- Ongoing digitalisation and the growing ‘gig’ economy is creating new opportunities for buyers and sellers all over the world via online marketplaces.
- These marketplaces typically rely heavily on online networks, often with no physical presence outside their home country.
- As they evolve, marketplaces are also changing the payments landscape with smaller and more frequent transactions.
- The combination of micropayments and lack of global presence is creating various payment challenges, ranging from foreign exchange fees and transparency to speed of execution.
At one time, building an international brand was a years-long endeavour. In today’s digital economy, however, it’s not unheard of for a company to go from start-up to household name in countries all over the world seemingly overnight.
This digitalisation has further spurred the growth of the ‘gig’ economy – so named due to the growing number of independent contractors and microbusinesses that make their living by taking on many different gigs with a variety of customers. These freelancers, along with other mid-market and large corporates, typically distribute their goods and services via online marketplaces that range from:
- Peer-to-peer (P2P) marketplaces offering perishable resources, such as taxis or spare rooms through transportation and homestay networks.
- Large sellers who aggregate their goods and services with those provided by others.
- Subscription-based services that charge a per item fee, such as for apps, or set monthly fee for streaming content.
Regardless of size or scope, these marketplaces have one thing in common. They manage collections from customers and distribute payments back to the marketplace participants; both of whom can be located anywhere in the world. As more customers travel and make purchases globally, this trend will drive international sales from these marketplaces.
Payment challenges of the marketplace business model
As marketplaces continue to evolve and mature, there has been an ongoing shift in payment requirements.
To begin, payments are becoming increasingly micro. Whether small, one-time app purchases, monthly subscriptions, or larger marketplace purchases – the average ticket size of payments continues to decrease. At the same time, these marketplaces operate primarily through online networks and have little or no physical presence outside their home country. That means they rarely have natural liquidity in global markets.
Yet as they expand their business reach around the world, more and more of their participants and their customers reside in other countries. As a result, payments are treated as cross-border transactions that need foreign exchange services.
This leads to an array of challenges such as foreign exchange fees that can erode the principle payment amount significantly, a general lack of transparency and inefficiencies that unnecessarily slow processes.
How fees impact participants in a gig economy
Many P2P marketplaces rely on a global network of participants and contract those services out to customers all over the world. As an example, assume a marketplace headquartered in London contracts out the services of a graphic designer who is based in Russia to a business located in Switzerland.
As part of the gig economy, the graphic designer is likely a freelancer who wants payment in their currency. In this particular case, making payment in Russian roubles is more than a convenience; it’s essential to ensure timely receipt of funds. Payments made to individuals in countries such as Russia in a foreign currency often require time-consuming paperwork that can take potentially weeks, or months, for local regulators to review and approve.
This outgoing payment then becomes a cross-border transaction, which means the marketplace provider must pay a foreign exchange fee. For example, the fee might be £30 per transaction – regardless of whether the payment is for £8,000 or £50. In the micropayment environment, this equation can easily become mathematically unacceptable as the marketplace provider comes closer to paying more in fees than the amount of the actual payment.
The graphic designer may be faced with lifting fees on the receiving end as well, which can be as much as 2% of the total payment. Unless payments are adjusted to accommodate the fee, the graphic designer does not receive the full amount owed.
Speaking the same currency language
Carrying on with this example, the marketplace customer will also expect their invoices to come through in their local currency. In essence, they want to work with providers who speak in their currency language. This becomes especially important when consuming on-the-spot services such as an online transportation network.
In addition to booking car rides at home, for instance, customers may have a need for the service when travelling internationally. When they do, they want to see the fare in their currency so they know instantly what the charge is and can assess whether it’s a good price. The ability to show the customer’s home currency alongside the foreign currency helps boosting consumer confidence and enhances transparency.
Speed of execution is still important
Transacting in a digital economy means people on both ends of the transaction expect fast, seamless execution. This is particularly true for those in markets such as the UK or Singapore, where money can be transferred in-country instantly. Cross-border payments don’t typically move this quickly, sometimes taking up to a week to clear no matter how small the amount.
How do banks adapt to this fast-paced environment?
For international banks, it’s critical to show customers that they understand how the landscape is evolving and that collectively we are paving the way to outpace that change. This includes using today’s technology to create innovative services and solutions that address fees, transparency for FX and speed of payments; which in addition to being key issues for marketplace providers and participants are coming under increasing scrutiny from regulators as well.
Using its geographical coverage and network to connect to local real-time payment services, an international bank can lower backend costs and make the entire process potentially less expensive. With long-standing expertise in global FX and payments and the ability to investment in technology, it is also in a position to simplify processes by integrating FX at the point of execution, allowing payments to be made from a single operating account (such as pound sterling) to multiple recipients and in multiple currencies.
This adds transparency to transactions, giving marketplace participants an insight into what they will be receiving in their currency upfront while letting marketplace customers also know what they will be paying in their currency. Plus, by leveraging their natural liquidity positions to fund payments immediately – rather than the standard settlement date one or two days post-transaction (T+1 or T+2), they can effectively help increase the speed of transactions. HSBC has developed a suite of solutions that move the conversion process and currency management into its FX wholesale marketplace.
Marketplace providers are well-served to seek out banking partners with expertise in a wide range of global markets. An on-the-ground presence in local markets is critical for understanding the nuances and complexities of doing business in unfamiliar markets as well as for ensuring compliance with ever-evolving regulations.
For instance, in India drivers participating in an online transportation network collect funds directly from customers and then pay the marketplace provider. This is converse to the standard business model, which charges a customer’s credit card and sends payment to the participant. An international banking partner needs to be in a position to foresee and resolve these challenges quickly and seamlessly.
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