Why currency conversion is fading to the background
Whether it’s an online sale or a corporate supply chain, the need to silently transfer and convert currencies is inspiring a mix of rapid product development and investment.
On the corporate payments side, Foreign Currency Direct acquired Earthport’s foreign exchange unit from Visa. Foreign Currency Direct will add Earthport’s FX business to the buyer's corporate division, Infinity International. Pollen Street Capital owns Foreign Currency Direct, part of a growing portfolio of FX businesses including Infinity International and Pure FX.
Foreign Currency Direct focuses more on business payments than cross-border P2P for online marketplaces, but the needs are the same. As transactions and supply chains become digitized, there’s pressure to remove steps from currency conversion, or make the experience as close to each party’s native currency as possible.
“There’s very little differentiation between brands in this market,” said Tracy Bownes, a director at the U.K.-based Foreign Currency Direct.
At the same time BigCommerce, whose e-commerce rails have attracted hundreds of millions of dollars in investment from Goldman Sachs and other firms, has followed an open banking pact with Barclays with a “native currency” portal designed to make international transactions appear local for both sides in terms of currency.
Banks have traditionally managed transactions involving different currencies. What’s changing is the impact of a handful of large firms, including Ripple, Ant and WeChat. In their own ways, these companies have created an expectation that money can flow internationally with less intermediaries.
Ripple relies on blockchain to remove correspondent banks, which perform currency conversions but extract a fee and time from the payment. Ripple has added partnerships with banks, turning B2B cross-border payments into a competition to bundle services and offer faster processing that’s part of a wider relationship.
“FX shouldn’t be transactional, it should strategically be part of what the treasury management function delivers to its business,” Bownes said, adding Foreign Currency Direct is working to migrate this business away from the banks that have dominated cross-border supply chain payments for years.
Ant and Tencent have used partnerships with local merchants to build a network that allows Chinese travelers to pay in their own currency when traveling outside China. While BigCommerce is not directly competing with Ant or Tencent, the concept is similar. BigCommerce wants to support a network that allows consumers and merchants to operate almost agnostic to currency.
To create a network for native currency cross-border transactions, BigCommerce is using its pre-built integrations with Adyen, Elavon, Klarna, PayPal Express Checkout and Stripe. BigCommerce also plans to add Barclaycard, Bluesnap and PayPal support shortly.
“When the e-commerce is cross border, most consumers want to pay in their own currency, they don’t want to pay in a local currency,” said Brent Bellm, CEO of the Austin-based BigCommerce.
There is a large addressable market. A PayPal survey found 76% of online shoppers prefer to have the option to pay for purchases in either their local or preferred currency. And Forrester reports cross-border shopping will make up 20% of ecommerce in 2022, with sales of $627 billion.
There is also traction for supply chain cross-border payments. Exports by small businesses on the PayPal platform grew by more than 17 times in Kenya, 9 times in Vietnam, 6.2 times in Colombia, 5.9 times in South Africa, 3.4 times in India, and 2.2 times in Argentina over the past year, reports PayPal, which manages the currency conversions. And the total number of trade corridors connecting these six markets to the rest of the world has increased from 608 in 2013 to 841 in 2017, averaging an annual growth rate of 9.5%.
PayPal noted 84% of EU PayPal merchants exported in 2017, compared to 25% of all EU-based SMEs. PayPal’s Global Seller’s Program partners with Webinterpret to localize a merchant’s site so that the price is translated into local currency using current exchange rates.
Currency management is already a big industry that often gets overlooked, said Gareth Lodge, a senior analyst at Celent. “Money never physically crosses borders, so it is quite a specialized field managing the fluctuations in FX and having the liquidity to do so.”
As such, it has been traditionally the domain of the big players, and with large margins, Lodge said.
“Players such as Currency Cloud have shown that the market can be disrupted, and I expect the market to get increasingly competitive as global commerce and global players increase,” he said.