Cross-border transactions for a future of global e-commerce

Foreign exchange and cross-border payments do not meet the needs of businesses and payments providers in today’s rapidly changing and highly competitive global market. Banking Circle’s Nick Tubb explores the current offering and limitations, and what steps can be taken to improve processes, reduce costs and optimise FX and cross-border transactions

by | September 21, 2022 | Banking Circle

Sponsored by

With the growth of global e-commerce and a revolution in the digital economy, cross-border payments provision has vastly improved over the past two decades. However, it has not been able to keep pace with industry expectations, and vast opportunities exist for banks and payments businesses to improve the service they offer their customers.

Faster, simpler, lower-cost cross-border payments will open competition further still and give businesses the international opportunities they need to compete and thrive in the new landscape.

When it comes to improving international transactions services, knowledge is the most powerful tool available. The latest Banking Circle white paper, Optimising FX and Cross-border Payments, offers insights on what businesses, banks and payments providers need to know in order to successfully improve their cross-border offerings. The best thing a business can do is gain a full understanding of the entire process and all parties involved.

Cross-border challenges persist

 The thing most global e-commerce businesses have in common is that they are expanding into new geographies and seeking to offer an optimal customer experience. They want to provide their customers with a familiar checkout process, in the right language and the right payment methods to suit local preferences.

They also want to offer payments in the customer’s local currency, but this brings with it foreign exchange (FX) volatility risk and operational inefficiency, deterring many businesses, especially those with smaller cross-border sales volumes. This limits their potential.

In 2020, Banking Circle spoke to 1,500 merchants based in the UK, Germany, France, the Netherlands, and the Nordic nations, to uncover the payments challenges faced by these businesses. The study revealed 25% of the mid-sized companies surveyed across Europe experienced poor value in the FX rates offered by their banking partner.

A further, 42% said their bank’s fees for cross-border transactions were too expensive, and more than one in three complained that sending money between countries took too long. Almost half (49.7%) had begun to use fintechs and other non-bank financial institutions to fulfil their international currency and payments needs.

While increased competition from new players, such as money transfer companies and more powerful technology, have certainly improved the situation, there is still a long way to go. FX is undoubtedly cheaper, and settlement faster than they were 20 years ago, but we are receiving more and more requests for Banking Circle to help PSPs scale globally by providing solutions to the challenges of operations and FX volatility.

The obstacles are not going away by themselves. We need to come together as a global industry to tackle the pain points, remove barriers and empower global trade.

A lack of transparency in costs and charges remains a significant stumbling block, especially when using credit cards or offline payment methods across borders. In these instances, rates can change significantly before settlement is complete; someone is losing out, whether it is the sender or the recipient of the payment.

Another common issue when payments are handled via the traditional correspondent banking network, is the payment can incur unnecessary and unexpected costs and delays. Depending on the location and currency of each bank handling the payment, the transfer may incur multiple FX charges as well as cause adverse financial impact due to poor FX rates and delays associated with the various regulatory obligations within the journey.

Cutting complexity and cost

To get past these roadblocks, the most important thing payments providers can do to simplify the process and reduce costs to deliver the best value for their customers, is to fully understand the FX process within the value chain.

Knowing who is involved in the transaction, where they and their bank accounts are based, and all regulatory requirements that will apply, will help payment specialists select the best process for the transaction. This will also give a clear idea of the transaction settlement times and risks for them to know what to expect and enable them to plan accordingly.

In a commoditised payments world, businesses should be looking for payments partners that add value through transparency around costs and fees, and they should get a clear commercial agreement in place with their financial counterparty regarding currency conversion.

As part of Banking Circle’s strategy of building an interoperable financial services ecosystem, we are partnering with companies providing access to tech-driven services that can be offered to merchants and businesses which allow them to sell in any currency without the worry of FX volatility, and enjoy expedited settlement giving them access to their cash as quickly as possible.

Financial institutions should keep in mind that reducing or even eliminating FX exposure risk will be a real value-add for merchants looking to sell cross-border.

The cross-border future

As the market continues to develop and competition increases still further, it will push better pricing and better offerings from banks and non-bank financial institutions. Businesses processing higher values and higher volumes of cross-border payments currency conversion should see more value-based offerings, as technology enables more customised solutions tailored to individual operational requirements and credit risk.

New technology, as well as new payment methods such as Open Banking, are increasingly enabling faster FX transactional processing – through account-to-account payments, instant payments, and Request to Pay among other new solutions.

With the list of payments solutions growing, legislation is being updated and extended to keep up. The consultation on PSD2 is just one example of regulation being reviewed to cover a wider range of payment activities, including crypto, Buy Now Pay Later and digital wallets.

While legislation that keeps up with industry change is vital, it will not reduce exposure to unnecessarily high FX fees and charges. Therefore, businesses and their payments partners must invest the necessary time to fully understand the FX and cross-border payments process and select the right partners to ensure they are not paying too much for cross-border transactions or putting themselves at risk of FX volatility or payment delays.

Learn more by downloading Banking Circle’s latest white paper here.

Resources

Evolving APIs | NXTsoft Connectors For 40+ Banking Core Systems

Best Practice | Banking Evolving APIs | NXTsoft Connectors For 40+ Banking Core Systems

NXTsoft
New GFT Engineering blog on Medium

Other | Artificial intelligence New GFT Engineering blog on Medium

GFT
Murex, Client Work to Comply with Regulator Fair Value Determination Request

Other | Risk management Murex, Client Work to Comply with Regulator Fair Value Determination Request

Murex
FrankieOne solves global fintech challenge with unified regtech solution

Case Study | Financial Services FrankieOne solves global fintech challenge with unified regtech solution

Austrade