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INTERNATIONAL PAYMENTS Moving with the Money INTERNATIONAL PAYMENTS Moving With the Money MEDICI powered by LTP FinTechs’ Global Knowledge Network 02 TABLE OF CONTENTS INTERNATIONAL PAYMENTS MOVING WITH THE MONEY Executive Summary 03 Introduction 05 Challenges in Wire Transfer 09 Correspondent Banking Problems 14 Introduction to InstaReM 22 © Let’s Talk Payments, LLC | Copying or distribution without written permission from Let’s Talk Payments is prohibited 03 EXECUTIVE SUMMARY • LTP has always had a great interest in exploring the opportunities and challenges in the space of international payments as it is one of the largest business segments of the global financial services industry and one which is being disrupted by the rise of FinTech. • The international payments market is dominated by banks and MTOs (money transfer operators), with the non-cash segment being governed by the existing system of SWIFT-based wire transfers. • The segment represents a massive market, great opportunities, and very promising players. However, there have been some recent developments in the area of correspondent banking relationships; they’re being affected by the changing regulations and increasing concerns on money laundering and terror financing. • In this report, we discuss some of the major challenges and loopholes in the existing wire transfer process of making international payments with a focus on recent developments. • Through our study, we address the reasons why wire transfer-based payments are gradually losing their shine among modern-day consumers. We highlight the problems faced by banks and present a solution for them to recapture their share of the market through collaboration with one of the leading FinTech startups. • Our research has been funded by InstaReM, but the views expressed in this paper are those of Let’s Talk Payments, reflecting our independent analysis. © LetLet’s’s Talk Payments, LLC | Copying or distribution without written permission from Let’sLet’s Talk Payments is prohibited 04 Introduction: INTERNATIONAL SECTION ONE PAYMENTS 05 INTERNATIONAL PAYMENTS A BRIEF OVERVIEW • With a current market size of $28.6 trillion, international payments is one of the fastest growing segments of the modern financial services industry. • The major components of international payments are consumer remittance, cross- border e-commerce, global workforce compensations, B2B vendor/supplier 7.45% $1 Trillion payments and import/export by SMEs and large enterprises. Global average cost Cross-border • Additionally, international education ($53 billion market), international healthcare of sending e-commerce sales ($40 billion market) and international real estate also contribute significantly to the remittance per year ever-expanding scope of international payments. • The market for consumer remittance is large and growing, primarily driven by the increasing globalization of economies with the cross-border movement of people. The World Bank attributes 10% of the top 25 developing countries’ GDP to 40% $5.6 Trillion remittance inflows. of global payments’ • However, for the first time in recent history, the consumer remittance volume saw a Market size of transactional revenue SME-driven significant dip for two consecutive years (2.6% in 2015 and 1.2% in 2016). This dip is comes from cross- international largely attributed to lower oil prices, weak economic growth in GCC countries and border payments payments the Russian Federation and weakening of currencies (euro, pound, ruble, etc.) versus the US dollar. This has resulted in a stalled growth of international payments over the past two years. Source: World Bank, LTP Research & Estimates © Let’s Talk Payments, LLC | Copying or distribution without written permission from Let’s Talk Payments is prohibited 06 INTERNATIONAL PAYMENTS THE EVOLUTION • Over the years, globalization and freelance economy have pushed the DRIVERS envelope of international payments. Today, there are scenarios where an Indian company is handling the digital marketing of a US-based corporate, • The rising shift from informal to formal electronic channels or a freelancer from Pakistan managing the social media for an Australian of payment. • Increasing global trade: freelancing, global workforce, company. outsourcing, cross-border supplier payments and global e- • As the market grows, the evolution of technology has resulted in an commerce. exponential rise in internet and mobile-aware customers, and has brought a • Increasing internet and mobile penetration, driving the growth of online services and MTOs. dynamic change in customer needs. • Financial inclusion of the underserved segments, driven by • The need for seamless, low-cost and transparent money transfers is being technology-led financial services. followed by an