for Treasury Teams

Despite the familiar hurdles associated with moving money across borders, there are many ways for treasurers to make international payments cheaper, quicker and less painful. Here, three experts from Barclays share their insights into creating a frictionless payments landscape – ranging from the benefits of ISO 20022 and payment APIs to the automation of transactional FX workflows.

Moving cash from one country to another is often more difficult in practice than it appears on paper. In fact, many a treasurer has been known to joke that, were it not for border controls, it would often be quicker to jump on a plane with a suitcase full of cash and take it to the intended destination, than to send it through traditional channels.

While payment rails and technologies have vastly improved in recent years, there are still significant infrastructure and workflow challenges. These contribute to the friction that is, sadly, all too common in cross-border payments today. Karsten Becker, Head of Europe Product Management for Payments and Cash Management, Barclays, elaborates: “There is no single global regulator for cross-border payments and countries have their own unique rules and regulations for data. Understanding those different requirements requires a high level of expertise, and this in itself is a challenge for banks, PSPs [payment service providers], and, of course, time-stretched corporate treasurers.”

Delays in international money movements are also often caused by – necessary – fraud checks and sanctions screening, with a significant percentage of cross-border payments subject to an enquiry or investigation, according to Becker. What’s more, with complex data fields to manage, payers sometimes submit incorrect details, leading to further friction as payments are rejected or misdirected. “Combined with time zone differences, varied cut-off times depending on the payment scheme in question, and other local differences such as holidays, fragmentation means cross-border payments can be challenging to automate,” he explains.

Cross-border payments mean FX is an integral part of worldwide trade. Treasurers, therefore, need to be increasingly mindful of FX risk arising from these payments.

Timing is often also an issue in the FX leg of an international payment, according to Gibran Maqsood, Head of Transactional FX Sales, Europe, Barclays. “Traditionally, FX and payment workflows have not always been fully joined up. When making a payment from a euro account into another currency, for example, cut-off times for different currencies and different time zones can make matters more complex, and ultimately lead to delays and inefficiencies.”

Additional friction often comes when dealing with illiquid or exotic currencies, he notes. “It could be that certain banks don’t have market-making capabilities in those currencies, or that liquidity is scarce. Sometimes there are payment limitations, due, for example, to capital restrictions. Payments in affected currencies usually result in a higher transaction cost or potentially require the use of specialist providers, which again takes time and comes with budget implications. None of this makes life any easier for the treasurer.”

Maqsood also highlights challenges around transparency and visibility. With FX, it’s not always possible to see the exact debit and credit values pre-transaction because it depends on the region, the corridor, and the banks involved. This can be frustrating for treasurers because this level of detail is incredibly important.

Actively managing transactional FX risk

Arguably the most critical issue treasurers face with cross-border payments today, however, is the overall cost of such transactions. FX is a major component of this cost, with prices varying depending on currency and corridor of transmission. “While FX costs have reduced in recent years because there are more players, better technology, and more market visibility, the FX element of cross-border payments, or the transactional FX as we call it, is still a significant contributor to the overall cost – and many companies don’t have a good hold on this at present,” admits Maqsood.

And this issue is only going to become more important as e-commerce and global marketplaces become even more prolific. “Cross-border payments mean FX is an integral part of worldwide trade. Treasurers, therefore, need to be increasingly mindful of FX risk arising from these payments,” he cautions. “As an example, in payroll, employees are more likely to be based across the world, especially with the increase in remote working. Many more low-value, high-volume payments across multiple currencies mean more FX risk in the business – and this needs to be managed more proactively.”

With this in mind, there is definite movement towards automating and transforming treasury processes, especially where FX is concerned. In fact, according to the TMI and Barclays European Treasury Survey 2022, more than half of respondents (59%) have been considering automating their low-value FX payments.

For those who have not yet considered automation, or wish to preserve some element of manual control, Maqsood warns that “these habits retain some operational risk. It can mean that for subsidiaries in different parts of the world, treasury can’t offer harmonised FX pricing for cross-border payments. And with the FX wallet spread across multiple providers, higher costs are likely”. Automation is, in his view, the more efficient, and ultimately, more cost-effective route.

And there are different flavours of automation available, depending on each corporate’s needs or wants. “Automation is a spectrum. At one end is the fully automated end-to-end system. At the other is a simpler approach to cross-border payments, where the bank performs the FX conversion as the payment happens,” he explains. And with the right level of transparency and reporting, and reasonable pricing, Maqsood believes automation can offer an easy way of streamlining FX workflows, or simply rationalising the number of FX accounts the company holds. “Ultimately, there is an automated FX solution suitable for every type of organisation – if they are prepared to open their minds to the possibilities.”

