How emerging financial utilities could solve the pain points for international payments

By Anders la Cour | 27 November 2017

Pressure continues to weigh heavily on the shoulders of the financial services industry, with increased regulation, the high cost of cross border payments, and the correspondent banking system becoming even less effective as banks retrench from foreign markets. Added to that, financial tech businesses and other new entrants that are also able to provide efficient and tailored solutions are bearing down on the traditional providers, particularly tier two and three banks, adding further pressure, especially in terms of pricing and customer expectations.

Increasing competition to win and keep customers, coupled with new regulation, has already had a huge impact. And the reality is that for the first time in generations the banking industry is on the cusp of big change.

The agility of fintechs – as well as their ability to react to customer needs with more tailored solutions – means that these new incumbents are truly seizing the opportunity. Indeed, 52% of UK millennials now prefer to do basic payment activities using fintechs rather than banks, simply because it is more convenient and the technology is easier to use. But where does that leave the banks?

For some the solution is to invest in financial tech firms. Others are creating dedicated in-house teams to build their own fintech solutions. But whatever route they take, the challenge is to use banking assets and customer data to provide businesses and consumers with more innovative services.

The stumbling blocks

With the growth of the digital landscape and online marketplaces for trade, the world has become more intricately and instantly connected than ever before. For the first time in history, emerging economies are counterparts on more than half of global trade flows. Yet, despite the explosion of global trade enabled by the latest technology, borders still have a huge impact when it comes to making and handling core banking services.

Financial institutions are looking beyond traditional routes to meet the evolving needs of their customers, including international payment requirements. And the emergence of financial utilities could be the answer to overcoming challenges such as high operational costs and slow transfer times.

A recent McKinsey report revealed that the average operational cost for a bank to execute a cross border payment, via legacy correspondent banking agreements, is currently between US$25 and US$35 – more than ten times the cost of the average domestic Automated Clearing House (ACH) payment. In addition, the FX rate varies based on size of the transaction, time of day, current volatility level, future implied volatility, quality of the customer, current market price action, and even competitor quote levels.

Cross border payments account for 20% of total payment volumes, but 40% of global payment transactional value, generating US$300bn in global revenues in 2015. B2B payments drive roughly 80% of cross border payments revenue and are a segment in which banks retain a nearly 90% share. Therefore, if businesses begin to reduce the cross border payments they make, this could have a huge impact.

The solution is to strip out any unnecessary stages and associated costs of the payment process. In fact, according to our latest whitepaper, in order to remain competitive, banks’ back-office costs for international payments need to drop by an incredible 90-95%.

Enter: the ‘Financial Utility’

Our whitepaper identifies that, as an essential service used in everyday life by both consumers and businesses, the banking industry meets the basic criteria of a utility, but has traditionally not held the same structure as other utilities. The report, ‘Reimagining global banking services in the connected digital marketplace’, commissioned by Banking Circle and published by Burnmark, examines the true potential of the emerging ‘financial utilities’ to fulfil that role.

New technology is at the heart of new solutions, like Banking Circle. These financial utilities handle core banking functions, such as payments for financial tech businesses outside their domestic core, leaving them the time and resources to focus on the customer relationship. As an example, tier two and three banks and fintechs can offer their customers the facility to pay suppliers and partners directly from a web interface delivered by them, in their name, without any loss of time or cash. And this goes to the heart of what merchants trading internationally are looking for.

In a separate study earlier this year we found that the hurdles and high costs associated with international trade had stopped 39% of merchants from expanding into new territories. Through financial utilities, financial institutions can help their merchants to expand beyond their local geographies to high growth markets without depending on larger banks for their infrastructure, or having to develop that infrastructure in-house.

Cost drivers such as higher compliance burdens and operational costs can also be alleviated, enabling fintechs and banks to offer global payments at far lower prices, while retaining a healthy profit margin from radical operational efficiency gains.

A new network for payments

Employing third parties to deliver specific solutions on your behalf is not a new idea, but this has so far not extended far into banking, meaning many banks and even fintechs have been missing a huge opportunity. Adopting a third party financial utility not only removes much of the delay in bringing new solutions to market, but it ensures those solutions are far more efficient and customer-centric as the company building it is focused only on that one type of product, rather than managing all elements of banking.

We are leading the emergence of a super-correspondent banking network powered by third-party utilities which offer the infrastructure, liquidity pools and connectivity with payment rails across the globe to facilitate cheaper, faster and secure cross-border payments. The ability to outsource non-core activities to a third party enables financial institutions to address innovation and global expansion challenges, whilst focusing on the customer relationship.


Reimagining global banking services in the connected digital marketplace is available to download now.

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