How the cross-border payments boom threatens to leave banks behind
The flow of money between countries is changing, and if banks and merchants get caught unaware, a reliable revenue stream will get shut off like a spigot.
"The problem we found is so much of the infrastructure for cross border payments is built for the 1960s, when global trade was one tenth the size that it is today," said Asheesh Birla, vice president of product for Ripple.
According to B-to-B payments technology company Traxpay, citing figures from BCG, the number of cross-border transactions is rapidly expanding, to 20.7 billion in 2022 from 9.9 billion transactions in 2012. The volume of those payments will expand to $54.8 trillion from $2.5 trillion over the same period. And Capgemini Financial Services says that for 2015, the most recent complete year, world merchandise volume increased about 2.8%.
But those numbers don't tell the whole story.
Ripple, which provides technology to support multi-currency payments, is in the middle of a revolution that's seeing cross border transactions get smaller in size but more numerous in amount. Driven by borderless e-commerce, these payments are often small in value and require more immediacy than the multi-day processing time and correspondent banking fees of $30 or more per transaction that is standard for larger purchases.
"The international payments system is built for large auto companies or oil companies that move millions of dollars once per month to their suppliers," Birla said. "Many of these e-commerce payments are just a few dollars. The fees and time don't make sense for those payments."
Ripple's early deals were with startups trying to disrupt banks' hold over international payments. Efforts such as a collaboration with Earthport removed correspondent banking from the process, using the decentralized nature of distributed ledger technology to cut the bans' fee out of the mix while making processing times shorter.
"There is a possibility that banks could lose control over this market," Birla said. "There will be winners and losers. There may be gaps where we can partner with startups, but it's hard for startups to scale to the size of the bank."
Banks are playing catch up, with some adopting new cross-border payments. Many of Ripple's most recent collaborations are with banks; the Spanish bank Santander has invested in Ripple as the bank builds out its distributed ledger and blockchain strategy.
And on Oct. 20, Ripple announced a dozen banks from the R3 distributed ledger consortium are testing Ripple's technology to reduce costs and inefficiencies of interbank cross-border payments. The banks include Barclays, Intensa Sanpaolo, Nordea, Santander and Scotiabank.
Ripple said the test will use a digital asset, such as its XRP Portal, to improve the common bank practice of holding different currencies in local accounts with local banks to achieve liquidity, a costly practice because have to fund the local accounts, trapping capital. The distributed ledger can execute transfers faster, fixing the "local account" problem, according to Ripple
Other startups are also targeting traditional cross-border models, including Align, which is focused on small-business payments in specific corridors such as the U.S. to Mexico; dLocal (created by the founders of AstroPay), which focuses on consumers and merchants; Transferwise, which uses a peer-to-peer model to speed cross-border payments; and Flywire, which specializes in tuition payments and is expanding to other categories. MoneyCorp, a foreign exchange company, and Tempus earlier this year launched a high-end international transfer service. Just this week, Flywire reported a 110% increase in payments volume 2016 over 2015, and should double again by the end of the 2016-2017 academic year.
Recently TerraPay, an international mobile payments network, acquired Pay2Global, a digital international money transfer company. The deal is central to TerraPay's goal to build a global infrastructure for low-value cross-border transactions, connecting mobile wallet providers, financial institutions and money transfer companies.
It's another model that cuts out the middle party, which has traditionally been banks.
"There are no correspondent banking accounts," said Ambar Sur, founder and CEO of TerraPay, who adds the network of local partners and collaboration agreements gives greater visibility and control than a centralized third party, particularly for under-$300 transactions TerraPay is targeting. "It's a lot safer than the traditional models that we have seen," Sur said.
Investors are becoming attracted to cross-border alternative payment methods as well.
Tritium Partners on Oct. 18 made a $22 million investment in PayCommerce, a cross-border network for disbursement and acceptance. PayCommerce's Federated Ledger enables near real-time payments, clearing and settlement, using both distributed and centralized ledgers to enable faster payments.
Beyond banks, merchants are also under pressure. Joe Leija, general manager of North America for Ingenico ePayments, said there should be an increase in the number of market participants and merchant adoption of alternative payment methods and other cross-border functionalities. Accepting global payments is no longer just for enterprise level retailers, Leija said, adding business of all kinds can transact with consumers regardless of location.
There is a gap, however. Leija referenced PayPal data showing that there will be 130 million cross-border shoppers in the U.S. spending $300 billion by 2018, yet fewer than 25% of U.S. merchants have full cross-border capabilities.
There is help to improve that, according to Leija, noting the emerging of application programming interfaces and other open technology tools that can quickly equip a merchant for international e-commerce payments.
Banks typically have better reach than the startups do, and can execute cross-border payments at less cost, said Andy Schmidt, an executive advisor at CEB. "There is both a threat and an opportunity for these traditional players."
Birla said banks are not a competitor for cross-border payments, and Ripple is focused on improving processing for the entire market where it can find pain points.
"Banks are good at what they do," Birla said. "There's some technology that we may replace or even update, even though we are looking to collaborate."