International payments have lots of tech, but rules are stuck in the past
In today’s digital economy, most people think that sending money across borders is a seamless process.
While it’s true that most front-end user experiences now offer a more frictionless environment for both consumers and businesses, the behind-the-scenes processes that allow for money to move from payor to payee still rely on an incredibly archaic system.
The reality is, we are still far from simple when it concerns global money transmission. Due to regulations that are designed to thwart money laundering, anyone attempting to transact on a global scale will encounter a patchwork of complex laws and local requirements that make payments anything but borderless. Payment service providers focusing on moving money globally must act as the interpreter of these requirements, where any mistake may prove to be costly.
This issue has forced many in the payments space to think creatively over the past few years in an effort to provide new solutions, which can be seen in the rise of cryptocurrencies such as Bitcoin, or contemplated partnerships between existing financial institutions. Most recently, it was a determining factor in the Alibaba owned Ant Financial’s $1.2 billion bid for MoneyGram, which U.S. regulators ultimately rejected.
Even with this setback, we are confident that those leading the payments space will continue to look for new partnerships in order to offer entrepreneurial and cutting-edge solutions.
In the meantime, however, there is no silver bullet for making global transactions simpler. For a company looking to provide financial services around the world, it’s important to start with an understanding of the three biggest challenges facing any company entering into this arena.
Simply put, it takes money to move money. In fact, the more places the money needs to move or currencies converted, the costlier the transmission.
While each country has its own unique set of requirements, some jurisdictions have similar playbooks when it comes to regulations governing international money movement. As an example, for a U.S. company doing business in Canada, the rules of operation result in a fairly straightforward process versus when that same U.S. company wishes to transact in Saudi Arabia.
It may be helpful to think of international funds movement like taking a flight; to fly domestically all you need is a plane ticket and a photo ID because no matter how many places in the U.S. you are flying to, you stay within the same country.
To fly internationally, however, you need a plane ticket, a passport, perhaps a visa or inoculations and sometimes even a letter outlining the purpose of the visit depending on the destination. Money movement is similar, with each additional step equating to additional time (e.g. waiting for the settlement of funds) and money (e.g. transactional fees or conversion fees). For example, in a simple multi-jurisdictional transaction where a company moves third party funds across one set of borders, it can take up to seven days for a business to receive its funds in the new destination net of any conversion or wire fees.
Because there isn’t a globalized system, or uniform approach, for sending, receiving, converting and storing currencies across borders, businesses entering the money movement arena need to develop a strong network of financial partners to help solve these issues for their clients.
As demonstrated within the payments world by the boom of fintech companies over the past 10 years, technology allows for change to occur in many consumer and commercial ecosystems at a rapid pace.
However, while technology is typically adopted by end-users quickly, laws regulating the actual activities enabled by such technology are more reactive.
In addition, the influx of global payments products in the market has continually increased government scrutiny on the practices of businesses moving money. There are essentially two components to global remittances that need to be understood on a country-by-country basis for any business looking to provide financial services in another country.
First, what licensing requirements are needed to operate within a certain jurisdiction, and second, what regulations (i.e. Anti-money laundering legislation, KYC requirements, etc.) govern the commercial processes once the product is in place.
The path to understanding these two crucial pieces governing international payments are anything but clear. Companies in the U.S. engaging only in money services domestically may find that the American standards for money laundering regulations, as stringent as they are, may not be as aggressive as they are in other countries.
Complicating matters further is the fact that the path to obtaining the proper licenses or authorizations in each country to provide money services is not formalized across the globe, requiring expensive local counsel and potentially other experts to act as an interpreter for the laws and regulations in each new jurisdiction.
In money services businesses, we tend to think globally and act locally. In addition to the various regulatory and licensing issues explained above, anyone providing money services abroad should be prepared to encounter a host of other differences relating to each country’s interpretation of such money service. A product rolled out on a global scale can receive acceptance in one jurisdiction relatively easily and be viewed as one type of product, while receiving intense scrutiny by regulators of another jurisdiction and viewed as a completely different type of product.
What appears to be a simple money transmission product in the United States may be seen as a completely different escrow product abroad, therefore no unresearched assumptions should be made when determining what is required to successfully launch a financial product or service on an international scale. Additionally, because of the reactive nature of local governing bodies to new products, fairly or unfairly, companies should be prepared to have their services grouped in with other products that have been rolled out in such jurisdiction previously, and thus subject to scrutiny that often may seem unjustified for such an offering.
While navigating this international regulatory landscape may seem daunting and onerous, it’s important to remember that exemptions to strict local rules can often be found with proper due diligence and a strong partner network of counsel, local experts, and other financial partners. As a result, accompanies should be prepared for the costs of a country-by-country assessment for any new product or platform launch.
Because of the constant cat-and-mouse game between regulators reviewing new product offerings and criminals trying to take advantage of loopholes for nefarious purposes, businesses will continue to experience uncertainty in managing multi-jurisdictional financial product offerings. This game consumes company resources and can make doing business in certain countries more expensive than expected.
While blockchain technologies will add additional variables to the mix, companies need to prepare for a broad number of already existing complexities that can prevent a successful global payment or e-commerce strategy.
We may dream of a modern marketplace where businesses can easily provide financial services for the sending, storing and moving of money across borders, but the reality is that we’re not there yet. If anything, at least in the short term, regulations will likely only become more burdensome as countries adapt to new financial products that are quickly being created.
As an industry, it’s important that financial services providers work collaboratively with each other and local regulators to develop technology that conforms to various rules and regulatory requirements to help create global standards that make rolling out new money services easier for everyone in this arena and to provide consumers with more cost-effective and quicker options.
In the meantime, for new participants in this space looking to develop global money services products, we believe the most important factor in their success will be the ability to draw upon the support of a global network of financial partners and experts.