Developments in Processing International Payments

As international business flows continue to grow across the world, organisations are increasingly looking to trade beyond their national boundaries. But while the commercial opportunities are clearly compelling, the expense and inefficiency of making international payments remains a major burden for the vast majority.

In this context, banks are trying to develop better solutions that will change the way cross-border payments are handled and processed. Banks are feeling the pressures of the difficult economic environment and are therefore looking at ways to increase revenue and maintain their margin, which focused their attention on developing more innovative products in order to reduce their operating costs.

Client Expectation

In today’s challenging and competitive environment, banks find it difficult to retain corporate customers if they don’t understand their business needs. Corporates are looking to their banks to offer customised and innovative products that can meet their day-to-day requirements.

As globalisation advances, customers are looking for banking partners that can provide them with a one-stop solution for all their international cash management and liquidity requirements. The focus is on providing efficient ways to handle transactions, which can then lead to a reduction in domestic and cross-border payment costs and improvements in payments processing time.

Cross-border payments are an area where corporates tend to have high costs – and where they are looking to save money, particularly for those whose monthly payments volume includes hundreds of thousands of cross-border transactions.

Regulatory Initiatives

Regulators in various regions are developing initiatives for ways of handling cross-border payments in order to increase efficiency and reduce processing costs. Two initiatives that are gaining traction are:

  • The single euro payments area (SEPA): an initiative developed by the European financial industry in which all electronic payments are considered the same as domestic payments, i.e. there is no difference between national and intra-European cross-border payments.
  • International Payment Framework Association (IPFA): this initiative is comprised of 21 leading banks, clearing houses and payment service providers based in US, Europe, Canada, Brazil and South Africa. The main thrust behind IPFA is to create an integrated, standardised payments market capable of handling larger volumes of transactions at lower cost. The idea is to create seamless reach around the world, starting with Europe and the US. In the US, the National Automated Clearing House Association (NACHA) is also breaking down the walls between national payment systems by adopting, for example, the ISO 20022 standard used by SEPA for financial messaging.

The point of both initiatives is to create an integrated, standardised payments market capable of handling larger volumes of cross-border transactions at a lower cost. As transactions through various regulatory initiatives increase, processing payments outside these regions will become increasingly expensive by comparison. This will trigger payment providers to start connecting with partners abroad and overseas in order to leverage their operations on a global scale.

Bank Initiatives

Banks are also developing innovative ideas to bring down cross-border transaction costs by handling and processing them as domestic payments. For example, corporates can initiate cross-border payments either from their enterprise resource planning (ERP) system or a bank payment initiation platform. At this point it becomes the bank’s responsibility to process the payment as a domestic item, taking on responsibility for the conversion into the beneficiary account’s currency and route the payment via its connections with overseas or partner bank branches to the beneficiary’s bank account.

Figure 1: Cross-border Payments: High-level Process Flow

Source: Cognizant

In addition, banks are working on providing efficient and automated solutions for handling reversals and rejections. As it stands, in most banks the client handles these processes manually, with no proper tracking mechanism. It also causes a delay in returning the client’s money back to their account, incurring an opportunity loss cost.

From the banks’ perspective, an automated solution has both pros and cons. The initiative will lead banks to attract more customers who either have a large international footprint or are planning to expand their business globally. One drawback is that this might lead to short-term losses on cross-border fees. But in long run, the benefits derived from acquiring new clients, together with foreign exchange (FX) fees, will far surpass the short-term losses.

The bank should target this offering at those corporate clients who initiate bulk cross-border payments in order to achieve a cost benefit. On the positive side, this will help large corporates and financial institution achieve operational cost efficiency and transparency in tracking cross-border payments.

Road Ahead

In the current era, where corporates are increasingly going global and are therefore looking for ways to increase their operating margin, customers are looking to their banking partners for effective and efficient solutions to handle their cash management in order to reduce cost and improve transparency in tracking payments through their various lifecycle processes. The initiatives highlighted in this article may turn out to be future milestones towards achieving these goals.

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