There’s a considerable conundrum in the payments industry, and that’s the question: “what is the industry?” There’s a great deal of ambiguity around its definition. It’s easy to collectively characterise anything involving a money transfer as a ‘payment’, but there is a big difference between the two, because a payment has emotion attached to it.
The importance of a payment is usually defined by more than just monetary value – it is invoices between B2B organisations or paying an employee. Paying invoices and employees on time is very much about the individual. This places the recipient or customer - be it a corporate relationship for goods or services, or an employee receiving their salary payment - at the heart of the process
Organisations work on a cash flow basis and often, credit facilities enter into the process to alleviate the payment vacuum on suppliers. It’s all about flow and timings, and speed of payments is of particular importance when it is a highly emotional payment. Even when it comes to relations between the remitter and the customer – there is emotion around that and it needs to be factored in.
When it comes to traditional banking and currency exchange services, it’s often the case of a straight B2B business transaction in the international payments landscape. It can be quite a cold transaction without real consideration of the people who might be affected by late or faulty payments.
This is where in-country knowledge becomes very important – enabling businesses to either pay recipients or enabling a purchaser to buy in local currency so they aren’t exposed to currency exchange fees or fluctuating rates. It helps to make the payment process as seamless as possible by providing as much pricing transparency as possible, without the risk of intermediary bank fees on top.
Having the individual recipient in mind when processing each and every payment is just a matter of course. The industry needs to define itself more concisely when it comes to payments, as this goes beyond fiscal transfers: there’s emotion in all payments and it’s more prevalent in global payments, which need to be managed by specialist payment providers who fully understand the process and hold the customer at the forefront of the interactions. It’s a culture change which needs to happen.
Payments also go far beyond the simple money transfer transaction, because there it is a world which is continually evolving and innovating, especially in the recent years of the fintech boom. Banks are generally perceived to be slower in terms of innovation, mainly due to their legacy systems and governance regimes, upon which we have relied for many years. This is the reason fintech companies have been moving into this space, but it’s the more modern, slightly riskier option versus the slightly more archaic but safe approach when it comes down to payments choices. It’s really all about risk appetite – start-ups don’t have the baggage of legacy systems or heritage banks, but banks have the assurance. It’s a given that the banks will need to innovate, but they won’t ever become as lean and fit as a startup.
Banks have to move from where they are, but it’s a costly and complicated culture-change. Diversification and innovation aren’t traits which banks are characterised by. You’ve just got to look at the past 10 to 15 years and assess how much of the foreign exchange market is dominated by banks – it’s marginal. The range of currencies offered by the majority of banks is limited because banks never really invested in currency capabilities outside of the mainstream currencies.
Currency conversion activity was more as a consequence of existing bank relationships than anything else. There was almost a degree of lethargy in mainstream banks and consumers alike, with the result that the need to develop an extensive overseas capability was never pursued.
There’s also a pricing transparency issue which needs to be addressed by the industry. For online retailers, research reveals that nearly 69% of e-commerce visitors abandon their shopping cart at the point of transaction, and the primary reason is friction. Pricing transparency plays a part here – whether the retailer offers pricing in local currency or whether there are supplementary exchange rate/conversion fees added on to the purchase – these factors deter completion of the purchase.
This is where fintech companies have a competitive advantage, as services which offer multi-currency pricing and guaranteed rates at the point of transaction, enable e-Commerce retailers to manage the rates and not rely on standardised bank charges. The retailer can increase revenue by pricing competitively with protection against currency fluctuations, and this cycle contributes to healthy global trade.
Transparency is one of the ways in which the industry needs to evolve – with improved payment transparency, there will be less friction and more recognition of the importance of international payments. For the purchaser, they pay what they see. It is a cultural shift that traditional banks and foreign exchange providers will need to take heed of, as in an increasingly competitive global marketplace, there will be an ever-rising expectation of upfront and visible pricing and maximum protection during payment transactions.
By Andy Brown, Managing Director, Equiniti International Payments.