By Jim Vrondas
At the forefront of such innovations in the financial services industry are disruptive technologies such as Bitcoin architecture block chain. Despite the closure of many Bitcoin Exchanges, the technology behind the virtual currency has the potential to revolutionize the international payments industry by making wire transfers at low costs in seconds instead of hours or days.
Bitcoin has the ability to register all international payments in a very efficient manner on a public ledger known as a Blockchain, which is then used to validate the currency transactions. The technology has caught the attention of some of the world’s largest banks that have begun working on a project dubbed R3, aimed at designing a safe lower cost alternative to the way banks currently settle currency transactions and other aspects of international payments with each other.
For decades, traditional international payment methods have relied on the correspondent-banking model, where up to four banks can be involved in the transfer of a single currency. Not only is this method expensive, as each bank takes a fee, but there is a high risk of important information about the payment being lost. As payment messages are transferred across banks and across borders, certain details can often get truncated or go missing. In addition, if companies are dealing with many different suppliers from around the world, this can lead to a severe lack of audit ability and visibility.
If the R3 project is successful in gaining greater efficiencies and reducing the cost of settling customer transactions, then critical mass in bank to bank payments may to follow. But some FX payment providers are already delivering faster and cheaper B2B international payments.
Peer-to-peer (P2P) international payment providers are also able to bypass the correspondent-banking model by matching a currency seller with a buyer of the same currency - even though the parties may be situated in different locations. P2P payment practices are gaining acceptance because these international payment methods features much lower fees, or in some cases no fees at all.
A spate of recent partnerships between P2P payment providers and cloud-based accounting software firms are raising a few eyebrows, confirming the technology's potential to see wider adoption amongst the business community. These electronic international payment solutions aim at improving the efficiency of foreign currency transactions and hold supplier data so that invoices can be settled in just a few clicks - making reconciliation for importers effortless.
This type of seamless integration across international payment platforms, made possible through cloud-based services, is removing some of the barriers associated with local and international trade. Innovation like this can remove some of the administrative burdens involved with international trade, making life straightforward for finance departments.
By enabling goods to flow more smoothly across borders, emerging trade management tools can automate certain aspects of the import and export process. For instance, payment platforms are beginning to target international payments in the supply chain market by offering a uniform network for billing, executing transactions and monitoring of vendor payments.
It is important to note that while there are operational benefits of an integrated trade management platform, the risks around foreign currency conversion still need to be managed. For an importer to reduce settlement risk, negotiating an open account with a supplier is key. If an importer cannot negotiate open accounts with suppliers, then innovative products such as American Express Accessline™ can assist in improving cash flow by offering the payment terms of their Card.
Other popular methods of managing currency risk are forward exchange contracts* and an FX option contracts. These FX International payment tools can help protect profit margins against adverse movements in the exchange rate. Companies should weigh their alternatives when considering how best to manage their exposure to currency-related risks
*Forward Contracts are not suitable for every business. American Express is not providing you with legal, tax or financial advice. We recommend that you consult your own advisers to determine whether Forward Contracts are suitable for you. Eligibility requirements apply.
The emergence of potentially disruptive technologies such as Bitcoin and Peer-to-Peer Payments are revolutionizing age-old business practices. These innovations have the ability to make international payments faster and cheaper, but the need to maximize cash flow and control risk will always be challenging. The likelihood of success will depend on valuable personal relationships with foreign exchange experts to assist decision-makers along the way.
With around 20 years experience in the financial markets industry Jim is acknowledged as a thought leader in Foreign Exchange and International Payments. Often sought for comment by print and online media including the ABC, Sky Business, Bloomberg, 2GB Radio and Business Spectator.