The current model for cross-border payments hasn't changed greatly since the 1970s. Today, cross-border transactions move through the SWIFT (Society for Worldwide Interbank Financial Telecommunication) network. SWIFT is reliable, robust and is able to facilitate a huge volume of transactions between countries. But the payment landscape is changing quickly thanks to the many digital tools that are emerging.
In this environment, payment providers need to deliver a good user experience to stay relevant in the environment. There are three components that help achieve this: that the payments gateway integrates seamlessly with a host of different accounting software packages; that transactions occur at a reasonable cost to the business; and that transactions are completed promptly.
While the SWIFT network has proven trustworthy and resilient, it does take a number of days for a transaction to move from a local to a foreign account, no matter where each is located.
But this is set to change.
Distributed ledgers may change user experience
“We have to continue to challenge ourselves to remove as much friction from the payment cycle as we can. We have to continually find ways to surprise and delight our customers in the way we manage this,” says Barry Fletcher, Vice President and General Manager, American Express International Payments, Australia and New Zealand.
Fletcher explains user experience is absolutely critical when it comes to payments. “It has to be a differentiator to add value to the business and its finance function across key competencies, which include security, speed, integration and value for money.”
Payment providers are increasingly exploring distributed ledger technologies, better known as blockchain, to help facilitate transactions. This could have great potential in payments and is likely to offer a quantum leap in user experience, helping to increase payments speed, accuracy and reliability.
Fletcher believes blockchain may provide the answers to the current friction of cross-border payments. But it's likely to be some time before blockchain-powered payments become mainstream.
How CFOs can assess their cross-border payments
Before blockchain-based payments become the norm, CFOs have an opportunity to explore how they can improve the way cross-border payments are handled in their businesses right now. In particular, they are encouraged to consider how they can maximise their existing payment infrastructure.
CFOs can consider conducting thorough SWOT analysis of the existing system and steps that may be taken to maximise it.
This could include an exploration of any inherent tensions in the payment process with which the finance team grapples daily, says Fletcher. His advice for CFOs is to pressure-test current processes, lining them up against alternatives.
“It is important and incumbent on every CFO to be doing that and maximising what is available, whether that is looking for cost reductions or efficiency gains through being able to introduce levels of automation they have not been able to access before.”
While debate continues over the use of blockchain-based cryptocurrencies like Bitcoin as a way to make payments, blockchain as a technology is now well entrenched behind the scenes. Payment companies are already looking at its uses.
Fletcher believes blockchain will not only deliver a slicker, faster, cheaper and more efficient system for the end user, it will also broaden the payments arena, making it more accessible to new players.
“Our systems should be moving at the speed of light. But there is so much friction in the process right now, two days is still seen as an acceptable time frame for cross-border transactions,” Fletcher says.
“We still see payments being stopped somewhere, requiring us to figure out where that transaction is, why it stopped, and we still see frequently have to figure out what needs to be done to keep it moving,” he adds.
Cost is another factor, says Fletcher. Too often, all participants along a payment chain charge a fee, which ultimately has a bottom line impact. “We only find out about it when a supplier's payment arrives, it's $20 short and they want to know why they have been not been paid in full."
This is a situation that's likely to improve as technology advances. Indeed, the inherent frictions in the process should be largely removed by new tools such as blockchain.
Fletcher believes blockchain should more easily allow everyone to see a transaction moving from, say, a US to a UK bank account in a matter of seconds, all fully confirmed and properly audited.
APIs usher in a cross-border payments revolution
While distributed ledger technology sounds like a game changer, the payments revolution will only truly arrive when application programming interfaces (APIs) are widely adopted. APIs can seamlessly integrate across different platforms, facilitating blockchains between different payment infrastructures.
They also allow new players such as fintech start-ups such as Brighte, a portal that facilitates payment plans for businesses offering services to reduce the impact of climate change and improve their premises, to connect directly to a payment environment of a large corporation that may have potentially hundreds of thousands of customers. Other examples of payment fintechs include digital layby leader Afterpay and digital FX provider Airwallex.
Open APIs are likely to provide opportunities for new payment providers to access current payment environments. They will allow two-way data sharing between financial institutions and third parties in a scalable, secure and accelerated manner. Customer demand and new technology could encourage incumbents to adopt a more open and collaborative approach, says Fletcher.
In the future, the way payments are made and handled will potentially look very different to the way they appear now. While much work needs to be done before the payments revolution is finished, its conclusion will mean that payments are likely to be faster, cheaper and easier, bringing benefits not just for CFOs, but to the whole financial services sector.
- Traditional cross-border payment systems which take days to complete may soon be replaced with blockchain technology
- CFOs should test their current payment processes and compare them with alternatives on a regular basis, exploring how they can be tweaked to remove inherent frictions.
- A revolution in payments is coming as APIs – application programming interfaces, which have the potential to link disparate payment platforms.