The world is getting smaller; the boundaries across countries are fading when it comes to business and money. People from all around the world are moving to different countries for work. Developed economies provide great opportunities for migrants to earn money and sustain the livelihood of their families back in the developing nations. In fact, the World Bank attributes 10% of the top 25 developing countries’ GDP to remittance inflows.
The workforce too has gone global. Today, there is a freelancer sitting in India, handling the business operations of a big corporate in the US. A company in Sri Lanka is managing the digital marketing of a UK-based corporate.
Cross-border e-commerce has grown by leaps and bounds. It not only gives customers a variety of alternatives for buying their desired products, it also helps SMEs to reach the international market and connect with potential buyers beyond their borders. Exciting times for international payments, indeed.
However, with the changing customer needs and evolving market dynamics, there is still a long way to go.
Cross-border payments require a rehaul
For long, banks have been the custodians of customer relationships in the financial services space. Their reach through a vast global network of institutions and the inherent trust factor has made them the leader in commercial money transfers. Over time, the banking framework for money transfer has evolved and is now governed by SWIFT-based wire transfer.
However, the traditional SWIFT-based wire transfer system has scope for improvement – the transfer fees are too high, the process is long and there is little transparency on the status of the money transfer. The lack of system and communication standards across multiple intermediaries make this a complicated process leading to reconciliation difficulties. The high currency conversion and transfer fee make it unattractive for the people sending small sums of money, which is increasingly forming a large part of remittances in volumes terms. For SMEs as well, the transfer fees prove to be a big roadblock while making low-value, high-volume payments.
But the real question is – What makes the traditional system ineffective? To find an answer, we must deep dive into the challenges faced by the modern banking ecosystem and understand the opportunities for improvement.
Issues with correspondent banking relationships (CBR)
Correspondent banking forms the core of international payments via wire transfer. There have been some recent developments in the area of correspondent banking relationships (referred to as CBR from here on); they’re being affected by the changing regulations and increasing concerns on money laundering and terror financing. Such relationships are being withdrawn across many geographies, causing a restricted access to financial services for a section of customers and business lines.
This development has been shaped by the changing regulatory, supervisory, and enforcement environment post-global financial crisis (GFC) and the resulting increases in overall compliance costs. The emerging markets in regions like Africa, the Caribbean, Central Asia and the Pacific have been the worst hit by this trend. As a result, small banks and MTOs in these geographies are losing their nostro accounts and are finding it difficult to run a sustainable business in the dynamically changing landscape. This is affecting the remittance business at large, as these are the major remittance corridors.
Apart from the loss of CBRs, banks today are bogged down by many other challenges that include but are not limited to – sighting of funds, lack of visibility, high reconciliation efforts, slow moving legacy systems and increasing the cost of maintaining a CBR. The wire transfer process certainly looks to be in a dire need of an overhaul. However, this is an opportunity ripe for a FinTech disruption.
We at LTP believe that bank-FinTech partnerships are the defining trend for the future of international payments. With their advanced technological leverage and innovative solutions, FinTech can fill the gaps and enable banks to provide efficient, high-speed and low-cost international payment services to their customers, while improving banks’ profit margins and running a sustainable business.
As a part of our recent study conducted in collaboration with InstaReM (a Singapore-headquartered FinTech company), providing cross-border money transfer services for individuals and businesses, from Hong Kong, Australia, and Singapore to 25+ countries, we have analyzed the nuances of international payments with an exclusive focus on trends in correspondent banking relationships. Our research report “International Payments – Moving With The Money” dives deep into the changing dynamics of the global market, presents the challenges faced by banks in processing international payments, and highlights the impact of de-risking (withdrawal of CBRs) on the entire landscape.
The report also expands on the challenges associated with existing wire transfer systems, taking into account both the end-user as well as the bank’s point of view.
Some key takeaways from the report include:
- The first time in recent history, the consumer remittance volume saw a significant dip for two consecutive years (2.6% in 2015 and 1.2% in 2016). This dip is largely attributed to lower oil prices, weak economic growth in GCC countries and the Russian Federation and weakening of currencies (euro, pound, ruble, etc.) versus the US dollar. This has resulted in a stalled growth of international payments over the past two years.
- Large banks (e.g. HSBC, JP Morgan Chase and BNP Paribas) are spending at least $8 billion annually on AML/CFT compliance. Some of these firms have paid huge fines in the wake of non-compliance-related violations. This has led to the reconsideration of business models based on risk assessment, and the subsequent impact to their CBRs.
Image source: International Payments – Moving With The Money
- Global decline in CBRs: 25%: The growth of CBRs in developing APAC countries (especially China) has slightly compensated for the huge decline in the US (31%) and EU (44%) region.
New-age FinTech startups, such as InstaReM, are disrupting the market with their innovative offerings, solving the biggest problems the banking community faces, be it tighter regulations, flawed payment systems, reconciliation, etc. Banks must leverage the superior technological capabilities of these FinTechs and combine it with their reach and customer relationships to deliver a next generation financial experience to their customers. To read the full report, click on the button below: