FX International Payments
By Frances Coppola
In B2B payments, businesses are increasingly adopting electronic payment technologies integrated with paperless invoicing and smart cash management. The ever-expanding universe of non-bank financial technology companies is highly active in the international payments space. They’re challenging the dominance of existing payments solution providers, who are responding by offering slick, efficient electronic payment solutions themselves. The benefits for customers and businesses are clear: fast, efficient and secure payments at low or zero cost. Payment services have come into the 21st century.
Except, that is, for cross-border B2B payments. Money transfers, letters of credit and correspondent banking remain the dominant model. Most businesses, particularly smaller ones, are still stuck with an expensive, time-consuming and inefficient paper chase.
But this may be about to change. B2B payments solution providers are already extending improvements in domestic payment services to the international payments arena. Faster and more efficient international networks are improving money transfer services, while for smaller payments, cards are becoming more popular. There are innovative solutions linking cards with electronic money transfers, enabling businesses to use cards for payment even when the counterparty doesn’t accept them. International B2B Payments solutions integrating with trade finance, FX risk management and multi-currency accounting software are enabling smart management of cash flow and currency exposures. Further expansion of these would benefit businesses and their customers around the world. Fintech companies are also entering the cross-border B2B payments space, and 2016 should see them beginning to provide serious challenges to banks, both at the customer interface and in the back-office processing of international payments.
At the front end, electronic peer-to-peer payment solutions are gradually replacing correspondent banking networks for international payments. Correspondent bank networks are already shrinking as traditional banks pull out of riskier and less profitable marketplaces, creating opportunities for non-bank FX payments solution providers to step into the gap that they leave. However, simply re-creating a correspondent banking network using non-bank providers is not likely to improve transparency or accountability, though it may increase speed and reduce cost. For businesses, the challenge will still be to understand how many layers their payment must go through to reach its destination: the more complex the routing – the more “hops” between the payment’s originator and final destination – the greater the likelihood of loss. That’s because the chance of simple communications errors or fraud is multiplied by the number of “hops” in the payment’s route. That’s one reason peer-to-peer B2B payment solutions, as well as improving speed and efficiency, can reduce the risk of payments disappearing or being accidentally diverted.
Of course, completely automating international payments increases the risk of losses in a complex network because there are no human checks in the system – the payment goes straight on through. But online escrow accounts and conditional payments can help businesses defend against these risks while benefiting from the efficiencies and cost savings of modern payment solutions.
Upgrading the underlying “plumbing” is more challenging because of the need to accommodate different legal frameworks and regulatory regimes, as well as foreign exchange differences. One particularly interesting development is blockchain technology, which enables near-instantaneous peer-to-peer international payments at low cost without the need for intermediaries.
Blockchain underpins cryptocurrencies such as Bitcoin and Ether, and is currently being examined by banks and central banks as an international payments solution. It is an attractive solution for large cross-border B2B payments where speed is of the essence and there are substantial foreign exchange risks – for example, if the local currency is volatile or not widely traded. Ethereum (the public blockchain platform that support Ether) also includes the capability to create international legal contracts, which could reduce the difficulty of transacting across different legal jurisdictions – though international trade agreements such as the Transatlantic Trade and Investment Partnership (TTIP) also harmonise legal frameworks across borders. However, at present, blockchain technology suffers from capacity limits which may make it unsuitable for large transaction volumes. And because cryptocurrencies are also speculative assets, their value varies in relation to currencies such as the Australian or US dollar. Blockchain solutions don’t completely eliminate FX risk.
The combination of improvements in existing cross-border B2B payments solutions with the entry of new providers to the international B2B arena is already increasing diversity, giving businesses a wider choice of payments providers and enabling them to adopt international payments solutions that more closely match their business needs. In addition to improvements in speed, cost and efficiency, a primary benefit of diversity in the cross-border B2B payments space may be to restore to businesses greater control of their cash flow, their currency exposures and their international risks. As the efficiency, speed, security and convenience of international B2B payments increases, businesses around the world may become more willing to trade across borders.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.