Any company that does business with suppliers in different countries knows the pain of making cross-border payments. Domestic supplier payments are difficult enough. Cross-border supplier payments have all the same challenges and then some. Accounts-payable managers report that though cross-border payments account for only about 20% of payments, they take up 80% of accounts-payable time.
That is all about to change as financial-technology companies (fintechs) bring their blend of technology and service to bear on this pain.
This is an area where banks have not innovated for far too long. Banks traditionally are not good at technology innovation, and when they do invest it’s typically to protect their margins rather than to create a better customer experience. This combination of big margins and poor services is really what has created the playground for fintech companies. Cross-border payments have long been a source of big margins and high profitability for banks, so it’s not a big surprise fintech companies would target this area to innovate and deliver better services.
This is partly why so many banks are exploring distributed-ledger technology. It promises to keep them in the cross-border payments game with a faster, global set of rails for moving money, with greater visibility and control over the payment. Distributed-ledger solutions will eventually come to cross-border supplier payments, with banks and fintech companies finding ways to partner and deliver solutions.
The problem is, distributed-ledger solutions are not yet ready for mainstream business payments and the market is in dire need of better solutions now.
Customers needn’t wait. Change is coming to cross-border payments in 2016 with fintechs bringing their now distinctive blend of technology and services to address the three biggest pain points of cross-border business-to-business payments:
The most challenging aspect of cross-border payments today is the initiation process. It’s done much the same way a consumer would initiate a wire—one at a time. You go to your bank portal, pull down a form, type in all your company and account information and the payee’s company and account information, and send it off. And typically you do that over and over again until you’re done.
Amazingly, there’s no way to process these in bulk, and no user experience worth talking about. There’s been no consideration at all given to people that need to initiate hundreds or even thousands of these payments every month.
Worse, the entire process takes place outside of the normal accounting process. You have to manually record that the payment has been initiated, and you have no reconciliation information to bring back into your accounting process, adding yet another layer of tedious manual work. It’s incredibly inefficient.
Fintechs are already using cloud technology to provide B2B payments solutions that dramatically improve the efficiency of making payments. They’re using people and networks to make managing supplier payment information simple and scalable. They’re providing dedicated support teams to resolve payment issues. Now, cross-border payments are part of the same workflow. They can be initiated from inside any accounting system, and the information is returned back into the accounting system. It’s so much easier on the accounting team.
2. Tracking And Visibility
With Federal Express, you can track your package as it hops from place to place; but up until now you couldn’t do that with a cross-border payment passing through correspondent banks en route to its destination. There’s been no way of knowing where the payment is and whether it’s landed.
Tracking and visibility are huge for B2B payments in general because there are many ways payments can go wrong. The opportunity for error is even higher when you add banks in different countries with different regulations into the mix. Having the ability to track the payment, know when it’s going to arrive, and find out quickly whether and where something has gone wrong is very important.
Fintech solutions in 2016 will provide both payor and payee with the FedEx-like tracking and visibility that has been unavailable through bank-based solutions.
Fees take a big bite out of cross-border payments. There are transaction fees, and then there are foreign-exchange fees. Companies are aware of transaction fees, on which they try to negotiate favorable rates. Foreign-exchange fees, by contrast, are largely hidden, and it’s pretty tough to get a good rate on the currency exchange, especially for one-off payments.
This is a prime source of bank profit. Rates are always changing, and banks don’t work very hard to keep you informed of what rates you’ll be paying at a given time and place. One of the ways fintechs are differentiating themselves from banks across the board is by eliminating hidden fees. For cross-border payments, they’ll show businesses a cost that’s transparent and easy for the customer to understand. Banks could do this too, but it would require a cultural shift. We haven’t yet seen any evidence that they’re ready to make that shift.
An Uphill Climb
Banks are likely to try to innovate as they see fintechs move into cross-border payments, but it’s going to be an uphill climb. When you think about how big this market is and how antiquated bank-based systems are, it’s really remarkable that corporations have put up with all the problems for so long, until you consider that there really hasn’t been any alternative. The bank has been the only game in town.
But not any more. Ultimately, we will see banks and fintechs partner on cross-border payments, but fintechs aren’t waiting around. They’re bringing cross-border payments innovation to the market now.