The way businesses handle international payments is changing. They are increasingly looking to external providers to offer more sophisticated solutions to their foreign exchange challenges. Alison Ebbage looks at the development of payments hubs.
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The international payments industry has long been in the shadows of more glamorous banking operations. But in fact the reliability of this area has served it well; it was one of the only areas in the banking system to stand well in the crash and is now set to reap some limelight of its own as corporates demand more value-added services around the core transactions process.
In addition, the industry looks set to benefit hugely from increasing volumes of global trade and technological advances meaning that payments methods will mutate.
"International payments are now growing very quickly and adding new innovations to the periphery all the time, says Nick Ford, global consulting practice leader for payments at Logica. "Global transaction services are now seen as front office, not a function or a process, and it can be a very profitable area."
Indeed, the Boston Consulting Groups Global Payments survey 2011 has forecast that the global payments market will be worth $782 trillion in non-cash transaction value and $492 billion in transaction revenues by 2020.
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By GlobalDataThe BCG report cited a backdrop of growing competition and price pressure, increasing regulation, macroeconomic volatility, changing demographic patterns and shifting customer demands.
It said that only those institutions that are able to adapt, transform, and optimally link their business and operating models would prosper and be able to profit and increase market share.
In practice this means being bombproof at the core offering and being able to adapt to client demand to provide a host of additional services that add up to an attractive holistic cross-border payments proposition.
But what is the core offering? Essentially, businesses want funds to clear in a timely and efficient manner. They also want to be able to track payments as well as be able to get some sense of transparency on fees and the foreign exchange (FX) rate.
Majid Moujane, head of payments solutions at Callataÿ & Wouters, says: "Customers want to be able to transact with certainty as regards time and cost. Being able to see the reconciliation and the management of the various payments steps is seen as ideal. Having seamless STP (straight through processing) also lessens costs."
Key considerations
As well as process efficiency, cost is also key. This is partly a function of the fees involved and partly down to timing an FX transaction and having the right tools to be able to hedge effectively against currency movements. In addition to actual market timing there are a plethora of instruments available that allow for effective hedging against currency movements.
Buying forwards or options is the most popular and is routine once the business-need to transact in a certain currency has reached a critical mass. In addition, the ability to operate multiple currency accounts and hold funds on account also allows for better control of currency exposure and more competitive exchange rates.
"Many people miss a point entirely when they overlook the currency aspect," says Marc Morley-Freer, head of payments solutions at specialist broker Moneycorp.
"Its management is as important as the payment itself. You need to try and read market movements rather than making an automated FX transaction when a bill needs paying. Top companies spend in the region of £10 million ($16.1 million) a year on FX transactions and getting it wrong can break a companys balance sheet."
But in an era when companies are closely examining every area of operational cost and greater volumes of international payments are seen, it makes sense for the scope of transaction service providers to expand.
This leaves the company free to focus on its core business. Attractive add-ons can include mandate management and liquidity and cash management as well as more granular reporting.
According to Ford, services such as stress testing and better data analysis are also becoming popular.
"Corporates want more of a holistic service and banks can see that by providing centralised payments along with cash management and other peripheral services the proposition is inherently more attractive. This is a significant change in the agenda," says Ford.
Increased efficiency
Another factor behind the desire to closely scrutinise transaction cost is when companies have employees or other people to pay in different countries.
Having a provider that can create and maintain beneficiary payment templates automates the payments process and also reduces inputting errors.
Some providers also generate proof of payment emails and have a live payment tracking functionality. Obviously these functionalities also apply to the broader payments market but are especially relevant in a goodwill and trust context when it comes to paying individuals.
Electronic invoicing is another frequently cited desirable and would serve to more easily match payments once in the banking system.
Morley-Freer says: "Electronic invoicing is a great improvement to the whole payments process as it allows for easier referencing throughout and easier reconciliation at the tail end of the order process."
Perhaps the most important development is the combination of technological advances and an increase in the volume of trade with emerging economies.
