Trade is the life blood of civilizations and its flow has gone only smoother and faster with better infrastructure. One area that is drawing attention in 2017 is cross-border payments. Several factors are bringing this topic forward. Firstly, more consumers are traveling overseas markets and buying goods to bring home. Second, consumers are discovering the convenience of buying overseas from the comfort of their home. In both cases, this is highlighting the issue of cross-border payments in order to facilitate commerce.
So cross-border transactions across Asia are definitely on the horizon said Eli Shoshani, Head of Payments Business Development at D+H.
“Banks are looking to compete with money transfer services such as Western Union and MoneyGram by offering low value cross-border payments facilitation. At the moment the more practical solution to enable cross-border transactions appears to be bilateral links between banks in countries, e.g. Australia to India, Middle East to India,” he explained.
Another factor impacting cross-border payments is the mobility of migrant workers. Thailand’s Bank of Ayudhya, for example, plans to offer cross-border payments in Myanmar as it targets Myanmar workers in Thailand. Similarly Thai bank, Kasikornbank (Kbank) will launch its own cross border payment system targeting Cambodia, Laos, Vietnam and Myanmar. According to RFi Group, data in the second half of 2016 from the Thailand Retail Banking Council shows that 24% of those who hold overseas banking products in Thailand do so for remittance purposes.
Shoshani predicts more digital disruption including e-wallet type services. Real-time payments may help banks claim back some of this business from third parties, by not only providing the same level of real-time service, but also utilizing the intelligence and capabilities that banks inherently have that third parties may not, such as access to fraud and security checks and richer transaction data.
“A side-effect of gaining back the market share taken by e-wallets and the like, is the fact that banks will have more liquidity left in the banking system which they will have control of,” he added.
Death of Banks Exaggerated
In 2017 banks will find themselves facing competition from every angle: from products like cards, savings, loans, checking, investments and insurance; to competitors: incumbent banks, insurance, investment firms, telcos, convenience stores, remittance companies and third party technology providers.
Shoshani cautioned, however, banks to remember that many of these third party vendors and offerings could not exist without the core services that the bank itself provides.
“Banks need to understand how these new innovations can enhance their own service offerings, whilst also ensuring that they keep innovating at the same time,” he opined.
He admonishes banks to ensure that they have a robust and flexible payment hub in place. Not only can the right hub (not just a switch) address the ongoing challenges a bank faces in today’s environment such as high volumes of electronic payments, increasing adoption of real-time payments and ongoing regulation and competition, but a payment hub can also help consolidate multiple legacy systems.
“This means banks will be able to release products faster, handle basic real-time payment flows, including “request to pay” and be able to implement value-added services such as addressing, notifications, customer receipts, bill payments, e-wallet top-ups (interaction with third party vendors). In addition, this also means simplified operational overheads and lower transaction processing costs,” he listed out.
Samish Kumar (photo right), CEO, Transfast noted that the cross-border space requires navigating complexities up and down the payments stack. This includes geographic coverage, last-mile reach, liquidity/FX management and compliance, which makes many prevalent solutions seem lacking in innovation.
“Most innovation for cross-border mass payouts has been at the margin, via repurposed traditional banking systems or card-based solutions that were designed and architected at a very different point in time and for very different purposes. Even solutions such as e-wallets, though more recent, are by-and-large a re-purposed solution for cross border payments,” he added.
John Tait, Managing Director of TNS’ Payments Division in Asia Pacific predicts that cross-border payments are ripe for disruption as the traditional payment instruments have certain legacy pain points, for example checks or correspondent banking challenges. These traditional instruments are already being challenged at the consumer level by virtual card products.
“In addition, distributed ledgers and crypto currencies will likely find comfortable landing points in cross border payments, micro payments and inter-bank transfers. The constant in all of these challengers and disruptors will be the need to carry a transaction over a communication protocol securely, quickly and in a compliant manner within the rising regulatory requirements of electronic payments,” he added.
Regulation: Friend or Foe
“Given the inefficiencies of those systems, this is no longer a sustainable model, and businesses and FIs are seeking more cost-effective and timely payments options. The demand for alternatives has opened the door for new players to offer new cross-border payment methods for high-volume, low-value payments.”
Kumar says regulation can, and is, a roadblock to innovation in cross-border payments. Unlike other areas of Fintech, cross-border payments by definition require businesses to operate globally immediately, which introduces multinational regulatory requirements. The time, money, expertise and resources it takes to be able to adhere to the complex, multiple layers of regulations in both the originating and receiving markets is a tremendous challenge.
“For example, they might choose to serve only a few corridors to minimize their need to handle regulations and compliance in multiple countries, or decide to serve more countries, but pass through the cost of regulations to clients and recipients. Still, obtaining the necessary licenses and complying with the regulations of certain countries can take years.”
“Regulations are a large part of why there are only a few players in the market like us that are able to take cross-border payments and provide a true global solution.”
Of greatest concern is the trend of tighter regulations pushing more payments volume into alternative unregulated, unofficial and sometimes illegal channels. This not only impacts performance but also increases financial and other risk in the global economy.
Trending in 2017 and Beyond
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Kumar suggests that providing several payments options also continue to be the trend because the payments landscape across Asia are evolving differently and at different rates, and cash continues to be a very significant payment method across most Asian economies.
Asia Pacific has become a hub for Fintech and is a great example of cross-border payments optimization based on market demand. Industries such as travel, e-commerce and freelancing/outsourcing have taken root in the region and the growth of those industries created demand for B2B/B2P cross-border payments that can keep pace with the growing digital economy.
However, payouts, or outbound multi-currency payments, remain a challenge. Businesses that need to send payouts to international suppliers or repatriate funds have had to rely mostly on correspondent banking systems.
“Given the inefficiencies of those systems, this is no longer a sustainable model, and businesses and FIs are seeking more cost-effective and timely payments options. The demand for alternatives has opened the door for new players to offer new cross-border payment methods for high-volume, low-value payments,” he added.
Correspondent banking will continue to play an important role in the future of cross-border payments especially for high-value transactions and in global settlements. “Speculation might that correspondent banking will disappear is exaggerated possibly because of the fact that there are now more options than we used to have before,” said Transfast’s Kumar.
However, for businesses in need of mass payouts – meaning, a high volume of low-value transactions — there are a growing number of alternatives, and the one they ultimately choose depends on their specific needs.
For example, an online marketplace for freelancers across Southeast Asia may employ a range of payout options, such as e-wallets, cards to proprietary bank and cash networks. Leveraging a proprietary local bank transfer network enables sellers on marketplaces to receive multi-currency payments directly to bank accounts, and in some cases, in the form of cash at payment locations elsewhere around the world.
“For banks, the processing aspects of acquiring will probably continue to become commoditized as the smarts in payments move more to the front end capture device which drives the best value add for businesses and creates new profit pools. And finally, insights from payments data may create more power through artificial intelligence – meaning that data insights may become more important than the payment transaction itself,” concluded Tait.
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