Cross-Border Payments Need More Than Bank-FinTech Collaboration

When PYMNTS asked cross-border payments experts at the end of last year what they thought the driving trend would be for the industry in 2018, the consensus was all about collaboration, particularly between banks and FinTech firms.

Throughout the year, that prediction has manifested into reality, as more traditional financial institutions (FIs) turn toward FinTech innovators to address the biggest pain points of the legacy correspondent banking system. Those points include the length of time it takes for transactions to settle, and the lack of visibility into the process as funds move between FIs.

Even more challenges are ahead for the world’s cross-border payments market, as regulatory pressures continue to cause a decline in the number of correspondent banking relationships. Last month, the Financial Stability Board (FSB) calculated a more than 4 percent decline in the number of these relationships between 2016 and 2017.

In a recent report, the Bank of England, Bank of Canada and Monetary Authority of Singapore emphasized the role that both collaboration and FinTech innovation play in maintaining the strength of cross-border payments functionality around the world.

“Many national payment systems are benefitting from considerable innovation and change,” said Bank of England Executive Director for Banking, Payments and Financial Resilience Victoria Cleland in a statement announcing the report last month.

In an interview with PYMNTS, Christoph Tutsch, founder and CEO cross-border corporate payments solution provider ONPEX, explained that collaboration to improve cross-border payments involves much more than just a bank and a FinTech.

“The modern-day client expects a seamless transaction experience,” he said. “This means the client gets simple access to the financial services they need through one provider.”

A straightforward solution that a corporate customer may access (for instance, an online banking portal) requires a trove of complex collaborations and integrations. This comes as more FinTech firms and third-party service providers — including exchanges, clearing institutions, as well as infrastructure and technical providers — integrate their functionality into banks’ own platforms to enhance the cross-border payments experience. What’s more, Tutsch noted, the end user shouldn’t be able to notice the complexities of all these collaborations and integrations.

“Without collaboration between banks, [FinTech firms] and technology providers, it will be hardly possible to create a seamless experience [that] our clients are asking for,” he said.

It’s perhaps unsurprising that so many players must be involved in improving cross-border payments, considering the number of friction points that corporates experience, and considering the rising demands among those clients. Tutsch said businesses today need reasonable speed, cost efficiency, easily integrated solutions that can work with their own existing back-end platforms, and support for the currencies they need to conduct business across borders, without excessive fees.

Furthermore, businesses demand reliability and security, he said, and the assurance that services are provided by a regulated party.

The challenges for service providers are lengthy, yet worth the trouble. According to SWIFT and McKinsey & Company research, B2B cross-border payments accounted for $125 trillion in revenues last year alone, significantly higher than the $54 billion initiated by consumer-to-business (C2B) cross-border payments.

At the same time, global B2B payments have the thinnest margins for service providers of any other payment category, at just 0.1 percent (compared to 6 percent for peer-to-peer [P2P] payments).

According to the report, SWIFT Head of Banking Harry Newman and McKinsey Partner Olivier Denecker discussed the conundrum of the emergence of FinTech innovators in cross-border payments, hoping to widen those margins and secure their piece of a lucrative pie.

“The trusted and tested correspondent banking approach has encountered challenges from emerging alternative solutions and new players upending some of the industry’s fundamentals,” they said. “The nature and direction of these changes, however, [remain] unclear in many cases.”

As a result, with the decline in correspondent banking and with FinTech market entrants exploring new ways to move money across borders for corporate customers, the cross-border payments industry is certainly in flux for the year ahead.

Some collaborators are turning their attention to target individual pain points — for instance, speed. Earlier this year, SWIFT emphasized the success of its ongoing gpi effort, which aims to enable real-time cross-border payments between institutions that have signed on to the initiative. Yet, Tutsch said real-time payments aren’t the driving factor he sees guiding the evolution of cross-border corporate payments.

“High payment speed or real-time transactions are often not the driving forces when doing business on a global scale,” he said. “But it’s obvious that a cross-border payment shouldn’t take a couple of days, or even longer.”

Still, speed can often be a residual effect of improving visibility and efficiency in cross-border payments. In addition to banks, FinTech firms and third-party solution providers like technology firms and clearing houses, Tutsch noted that regulators must be involved in the mix to provide the trust and compliance that corporate payers need, too.

Looking ahead, he added, the industry continues to consider cutting-edge technologies that can address the rising number of pain points that exist in the traditional correspondent banking model, if not bypass that model altogether.

“Service providers in the payment and banking space have to be open-minded to new technologies coming up,” said Tutsch, “especially in blockchain technology.”