The two look to be dovetailing and may well develop into new trading mechanisms that partially bypass traditional banking routes all together.
For example, in emerging economies counterparty risk is a significant consideration and money often needs to change hands sooner rather than later in the absence of a letter of credit.
"Counterparty risk is a big factor and can get in the way of developing successful business relationships," says Moujane. "For simple international transfers SWIFT is usually used with correspondent banks in each country routing payments into
customers accounts via clearing and settlements houses."
Power to the people
This standard process may be about to change though as social networking applications and methods take on a business perspective. For example, the Philippines main export is its people, and consequently its people are enthusiastic users of Facebook, which in turn formed a payments subsidiary in December 2010.
In addition, M-PESA, an electronic peer payment and stored value system that relies on a mobile phones SIM card and PIN for authentication, has enjoyed runaway success in Kenya. Its initial use was around sending money home or low value peer-to-peer transactions, but users have found other uses for it including micro-enterprise prepaid sales, safe travels of cash-in and cash-out.
Neil Burton, director of product service strategy at Earthpoint, thinks M-PESA accounts for up to 15 percent of GDP in Kenya which throws up obvious implications for its expansion to other countries and to business networks.
"In BRIC countries in particular, there are many smaller companies who are much more open to using new payments methods wanting to do business with companies in developed countries. If a corporate in a developed country cannot deal with this then they lose a lot of potential business," says Burton.
And Logicas Ford says that although there is a lot of investment required to make the Facebook proposition viable, significant interest from venture capitalists sends a clear signal as regards to its eventual viability.
Even if new technology is not yet up and running, there is much to suggest that the traditional banks are not meeting the needs of smaller businesses.
The Earthpoint Glenbrook Global Payments survey in March 2011 found that existing cross-border payment solutions for large corporations work relatively well, and low end international payments (typically under $500) were well served by services such as PayPal and card networks. However, the survey found a distinct level of unmet needs for a mid-market payment solution (in the sub-$10,000 level).
Burton says: "SMEs have lower transaction values and thus feel the fee as a percentage much more; they are also less able to get the critical mass to make using things like letters of credit or structured credit finance worthwhile. The various pieces of the service that banks make available to bigger players are not really viable on a smaller player basis."
He thinks the payments services directive in 2009 did much to make payments providers and specialist brokers a more viable alternative to the banks. Morley-Freer meanwhile points out that although the banks mark
et share is about 88 percent, the proportion of new market share being taken up by specialist providers is growing fast.
"Financial directors know that FX is not an easy thing and, like other non-core business, it is best outsourced. They want to deal with a specialist and get a bespoke service," he says.
As well as getting a more personal service, a key advantage of a specialist service provider is that they give a smaller business access to critical mass.
Burton explains: "We use funds that are already sitting in a destination country to make a payment rather than making an FX transfer automatically. Its basically about living off the efficiency of the domestic schemes, which are generally very good, and not moving money around for the sake of it.
"By keeping the liquidity at the national level we make good cost savings because were not actually moving funds unless we need to."
Moneycorp meanwhile deals with the counterparty, thus controlling both receipt and collection.
"Its a much better way of managing costs, we can reduce the actual transaction cost by up to two thirds," says Morley Free
r. "It makes a company more attractive as a trading partner as well as the inherent benefit of cost savings."
Clearly for smaller companies outsourcing makes sense and for larger ones too there are many benefits from having a more holistic international transfer service as part of a broader banking relationship.
Combined with the development of social networking this may well lead to payments hubs emerging in the not too di
stant future provided by banks or other suppliers for companies of all sizes.
This would give better cash management transparency and better linkage, either on a company-wide basis for larger corporates or between communities of similar trading partners for smaller companies.
"The payments hub concept is a central utility which all payments go through," says Ford. "It is workable on a firm-wide, bank or other service provider basis. The idea is to bring together cash management and gain from greater visibility and thus better efficiency."
Morely Freer agrees: "The next five years will see the developments of payments communities with much better linkage as companies, both large and small, will be at pains to managing international payments more effectively."