Paracetamol for payments pains

It is not just the FX aspect of cross-border payments where technology-driven solutions are helping to reduce sources of friction, though. Becker comments: “A great deal is happening in the wider payments industry to remove pain points. SWIFT gpi is helping enormously, both in terms of transmission times, but also in terms of the tracking ability.” Indeed, statistics from SWIFT suggest that nearly 50% of all gpi payments are credited to the end beneficiary within 30 minutes and 40% in under five minutes[1]. In addition to rapid processing, gpi enables banks to provide customers with full visibility of fees, timelines, and exchange rates.

Daniela Eder, Head of Payments and Cash Management Europe, Barclays, notes: “What gpi offers is certainty. There are no more nasty surprises. And arguably, the greater the transparency, the more prices will reduce in the longer term, so it’s to the benefit of all.” She emphasises that gpi traceability is also incredibly useful. “Payers generally want to know when a payment is sent, where it is, and when it reaches the beneficiary. With gpi, banks can track those payment flows, end-to-end, in real-time, and enable end-users to access that information themselves. This offers tangible benefits for treasurers. And a huge proportion of international payments are already faster, more transparent, and traceable, thanks to SWIFT gpi.”

Elsewhere, Eder highlights the move towards common standards and interoperability on high-value payments across the global banking community, with the advent of ISO 20022 – which has been pushed back to March 2023 for the Eurosystem[2]. “ISO 20022 creates a common language for payments data across the globe, thereby simplifying communication. ISO migration will also make payments data richer and more consistent, end-to-end. And with the high-value payment systems of the major reserve currencies now migrating to ISO 20022, it’s rapidly becoming the norm – and a true global standard,” she notes.

Becker agrees, adding: “High-quality data end-to-end as a result of ISO 20022 will result in superior payments for sender and recipient, improving compliance, reducing false positives, and increasing efficiency. A reduction in compliance hits alone will lead to fewer investigations and thus faster end-to-end processing.” In turn, accelerated payments processing and the richer data should also aid enhanced cash flow forecasting and reconciliation processes for corporate treasurers, thereby facilitating end-to-end automation.

And if anyone was still in doubt about the importance of ISO 20022, Eder asserts: “This is a true banking transformation. No one should underestimate the importance of this absolutely foundational initiative.” And of all the innovation that’s coming on the back of ISO 20022, the underlying element is enriched data she explains. “This is based upon a single format, with consistency and global interoperability enabling processing to be securely expedited, with business growth for all.”

Low-value payments must also be high priority

Alongside SWIFT gpi, SWIFT Go is starting to make waves for low-value international payments, such as those generated by consumers, and received by consumer-facing businesses. Eder comments: “Swift Go is quick, easy, and predictable; just how payments should be. And it is a major transformation in the making, empowering a global chain of low-value payment participants. Like gpi, the biggest benefit of this new development will be for payers and receivers, with the beneficiary finally receiving their full amount – without any unexpected deducts.”

To reap the full value of SWIFT Go, however, it is important to reach critical mass quickly. “Only about 200 banks in the SWIFT network have signed up, with 11 global banks actively participating. So, it’s now a matter of developing the rails that have been built to provide data and transparency, and getting the community on board – with the aim of helping everyone to grow,” she says. Indeed, Eder believes that with APIs and instant processing, SWIFT Go could be the biggest transformation ever seen in international global low-value payments to date.

For treasurers with business models skewed towards the consumer segment, SWIFT Go could also prove highly beneficial. “Now is the time for treasurers to start investigating the possibilities, and explore how SWIFT Go might fit into their wider ecosystem. Of course, it depends on the business model and how many international low-value payments they execute. But moving now presents treasury with an opportunity to create an automated no-touch process for low-value transactions, even for FX payments that are below a certain amount. If treasury has built gpi into its ecosystem, and I would think many MNCs [multinational corporations] have, then SWIFT Go is an obvious next step.”

API connectivity and automation

Another important technological development changing the payments landscape is the rise of APIs. While these are not a new technology per se, APIs are being put to use in novel ways in the treasury space and have the potential to significantly improve payments processing and more.

Eder elaborates: “APIs are essentially the glue that enables systems to interact seamlessly, in real-time. Treasurers can now use payment APIs to initiate payments from their treasury workstation, without needing to log in to a bank portal. With the correct parameters in place, this can even be done in an automated fashion, and significantly reduces the need for manual intervention – and limits the room for human error or fraud.”

APIs also offer the convenience of retrieving information when its needed, rather than having to wait until its received, says Eder. “We’re seeing more use cases emerge, especially as real-time account information, such as balances and transaction reports, is becoming even more critical for forecasts as the cost-of-living crisis bites, and inflation eats away at margins.” What’s especially great about APIs, she believes, is the ability to aggregate them into a single dashboard. “A treasurer can, in theory, ping all their global banks for their account information, and it will be instantly delivered to their dashboard and consolidated. In turn, this can provide a huge boost to critical, on-the-spot, decision-making.”

