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February 25, 2014updated 04 Apr 2017 4:08pm

Rewiring the global payments system

Cross border payments is an area where the speed of innovation, usually fast paced in the payments world, seems to slow and falter. Global payments, especially low value payments, still require a long, complex process, but one small company is determined to change all that for good. Ellie Chambers reports

By Ellie Chambers

Cross border payments is an area where the speed of innovation, usually fast paced in the payments world, seems to slow and falter. Global payments, especially low value payments, still require a long, complex process, but one small company is determined to change all that for good. Ellie Chambers reports

The payments environment is a field where innovation moves at a breathtaking pace and where the smallest transaction can be completed through a variety of transactions – at least where the consumer is concerned.

However, the world of global payments seems several years behind, with cross border payments often requiring a whole chain of banks to get a payment from one country to another.

Companies sending low value payments around the world have to use the correspondent banking system, a process involving several stages and with multiple parties involved.

The room for error is higher because of the multiple banks involved and the payment can get held up at any stage, a delay the sender and beneficiary can often ill afford.

It’s a particularly difficult problem for companies that need to send low value payments in high volumes.

However, one company looks set to take the world by storm.

New leadership

When Hank Uberoi first encountered Earthport, it was on its last legs.

A survivor of the dotcom boom and subsequent bust, the company had nearly gone bankrupt several times, but was limping on regardless.

Uberoi came into contact with the company through his investment firm and almost instantly saw the potential.

He recognised the need for an update to a global payments system that has changed little since its instigation and was not built to deal with the huge volume of payments that need to pass through it.

"Global trade is 60-70% of all international payments and now there are millions of companies involved in global trade.

"The average value of payments has gone down while the total size of the pot has gone up massively. So the number of payments has gone up exponentially."

He says: "I went to one of the biggest investors and said: I’ll put up my own capital, you put up some capital, I’ll get involved on a part time basis – let’s see if we can fix it.

"I replaced the whole management team, replaced the entire board at that point, brought in fresh leadership, a fresh board.

"My plan was initially to carry on doing this for a short amount of time and then go back to being an investor, but once I realised the size of the potential I decided this was well worth it,

so now I’ve been doing this full time and investing for over three years."

In those years, Earthport has gone from being a virtual unknown just clinging onto life to sealing a deal with one of the world’s biggest financial institutions – Bank of America.

Uberoi has absolute faith that the company can go even further. He says:

"It was one of the largest investment opportunities I had ever come across so I got involved on a full time basis, my salary is zero, all my compensation is in options, all my options are struck at two times the market price when we did our last round of funding.

"If I’m right about the opportunity it could become a global utility."

What’s the big idea?

The idea at the heart of Earthport’s business is really rather simple; the company takes in all the money its clients want transferred, then identifies where it has excess and in which currency and where it needs to go, effectively swapping clients’ payments around to ensure the beneficiaries all receive the right amount in the right currency.

Uberoi says: "Our clients are typically high volume aggregators, we don’t deal with consumers or even small corporates.

"Let’s say they send us a payment file with 37,000 payments to 24 countries – the first thing we do is validate those payments.

"We can tell in real time which payments are likely to fail because we have a validation database that is very complete for a global payments process.

"Then what we do is take all the payments from all our clients, do the same process and we tell our clients how much they owe us."

Earthport accepts payment in any currency and charges a flat, per transaction fee except in cases where the client asks them to do the foreign exchange.

"In that case we agree with the client the spread we’re going to take, the client sets the spread and we charge that and do a revenue share back with them.

"So now we’ve got all these payments in our system and we’ve got money in different currencies around the world, so we run a netting algorithm to identify where we have excess money, in which currency, in which location, where do we have more – across all our clients.

"Then we make sure we have the right money in the right place and we move that through the normal correspondent route as bulk payments.

"So we may have 90,000 payments to do, but we may only have three movements of money. "And then we create pre-validated and pre-formatted files and deliver it to a partner bank in that country – and we have one or more partner banks in every country – which then gets it to the final account through the local clearing level."

As most of this process takes place within Earthport’s internal infrastructure, there are no landing charges on the money, fewer links in the chain, less chance of failure.

