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Cross-border Payments at cross-roads - how banks and payments companies should respond

With increasing globalization value and volume of cross-border payments are increasing. Digital technologies are changing the customer expectation to a near-real time transaction experience with end-to-end traceability. At the same time operational risks of making a cross-border payment is increasing due to ever-changing regulatory requirements across the globe and criminals finding new ways to use the payment systems to transfer illegal funds. Due to legacy rails, varied global regulations and lack of global standards, cross-border payments are error-prone with low Straight Through Processing(STP) rates making the traditional correspondent banking model slow, costly and unpredictable. It is estimated that banks collectively need to keep trillions of dollars in idle 'Nostro' accounts for handling cross-border payments reducing the overall return on capital. Due to this, many banks are finding it difficult to maintain loss-making correspondent bank relationships in low volume markets and abandoning their service. This is increasing concentration risk and the need of additional routing layers increasing overall cost of payments. Payments Transparency (including Fee Transparency) is another issue of conventional SWIFT payments - as the payments touch many banks and payment rails the remittance information is often modified and multiple fees are deducted reducing the amount reaching beneficiary. 

Recently both Incumbent Payment players (like SWIFT) and emerging Fintechs (like Ripple) are responding to these challenges and building new solutions to improve the efficiency of cross-border payments. Broadly we can classify these innovations in three categories - 

  1. Incremental Innovation - Incumbent player SWIFT is driving incremental innovation through their Global Payments Innovation (GPI) initiative. We call it Correspondent Banking 2.0 where the basic correspondent banking model remains the same but SWIFT provides additional features like Unique End-to-End Transaction Reference (UETR) for Payments Tracking (through a Cloud based tracker), faster same day use of funds, fee transparency, transfer of rich remittance data, real-time Nostro reconciliation etc. addressing some of the key concerns.
  2. Disruptive Innovation - Challengers like blockchain based solution Ripple is trying to disrupt this space directly competing with SWIFT. They are offering a totally new way of moving funds across the globe through Interledger protocol where pre-transaction validation improves STP rates, settlement occurs in seconds, with lowest fees and best FX rates.
  3. Collaboration-led Innovation - Some of the fintech startups are taking a middle role. They are not building a new rail but filling the gap of exiting inefficiencies in the market. For example, instead of doing FX for individual payments they are consolidating multiple payments for better FX rates (Currencycloud/Transferwise/Earthport), using Swap based models to reduce FX need (Transferwise) or providing payments orchestration solutions (Bankingcircle, Currencycloud etc.).
Recommendation for Banks and Payments Organizations:

Cross-border Payments market is huge and Leading Banks can win a significant part of this business even in a very competitive marketplace. Banks need to adapt and adopt right technologies and partnerships to succeed. Here are some key recommendations for banks -

  • Explore the right-fit for customers and follow a portfolio approach in adopting innovations -most banks are experimenting through proof-of-concepts with early adoptions of Incumbent solutions (SWIFT GPI), Challenger solutions(RippleNet) and Collaboration-led models (Currencycloud/EarthPort)
  • Embrace Open-Banking - Build IT infrastructure to partner with Financial utilities through API-Economy, e.g. use CurrencyCloud for Compliance or for live rates, EarthPort for International Low-value, high volume payments
  • Improve Back office systems & processes through Digital Adoption to remain competitive -  invest in SLA management, automation of manual processes through Artificial Intelligence, Optical Character Recognition platforms etc. 
  • Monetize Rich Payments information by providing value-added services in Customer Financial Supply Chain (e.g. reporting and reconciliation services through Virtual Account Management, AR/AP Integration etc.)
  • Take regulatory compliance and payment security with utmost priority to reduce operational risk- banks may selectively consider outsourcing to niche partners to cope up with ever-changing regulatory landscape.   

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