By Alan Koenigsberg, Global Head of New Payment Flows, Visa Business Solutions
How innovative solutions are creating partnership opportunities for banks to improve cross-border payments
When it comes to innovations in business-to-business (B2B) payments, the marketplace once again is taking its cue from the consumer space. Modernization of consumer payments has largely been driven by demand for a better customer experience.
In much the same way, banks are responding to businesses who are keenly interested in leveraging emerging technologies to improve transparency, expand optionality, and lower costs associated with cross-border payments. Considering the difficult environment banks and businesses alike are experiencing globally, providing payment solutions that are transparent, simple and low cost is now more important than ever.
As global business continues to expand, so too does the volume of cross-border payments. There are currently $120 trillion in global B2B payments processed annually. In the face of this growth, banks are left to deal with these highly complex transactions that are dependent on correspondent banking relationships, offering limited visibility into the status of payments, costs, and certainty. The traditional payments process leaves receiving banks with little predictability of when payments will arrive or the amount they will receive after currency exchange calculations and various fees are deducted. Know Your Customer (KYC) and Anti-Money laundering (AML) regulations are also adding to the demand for new approaches. Complying with regional AML rules can result in transaction delays, which fosters greater uncertainty in an already uncertain process and a current business landscape fraught with unpredictability.
Fortunately, new solutions are emerging that offer banks and their customers, new ways to tackle rising challenges.
An opportunity for innovation in B2B cross-border payments
With expanding global business growth comes increased opportunities for modernization across the cross-border landscape. Banks are in an excellent position to take advantage of dynamic changes made possible by emerging technologies, such as distributed ledger technology, artificial intelligence and cloud, which are bringing greater innovation to cross-border payments. The rise of leading-edge solutions designed to reshape B2B cross-border payments will enable savvy banks to meet the shifting demands of clients.
The traditional payments process leaves receiving banks with little sureness of when payments will arrive or the amount they will receive after exchange calculations and various fees are deducted.
How partnerships can deliver greater transparency
Executing cross-border payments using the traditional bilateral corresponding process lacks transparency because both the originating bank and the beneficiary bank remain unaware where the funds of a transaction are at any given moment. Since the transaction is routed across multiple correspondent banks, knowing when payments will arrive or what costs will be incurred is essentially impossible to determine.
It is little wonder that banks view transparency into the movement of payments as a key to improving B2B cross-border payments. New digital technology innovations are entering the marketplace to address this pressing need. In a recent survey*, 82% of banks worldwide viewed gaining improved visibility as one of the most appealing features of emerging payment approaches.
Fintechs and other innovative players are bringing their digital expertise to bear, looking to create a more transparent ecosystem. As a result, financial institutions have a unique opportunity to partner with these innovators, combining resources to overcome B2B cross-border payments challenges.
Another benefit of such innovation is the ability to gain access to important data. In the current model, much of the data related to cross-border payments doesn’t ultimately make it through to the beneficiary. Without this data, bank clients struggle to reconcile payments efficiently. Any solution that ensures a full stream of data accompanies payments throughout its lifecycle can begin to deliver on the highly sought-after goal of straight-through reconciliation.
At the end of the day, the importance of listening to customers should not be overlooked. Especially in challenging times, customers need as much data as they can get – to enable them to make smart, strategic decisions which can have a huge impact on their business. If emerging solutions hold the potential to deliver the critical data that businesses need, their implementation should be a no-brainer.
More optionality is good news for banks and their customers
When it comes to B2B cross-border payments, banks and their customers view expanded optionality in the marketplace as a very positive development – today more than ever. Up until now, these types of payments have always been completed through the tried and true SWIFT messaging system. SWIFT has and continues to serve the industry well, but clearly there is room for additional choices.
Innovative new solutions are enabling efficient cross-border payments through a multilateral relationship structure. This type of structure overcomes the restrictions of the traditional bilateral approach that relies strictly on correspondent networks. Emerging networks are tapping into next-generation technologies, such as distributed ledger infrastructures that can facilitate financial transactions on a private, permissioned, and highly-secure network.
Increased optionality built on innovative technology promises to democratize the way cross-border payments are made. Of course, ultimately, it’s all about empowerment and helping businesses, both large and small, do more business – even during tough times. Having optionality, managing risk and accessibility will help do just that.
The evolving future of cross-border B2B payments
As business continues to expand globally, innovative solutions are emerging that reimagine how B2B cross-border payments are made. These evolving solutions are offering important advantages to banks and their customers – providing greater optionality, improved transparency, increased predictability, enhanced compliance, and better access to vital data.
Cost savings remains another important benefit of adopting a multilateral cross-border payment solution, as expenditures associated with managing intermediary bank relationships are eliminated. Look no further than nostro accounts, for example. The average annual cost of maintaining these accounts among global banks can amount to $1.5 billion*; while maintaining just one of these accounts costs a US bank $27,270 each year*. That’s a lot of money.
A centralized, permissioned network, where all participants are known participants, will enable payments to be processed securely and directly, thus minimizing the expense of maintaining nostro accounts.
The future of B2B cross-border payments promises to be simpler, secure, lower cost and more transparent. Geographic barriers will gradually be eliminated in this rapidly evolving global payment ecosystem. Banks can be expected to partner with fintechs and other innovative players to bring new technology to the space, tapping into their expertise as digital natives, with the goal of strengthening customer relationships. Modernization is here for cross-border payments and that’s a good thing for everyone involved.
* Research conducted by East & Partners Europe, June 2019; Visa B2B Connect: Voice of the Customer – Banks Markets Report.