Bank of America deal

Just as Earthport was beginning to take off, Bank of America was coming to recognise a growing need amongst its clients for high volume, low value, cross border payments.

Ather Williams, head of global payments, explains: "From our corporate clients and our public sector clients in particular there’s an increasing demand for making low value payments in markets around the globe.

"We did the analysis of the breadth of endpoints that clients like a public sector government would need, which can be over 100 or even a very diverse corporate can be over 50."

The bank starting looking amongst its clients for someone in global payments with a solution to the problem and quickly realised Earthport might be the answer.

The companies already had a pre-existing relationship, so it made sense for them to work together.

Williams says: "We started looking at clients in the marketplace and Earthport was actually a client of ours – we do their clearing for them in the US. So it became a natural synergy point.

"Hank and I started discussing their long term strategy and a couple of things became clear.

"One is there are distinct economic benefits for us in leveraging their existing endpoint and partnering with them to expand into new markets, because of the scale factor.

"They’ll have our scale plus other FIs’ scale in those markets, it just makes more sense."

Although Earthport had already signed deals with some big names, the partnership with the banking giant has thrust the company into the limelight.

Uberoi says: "The Bank of America deal is a complete game changer. We’ve done some very significant deals – Western Union, American Express, Yandex. This is different.

"What Bank of American has done is to say they are committing a certain amount of revenue, a significant amount of money, in a limited period of time.

"And they’ve said they’re not only going to do payments with us, they’re going to work with us to expand our network globally because they want this to be the de facto standard for the industry.

"It’s completely changed the dynamics of the marketplace. Suddenly everyone is looking at us – it’s made us a trusted utility."

The competition

On the subject of competition, Uberoi is adamant there is no one doing the same as Earthport but to Uberoi’s mind, it’s actually a disadvantage to not have many competitors.

"The lack of competition is actually a hindrance, not a help to us.

"The market is so large, if we had 2-3% of the market we’d be a billion dollar company, so it’s not like competition would be a challenge for us, given everyone needs a solution.

"The fact that there is no-one else doing it actually makes the sales process that much harder.

"If there were three other companies doing it we could say: "We do what they do, except we do it better." And there’s enough demand in the market that probably all of them could be successful."

Williams is more circumspect. He says: "There are a couple of companies out there that are trying to provide similar services – I think where Hank has the advantage is his team.

"I think the team he’s put together really know what they’re doing and have a very good process and they’ve got some incredible volume flowing through the system.

"I think he does have a lead. We’re hoping for big things from him."

Williams does acknowledge that BofA has probably got first mover advantage by getting on board with Earthport now.

"I think the first mover advantage is critical, that said I think the breadth of the market is a competitive advantage that will eventually go away.

"But I think, in the interim, enabling clients, be it corporate or public sector, to have access to this broad network though one point of contact gives us a window of opportunity to have an advantage.

"They initially come to us because of the breadth and then once we kind of lock them into using us we then can bring other solutions to the table.

"Secondly by working with Earthport and being the first large institution in we get to set the priorities."

New horizons

In the future, Earthport is looking to expand its coverage. The company is currently in 60 countries, according to Uberoi.

"We can send money to 60 through the global ACH, but we are members of SWIFT so we can send to the other countries through the normal process. But we’re adding new countries all the time – we have another 15 or 18 countries in the pipeline."

Williams also sees a strong future for Earthport. He says:

"I do think that this has been a long time coming. I think that banks in general have a tendency to want to handle everything themselves and in some ways that is a strength, because it creates a very nice solid closed loop but in other ways it stifles innovation and growth – everyone is doing their own thing."

"The time has come to start thinking about the globalisation of the payment system.

"Having spent most of my career in banking I know that banks are good at managing risk, which means not doing things outside the box, so it will take a while.

"Earthport is an example of a common technology that we all can get around, it doesn’t have to be the shiniest toy on the shelf, but it works, it’s a proven model, it connects to the existing infrastructure and can be a very efficient way to move money around the world."

Meanwhile, Uberoi’s ambition for the company shows no sign of waning.

"We just want to be the best, fastest, cheapest, low-value, high volume provider of payments in the world."


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