Foreign exchange and cross-border payments can struggle to meet the needs of businesses and payments providers in today’s rapidly-changing and highly competitive global market. Livia Benisty, Chief Business Officer, Banking Circle explores the current offering and limitations, and what steps PSPs and banks can take to deliver cross-border payments as an added value service.
With the growth of global e-commerce and a revolution in the digital economy, in response to COVID-19, with technology fast-tracked to deliver socially-distant, lockdown compliant solutions, cross-border payments provision has vastly improved over the past two decades.
However, it has not been possible for the cross-border payments offering to keep pace with industry expectations, especially in terms of B2B payments. Vast opportunities still exist for banks and payments businesses to improve the service they offer their customers. Faster, simpler, lower-cost cross-border payments will open up competition still further and give businesses the international opportunities they need to compete and thrive in the new landscape.
When it comes to improving international transactions services, knowledge is the most powerful tool available. The latest Banking Circle white paper, ‘Optimising FX and Cross-border Payments’, offers insights on what businesses, banks and payments providers need to know in order to successfully improve their cross-border offerings. The best thing a business can do is gain a full understanding of the entire process and all parties involved.
Cross-border challenges persist
The thing most global e-commerce businesses have in common is that they are expanding into new geographies and seeking to offer an optimal customer experience. To deliver the best possible user experience (UX) they want to provide a familiar checkout process, in the right language and the right payment methods to suit local preferences. A critical success factor in the customer journey is their ability to make payments in their own currency, but this brings with it foreign exchange (FX) volatility risk and operational inefficiency for businesses, deterring many of them, especially those with smaller cross-border sales volumes. This limits their potential.
In 2020, we spoke to 1,500 merchants based in the UK, Germany, France, the Netherlands and the Nordics, to uncover the payments challenges faced by these businesses. The study revealed that 25% of the mid-sized companies we surveyed across Europe experienced poor value in the FX rates offered by their banking partner. 42% said their bank’s fees for cross-border transactions were too expensive, and more than one in three complained that sending money between countries took too long. Almost half (49.7%) had begun to use FinTechs and other non-bank financial institutions to fulfil their international currency and payments needs.
While increased competition from new players such as money transfer companies and more powerful technology have certainly improved the situation, there is still a long way to go. FX is undoubtedly cheaper and settlement faster than they were 20 years ago, but at Banking Circle we are receiving more and more requests to help Payments Service Providers (PSPs) scale globally by providing solutions to the challenges of operations and FX volatility. The obstacles are not going away by themselves. The global industry needs to work together to tackle the pain points, remove barriers and empower global trade.
Something of a buzzword in many industries at the moment, and for good reason, is transparency – and the lack thereof is a significant stumbling block for cross-border payments. Especially in credit card payments, but also in most other methods, the costs and charges are distinctly lacking in transparency. The time it takes between a purchase and settlement can be a number of days. Even in stable times, with very little FX volatility, the FX rate will change between the two stages and therefore the amount paid and the amount received will differ.
When we look at recent political turmoil in certain nations, and the resulting impact on FX rates, we can see that this is not an insignificant challenge. When a business is sending or receiving large amounts across borders, transferring between currencies, the potential losses are enormous.
The traditional route
Payments handled through the traditional correspondent banking network can be subject to similar challenges with FX volatility and can also incur unnecessary and unexpected costs and delays. Depending on the location and currency of each bank in the chain handling the payment, the transfer may incur 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.
For example, a British company placing an order with a Danish company: the banks handling the payment may add a conversion from Pounds to Euros, then convert again to Danish Kroner – an unnecessary step that adds a conversion fee and potential to lose out on poor exchange rates.
These costs must be absorbed by the business or passed on to customers, making businesses less competitive and reducing profitability – reducing the cost of cross-border transactions is vital to remain competitive. Instead, the Danish company could hold an account in Denmark denominated in British Pounds, which would only require a single currency conversion, reducing significantly the costs and delays of the transaction.
Cutting complexity and cost
To get past these roadblocks, many of which we have come to accept as necessary burdens, the most important thing businesses can do is to fully understand the FX process within the value chain. Knowing who is involved in the transaction, where they and their bank accounts are based, and all regulatory requirements that will apply, will help businesses 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 to know what to expect and enable them to plan accordingly. As a result, the payment process can be simplified and costs reduced, delivering better value for the underlying customer.
However, not many businesses have the resources to dedicate enough time to acquiring and maintaining this level of knowledge and understanding in-house. And developing new solutions on the back of that knowledge requires even more investment. Instead, businesses should choose a cross-border payments partner who can handle this on their behalf. Working with third-party expert providers allows financial institutions to fast-track improvements without the need to build expensive and time-consuming new systems and solutions internally.
Businesses should be looking for payments partners that add value through transparency around costs and fees, and they should get a clear commercial agreement in place with their financial counterparty regarding currency conversion. As part of Banking Circle’s strategy of building an interoperable financial services ecosystem, we are partnering with companies providing access to tech-driven services that can be offered to merchants and businesses which allow them to sell in any currency without the worry of FX volatility, and enjoy expedited settlement giving them access to their cash as quickly as possible.
