FX International Payments
By Mike Faden
The report suggests that these factors may drive changes in the banking industry and continue to provide businesses with greater choice – but also increased complexity and risk – when it comes to international payments.
Expanding international trade and FX trading continue to drive growth in international payments, according to the report, International payments: accelerating banks' transformation. BCG forecasts that global trade will continue growing at 4.3 percent per year, reaching $18.7 trillion in 2020. That generated $145 billion in revenue for providers of international payments, FX transactions and trade services in 2016, and the revenue is expected to grow at 6 percent annually until 2022, according to the report.2
The global transition to electronic payments creates opportunities for cross-border payments to increase further, the report adds; once businesses and individuals are operating digitally, they are more likely to use international payments.3
However, several trends in international payments are creating structural challenges for banks. E-commerce is driving expectations of faster, simpler transactions in which the payment process becomes an almost-invisible part of the purchasing process, the report says. New financial-technology (fintech) companies are offering domestic and international payment solutions and expanding into other services including banking, exerting pressure on bank fees and making services more affordable for businesses.4 Digital advances have reduced the value of traditional banks' branch networks, which are expensive to maintain, according to the report, while online banks and international payment solutions are competing for banks' small and medium-sized business customers. Emerging technologies, such as blockchain, are enabling completely new international payments solutions that don't rely on existing banking networks.5
Banks are also being pushed to open their systems through Application Programming Interfaces (APIs), enabling customers to access products from multiple suppliers, including fintech competitors. For example, the EU Payment Services Directive 2 (PSD2) defines "open banking" APIs that provide standard ways for third-party payment solutions to access customers' bank accounts.
Meanwhile, growing regulatory activity is increasing banks' compliance costs. For example, regulators are becoming more rigorous in their design and enforcement of anti-money-laundering (AML) provisions, the report says. To reduce risks, banks are investing significantly in compliance operations. Compliance costs have doubled since 2013, according to the report. And a separate survey of financial-services firms by global advisory firm Duff & Phelps found that executives expect compliance spending to roughly double again over the next five years, accounting for up to 10 percent of revenue in 2022.6
Cybersecurity costs are also growing sharply, since cybersecurity is now the top issue for financial institutions as well as other businesses, the report says. The regulatory and business consequences of breaches are justifying higher cybersecurity investment; in 2016, the financial-services sector was attacked more than any other industry, according to an IBM survey.7
This combination of technological, regulatory and other factors is creating pressure on banks' traditional business models. BCG estimates that international payments account for only 5 percent of transactions, but generate 12 percent of banks' payment revenues. Now banks face mounting competition, creating pricing pressure and the threat of sharply reduced revenues, along with higher costs. The impact on banks' international payment business will be profound, the report says. "To survive in the face of increased regulation and competition, banks will need to invest in emerging technology and in providing improved services to their clients."8
BCG and SWIFT say that the impact on banks may vary depending on their size. The largest global transaction banking firms may experience the least difficulty, according to the report, because economies of scale mean that the unit costs of automation and compliance are relatively lower than for smaller banks. Small domestic banks may continue to focus on "relationship banking," providing services based on the trust built up with clients, while outsourcing "subscale" international payment operations to larger players.
Medium-sized banks face bigger obstacles because they lack the scale of global giants, yet operate expensive branch networks and face some similar costs. "The cost to implement the new regulatory reforms is similar for a $500 million institution as it is for a $5 billion one," Tim Johnson, banking merger and acquisition specialist at professional services company KPMG, told U.S. News & World Report. "Those increased costs at some of the smaller institutions are dramatic because they don't have enough clients to spread it out."9
Options for mid-sized banks include investing in technology to focus on a flagship product, such as trade finance or supplier financing, and offering business customers the opportunity to seamlessly weave such financial services into their business processes. Banks might also choose to focus on scaling payments by playing a bigger role in regional payment infrastructure. Or they could aim for economies of scale through mergers.10,11
"Whichever option banks take, and however difficult the process of change, corporate clients will benefit," the BCG/SWIFT report says. "They will have access to high quality tailor-made services, straight-through processing and payments embedded in their business processes, coupled with lower transaction costs. They will find it easier to do business both domestically and across borders, but at the same time they will be facing an increasingly complex and fragmented ecosystem requiring a tighter management of trust."
Technology advances and regulatory costs are putting pressure on banks' traditional business model for international payments. As banks adjust to the changes and fintechs continue to offer new payment solutions, experts say that businesses may see improved services, more international payment options, and lower transaction costs – but also increased complexity and new risks.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. International payments: accelerating banks’ transformation, Boston Consulting Group and SWIFT; https://www.swift.com/node/138811
5. “Payment services (PSD 2) - Directive (EU) 2015/2366,” European Commission; https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366_en
6. Global Regulatory Outlook: Viewpoint 2017, Duff & Phelps; https://www.duffandphelps.com/assets/pdfs/publications/compliance-and-regulatory-consulting/2017-global-regulatory-outlook-viewpoint.pdf
7. Security trends in the financial services sector, IBM Security; https://www-01.ibm.com/common/ssi/cgi-bin/ssialias?htmlfid=SEL03129USEN
8. International payments: accelerating banks’ transformation, Boston Consulting Group and SWIFT; https://www.swift.com/node/138811
9. “Buying Spree Ahead for Regional Banks,” U.S. News & World Report; https://money.usnews.com/investing/articles/2016-03-22/buying-spree-ahead-for-regional-banks
10. International payments: accelerating banks’ transformation, Boston Consulting Group and SWIFT; https://www.swift.com/node/138811
11. “Buying Spree Ahead for Regional Banks,” U.S. News & World Report; https://money.usnews.com/investing/articles/2016-03-22/buying-spree-ahead-for-regional-banks