This Will Be The Year Of New Cross-currency Consumer Payment Solutions
Cross-border payments continue to grow, especially transactions between $500 and $500,000, for many reasons. New trading routes and alliances are helping global trade to rebound. Cross-border business to consumer payments is on the rise, as well as borderless ecommerce.
This is due to worker mobility, and the fact more companies outsource and use foreign contractors. New global business models, such as those of Booking.com and Airbnb, also contribute to the increasing volume of these payments.
The rapid rise in e-commerce that is borderless is one example of this growth. PayPal predicts that online shoppers will spend over $300 billion annually by 2018 across borders. This is an increase of $105 billion from 2013.
The FX volatility associated with these payments has increased due to political and economic uncertainties, central bank intervention, uncertainty in Europe, and long-term strengthening USD. Many major currencies considered “safe havens” have lost significant value, with many losing more than 30% over the past two years. This is evident in the EUR and CAD comparisons with the USD, which fluctuates much wider.
Payments risk is a growing concern.
Despite the increasing volume of cross-border payments for small and medium-sized businesses, few companies actively manage FX volatility. For several reasons, it has not been a key focus for corporations. One reason is that transactions relevant to the transaction – which often include payments to global supply chain partners – are usually handled by Accounts Payable or Procurement teams.
These teams aren’t focused on risk management. These transactions are treated as an afterthought rather than a priority. It doesn’t help, either, that managing small amounts of payments can be perceived as inefficient.This is both because it increases costs and causes changes in the workflow.
This lack of attention to FX volatility risk has become a growing problem, especially as treasurers and CFOs are being required to explain to shareholders how much volatility affects earnings.
Payments innovation requires a response.
Corporate financial managers face challenges and decisions due to the increasing volume of cross-currency payments and the need to manage the risk. There is a lot of innovation in technology and payment methods.
These include digital wallets from all over the globe, push-to-card options like Visa Direct or MasterCard MoneySend, and blockchain technology and virtual currency. We also see the rise of non-bank payment providers with innovative e-payment options but still, use traditional bank and card payments.
What impact will new technology and providers have on managing risk related to the increasing volume of cross-border payments every day? How will banks help corporates to take advantage of “disruptive payments technology”? How will banks support their corporate clients with future innovation?
Bank solutions are in the works.
These changes in cross-currency payments prompt banks to develop tools to help corporate clients better manage their payments risk. This includes FX volatility risk. There are many stages of development for solutions:
Integration of currency trades and payment workflows
Many banks now offer separate online tools to book an FX trade or initiate a cross-border transaction. Banks have integrated these tools to make it easier for clients to hedge without sacrificing efficiency when making large cross-border payments.
A US company with 100 employees in London can know in advance how much GBP it will pay them each month. The new integrated tools will allow the US company to log online every month to enter into a forward agreement that will lock in the USD to purchase these pounds. This will help reduce FX risk and make sure that the payment delivery is done using the most efficient method, such as an ACH cross-currency payment.
Lock-in/guarantees FX Rates for Longer Tenors.
Banks want clients to be able to lock in spot FX rates over a longer term without using a derivative product such as a forward, swap, or option that they would have to record in annual statements.
Clients will be able to expand more easily and reduce their exposure to FX volatility risk by utilizing this system to manage high volumes of low-value payments. This will reduce the concern associated with large amounts and high values of cross-border payment, which can make or break a product launch or global expansion effort.
Allows bank payments to be made via consumer-directed channels. No bank account is required.
The idea is to change the paradigm from corporates asking their bank to make a payment by wire, ACH or cheque, to asking the bank to make a payment to a certain party by using whatever payment channel the consumer wants or is best suited for their needs, regardless of where they are located. These delivery channels include push-to-card technology and delivery via a digital wallet. This new frontier could open up other frontiers and make it easier for consumers to have a better experience in the long term.