Best Practices in Cross-border Payments to Support Globalisation Strategies

Treasurers understand that globalisation opens the door to vast opportunities for their organisation and want to know how best to leverage this phenomenon to bring their organisation to the next level of productivity and efficiency. How can they take advantage of the avenues made possible for their company through globalisation – the ability to have a footprint of vendors, suppliers, employees, customers and shareholders that span countries worldwide, in the most efficient manner?

Globalisation, the integration of the world economy, is a long-term trend that has evolved over time, carrying profound implications and opportunities. It has been driven by the development and growth of international transport and telecommunication, initiatives to promote free trade carried out by international institutions, such as the World Trade Organisation (WTO) and the International Monetary Fund (IMF), plus advances in technology that has reduced overall costs of trade. Equally important are the decisions of many countries to open up their economies to global trade, such as India, as a hub for software, and China as a hub for manufacturing.

Flows that were previously more concentrated within national boundaries, perhaps due to tariffs, high transportation costs or capital controls, are now easily transferrable across countries. As a result, business units should look outside of their base country for the optimum business partners and suppliers. If an Australian mining company finds that a Swedish company provides the best mineral-cutting equipment, it should not have to worry about whether it can pay the supplier in Swedish krona. A manufacturing company building a sales force in non-presence countries should not have an issue with expatriate payroll. Pensioners who retire overseas want to receive pensions paid in the currency of the country they live in – this should not be a headache for organisations to provide. What is the optimum payments infrastructure to support this?

The payments infrastructure required to participate in cross-border flows can either be gradually built over time, country-by-country, or organisations can take advantage of international payments solutions that have a single window for global reach, are quick and resource-light to implement, and are easily scalable.

Account-based Payments

The traditional approach to facilitate cross-border payment flows has been to: open and maintain bank accounts for each currency that payments must be made in; and work with banks to send payments funded from account balances. This framework demands a number of requirements:

Country-specific payments expertise

A knowledge base of country-specific payments regulation, market practices and requirements are needed, and must be kept up-to-date, since regulations, laws and payment rules can change. For example, in order to make a Korean won payment, a company must provide its bank with the phone number of the beneficiary. Because of Korean currency restrictions, the bank has to call the beneficiary to verify its existence before making the payment.

Operational workflow and currency positions

Local bank account reconciliation and maintenance is required, and may be costly, especially if a number of banking providers are used. Cash balances of the various currency accounts should be monitored regularly, in order to avoid idle cash balances across currencies or lack of funds. Currency positions will need to be considered, and foreign exchange (FX) must also be managed to fund the payment accounts when required.

Addition of new currencies

The time to fully implement a new currency under this method may be lengthy, as factors such as bank account opening processes, training and testing must be completed. Each bank will have its own requirements, and even within the same bank this can vary depending on the currency and domicile of the account.

An account-based payments process can be costly to build and maintain, therefore organisations should revisit the currencies they are supporting under this type of structure, and re-evaluate the need for this structure. For example, an account-based payments structure for non-core currencies for which there are no incoming funds received in that currency may incur excessive direct and indirect costs, and hence will not be the most efficient method. The benefit of working with a global cash management bank under this structure is the breadth of countries they can cover, allowing organisations to work with a smaller number of banks.

Non Account-based Payments

The alternative approach, ideal for non-core currencies, is to fund payments in multiple currencies from a single bank account. The fundamental concept allows organisations to make payments in a currency without holding a bank account in that currency. This solution accepts funding for payments in a single base currency (such as US dollars), executes the FX purchases required, and also sends the converted funds in the desired currencies to the end-beneficiaries. For example, a French company can use euros to fund Hong Kong dollar, Brazilian real and Polish zloty payments to recipients in Hong Kong, Brazil and Poland – straight from their euro account.

This single-account structure enables organisations to process complete end-to-end multicurrency payment processing, including FX conversion, through a single window. Rationalisation of cash accounts could result in vast cost savings as companies benefit from workflow simplification, reduced currency exposure, consolidated funding and FX aggregation.

The simple concept of non account-based payments in fact requires a complex infrastructure and integrated FX process in the background to be successful. Furthermore, as the international payment needs of organisations evolve over time, global payment providers must continuously improve their products to meet these needs, while keeping things as simple as possible for their clients. Advanced non-account payment solutions should offer a wide range of payment methods, such as funds transfers, low-value automated clearing house (ACH) payments and cheques, to cater to the need of the both the sender and recipient of the payments. Multiple customer interface options should be offered, and expanded as organisations adopt new connectivity solutions, such as the ISO 20022 XML format and the SWIFT channel.

This may seem like a relatively new solution, but Citi’s clients have been achieving this for over 25 years through WorldLink Payment Services (see Figure 1). With one WorldLink installation, payments can be made in 135 currencies, using virtually all payment types – wires, ACH, remote and on-site cheques, and even cash – from a single-base currency account. It is brought to users via their interface of preference: host-to-host connectivity, electronic banking or SWIFT. The bank manages the systems and operations on behalf of the clients. For example, on-the-ground experts globally track ever-changing country regulations, payment rules and formatting standards.

Figure 1: WorldLink Payment Services Workflow

Source: Citi

Conclusion

The value that truly global cash management providers bring to the table is an ability to provide the infrastructure that enables companies to support a worldwide footprint and become truly multinational and transnational. Companies can build their own payments infrastructure, leverage a single account global payments solution, or strike a balance of both in a hybrid structure.

Maintaining their own payments infrastructure requires an organisation to open and maintain accounts in each of the currencies they wish to pay out in and to support this with adequate FX capabilities and a knowledge base around country-specific regulatory and payment market practices. Leveraging a global payments solution, such as WorldLink where multi-currency payments can be sent from a single account, provides companies with a single window for global reach, is quick and resource-light to implement, and easily scalable across all currencies. Payment solutions can be further tailored to address industry and client-specific needs.

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