With projections that cross-border payment flows will reach $156 trillion in 2022, the market is being disrupted by entrants promising to solve historical pain points like long settlement periods, high transaction costs, and limited accessibility. And business-to-business (B2B) transactions are expected to comprise $150 trillion of this anticipated growth.
Through traditional banking routes, cross-border payments usually journey through a network of banks, racking up fees and taking time along the way. This procedure often lacks transparency for the company making the payment, so it often doesn’t know where the payment is or how much each step costs. Further, the process often requires complicated know-your-customer (KYC) procedures and significant documentation.
Let’s take a look at the current B2B cross-border payments landscape and how financial technology companies (fintechs) are taking a larger share of the pie.
Improving the cros-border payments process through digital innovation
The World Bank estimates the cost of transmitting $200 globally averaged 6.5% during the fourth quarter of 2020. And while banks have historically dominated the cross-border payments market, that’s changing since delays and fees are often associated with legacy cross-border money transfer methods.
In recent years, fintech organizations have embedded themselves deeper into the growing cross-border payments market with digital innovations that make these payments cheaper, faster, more transparent and more secure.
Fintechs often have a level of agility and technology capabilities that allow them to move faster than many financial institutions, providing a more modern and robust user interface and platform.
This includes using APIs, which integrate seamlessly into existing treasury infrastructure and interfaces, providing real-time visibility into foreign exchange (FX) rates and allowing fintechs to better mitigate risks. APIs also allow them to lock in FX rates on their customers’ behalf.
Helping mitigate risk
By locking in rates, fintechs like Corpay help companies better manage risk because they avoid betting on which way currencies are going to move – up or down – which helps them better predict revenue or costs. These automated trade execution mechanisms are especially useful for organizations conducting business in more than one country since currency rates fluctuate depending on factors such as inflation, the labor market, political climate and events like the global pandemic, thus simplifying what can be a complicated netting process
Further, fintechs can help organizations by giving them an options contract, which provides buyers the right to buy or sell an asset at a determined price during the life of the contract. Similarly, by hedging current investments, fintechs lock in customers’ revenue or cost of the FX exposure and can even provide some flexibility in the event that the market moves favorably.
Say, for example, a U.S. company has revenue of $100 and $50 in cost, but the cost is sourced in Germany. If the euro appreciates and the cost increases from $50 to $70, profit plummets, which is why companies often rely upon fintechs for revenue management and cost management related to FX conversions.
Decreasing cross-border payments fraud through vendor data management
Many businesses rely on fintechs to get their cross-border payments to the final destination safely on time, while also managing all of their vendors’ bank account data – enabling the company to focus on other tasks.
Managing vendor data, including changes in bank account information, is crucial since this is an area where payments fraud occurs. When a vendor changes its bank account routing information, for example, a fintech providing B2B payments verifies the account information through by leveraging bank validation capabilities that ensure payments are being routed correctly and in a manner that minimizes correspondent fees.
According to the 2020 AFP Payments Fraud and Control Survey, 81% of companies responding were targets of attempted or actual payments fraud attacks in 2019. The report suggests scammers are becoming increasingly innovative as they continue to find success circumventing controls and infiltrating companies’ payment systems.
Increasing speed and visibility
By using SWIFT global payments initiative (GPI), fintechs (and banks and other payments processors) enhance speed and transparency of cross-border transactions. This enables payments to be settled within a day – and sometimes quicker – while providing transparency as to where a payment is in the process, along with the associated fees that might be deducted along the delivery channel, at all times.
SWIFT GPI enables organizations to track their cross-border payments like they would track a package using UPS. Its increased transparency helps companies route cross-border payments better and often faster.
Continuing to disrupt the cross-border payments landscape
Fintech payment solution providers will continue to disrupt the cross-border payments industry by generally making payments cheaper, faster, more transparent and more secure than traditional financial institutions. Employing a robust user interface and transparent platform, they excel at mitigating FX-related customer risk and reducing fraud by managing vendors’ bank account data – where fraud often occurs.
As we head into 2022, it will be interesting to see how this disruption will unfold and whether fintechs will continue taking a larger share of the cross-border payments market. I’m banking on, yes, they will.