increasing demand for a superior customer experience – something the payment systems could not meet with the existing processes INHIBITORS in place. • Money laundering activities, majorly associated with cash • Banks which have been leading the money transfer market since their transactions has led to tighter AML/CFT-related regulations, especially in the ‘sending’ countries. inception have begun to realize the changes in customer needs. They are • These tighter regulations and exchange control by certain responding to the increasingly digital world in which a growing number of countries is giving rise to black market exchange premiums their customers live. and informal remittance channels. • De-risking in international correspondent banking. • However, the existing system of wire transfer is broken and the gaps are • Anti-immigration sentiments in several high-income, slowly being exposed by the rise of agile, innovation-driven FinTech startups. remittance-sending countries. © Let’s Talk Payments, LLC | Copying or distribution without written permission from Let’s Talk Payments is prohibited 07 INTERNATIONAL PAYMENTS THE ECOSYSTEM • The umbrella of international payments covers four major categories, ENTERPRISE CONSUMER based on the sending and receiving entity: B2B, C2B, B2C, and C2C. PAYING PAYING • Banks have been the custodians of customer relationships in the Supplier E-Commerce financial services space by means of their vast international network and ENTERPRISE Payments Purchase RECEIVING reach. They handle the majority of international payments by leveraging (B2B) (C2B) this. • However, the non-bank market has gradually been captured by large Payroll MTOs (money transfer operators) like Western Union, MoneyGram, and Consumer CONSUMER Retirement Ria. Between them, they operate 1.1 million retail locations across 200 Remittance RECEIVING Benefits (C2C) countries. (B2C) • The past few years have seen the emergence of a number of exciting FinTech startups who have revolutionized the market with their online and mobile offerings by way of lower fees, transparent FX rates and In this report, we emphasize on better speed of delivery, thus delivering superior customer experience the opportunities and challenges in and ease of making payments. the international payments made • The FinTech innovators were initially seen as a threat to the incumbent through banks. banks. However, in recent times, the market has seen the trend shifting towards a collaborative model, promoting bank-FinTech partnerships. © Let’s Talk Payments, LLC | Copying or distribution without written permission from Let’s Talk Payments is prohibited 08 THE CHALLENGES SECTION TWO 09 THE PROCESS OF… SENDING CROSS-BORDER PAYMENTS IS BROKEN There are multiple intermediaries for sending a simple cross-border payment SME/RETAIL CUSTOMER C) CORRESPONDENT BANK D) LOCAL CLEARING • $900; Equivalent of INR received. • Customer must pay a • FX: $30 (3%) supplier in Indian rupee (INR) INR Transaction Fee: $40 Agency Fee: $20 • Instructs bank to send INR Lifting Fee: $10 payment to supplier • Funds their payment in USD E) BENEFICIARY BANK • Potentially many “hops” with accumulating fees $1000 • Limited transparency for all parties A) FINANCIAL INSTITUTION B) INTERMEDIARY BANK • Delays in settlement and BENEFICIARY deposit • FI deducts payment amount FI’s Global Payment Provider from customer and using • Multi-faceted compliance SWIFT FIN, and instructs the requirements intermediary to INR send payment $/£/€ Indicates payment charging points © Let’s Talk Payments, LLC | Copying or distribution without written permission from Let’s Talk Payments is prohibited 10 INTERNATIONAL PAYMENTS PROBLEMS IN WIRE TRANSFERS: CONSUMER/SME PERSPECTIVE • Very high costs involved in • The wire transfer process is • In the case of any • Clearing of funds for low- the wire transfer process, opaque and does not allow discrepancy, most banks ask value, high-volume including processing fee, the sender to check the customers to wait for 5-7 payments may take months inward payment fee, FX status of money transfer at days after making the in some cases. markups, commissions, etc. any given time. Also, there international payment. • Late payments of invoices • These costs can get heavily isn’t much clarity on FX • Most banks are not available incur financial and compounded in the case of rates. for 24/7 support. administrative costs and can low-value, high-volume • Most of the transfer fees are negatively affect cash flow transfers. hidden. and business growth for SMEs and enterprises. COST OF MAKING TIME TAKEN FOR MONEY LACK OF TRANSPARENCY CUSTOMER SERVICE INTERNATIONAL PAYMENT TRANSFER Banks need to find a solution to lower the There have been cases where a payment In the age where customer experiences Modern
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