In addition, APIs can reduce manual back-office work since information can be directly integrated into the ERP or TMS. Eder continues: “One area of promise is faster reconciliations on the back of APIs in combination with RPA, AI and ML. And the quicker a corporate can reconcile, the quicker it can gain access to its liquidity.”

Moreover, being able to retrieve information on demand thanks to APIs can help a business to grow more rapidly, because it can make decisions when it needs to – rather than being beholden to out-of-date processes. What’s particularly exciting, says Eder, is that these functionalities are available to SMEs as well as large corporates. “The playing field is becoming increasingly level,” she enthuses.

Maqsood is also a keen proponent of APIs, and he believes they have brought about a step change in the FX industry. “Where once accurate FX rates came only through a Reuters or Bloomberg terminal, now live rates are streamed on mobile devices. APIs have been very disruptive to FX rates, contributing to many improvements in the level of transparency, availability and awareness,” he notes.

Furthermore, APIs enable more efficient and faster FX executions. “For corporate treasurers, this is highly relevant because they can access solutions enabling them to not only obtain live rates with transparency but also to instruct the corresponding FX and payment transactions,” he explains. “For a corporate treasurer executing bulk supplier payments in multiple currencies, for example, using an API solution enables them to obtain pre-transaction transparency around the FX rate. They’d be able to instruct that FX and payment in an integrated workflow, reducing the workload, and enhancing reconciliation and reporting.”

Reaping the full benefits

While Becker agrees that APIs have great transformational power, he cautions that APIs by themselves are not a silver bullet. “They are a technical enabler, albeit a powerful one, but if you want to achieve all the benefits that APIs can bring, especially real-time treasury, other elements need to come into play.”

Together with systems integration, internal processes may also need to be adjusted, says Becker. “If you can’t analyse data in real-time then what good is it? There is no point putting in an API for instant information, only to sit on that data and not use it. And if the data is able to be analysed in real-time, the company also needs to be able to act on it in real-time, for the same reason.”

In today’s fast-paced world, it makes sense, Becker believes, that more companies are exploring real-time operations as part of their changing business models. “But this triggers necessary changes to underlying treasury processes and companies must be willing to make the required investment in their systems to do this.”

Corporates may also need to explore new ways of carrying out traditional treasury tasks in order to enable the best possible real-time information and money flows. One such future avenue could be DLT.

Becker explains: “DLT is a potential platform for next generation payment systems because it enables transparency and faster automated payments. It can help payments processes better match the needs arising from changing corporate business models. And already, DLT is being used for payments between bank accounts, eliminating various intermediaries. And cross-border blockchain-based payments could result in faster transfers and reduced costs.”

Eder is similarly excited by the prospect of DLT. And although it is not necessarily an immediate need for treasurers, she believes DLT can offer significant security and automation benefits to interested parties. “Take smart contracts, for example. The scope for automated, intelligent decision-making, is huge. And payments could easily be set up to be automatically triggered to suppliers on receipt of goods at a shipping yard, for instance,” she describes. “The possibilities are significant and we expect to see enormous interest in co-creation around DLT between banks, corporates, and fintechs going forward.”

Preparing for tomorrow today

While DLT may be a little way off for some organisations, there is plenty that can be done now to prepare for the new payments and operating landscape. Eder comments: “The action points will vary according to the business, industry, and focus on payments processing, but my suggestion is that if you’re not actively involved in discussion around the future of payments, get involved.” Businesses need to transform sooner rather than later, she believes. “In the next few years, dramatic changes will be taking place in the financial industry, and corporates need to shift with those. There is no better time than now to engage with your banks to find the best solution to help grow your business.”

Meanwhile, Maqsood is keen to focus on the notion of invisible FX. “Most corporate treasurers know their visible risk, which is usually transactions above a certain threshold. But the smaller values, usually off the back of cross-border payments, quietly but quickly add up. Spend time unearthing invisible FX, then think how FX workflows can be simplified through automation, because this is the direction of the future.”

Becker echoes this search for simplification, concluding that: “Besides keeping internal processes aligned with the business model, it is important to stay engaged with your banks to ensure you are leveraging all of the solutions that we have today – ultimately to make your life easier. Banks can help support your journey towards real-time payments and real-time treasury. And if we keep the dialogue open, and innovate together, the transformation journey will be successful.”

Barclays Bank Ireland PLC is registered in Ireland. Registered Office: One Molesworth Street, Dublin 2, Ireland D02 RF29. Registered Number: 396330. A list of names and personal details of every director of the company is available for inspection to the public at the company’s registered office for a nominal fee. Barclays Bank Ireland PLC is regulated by the Central Bank of Ireland.

This article is intended only for an audience in Europe. Where readers are present in the UK it is only intended for persons who have professional experience in matters relating to investments, and any investment or investment activity to referred to within it are available only to such persons.

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