Navigating the World of Cross Border Payments
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NAVIGATING THE WORLD OF CROSSBORDER PAYMENTS Top Challenges Facing Businesses Initiating Global Mass Payments Courtesy of The multi-trillion dollar a year cross-border payment industry is expanding at an annual rate of more than 10 percent and is in the process of fundamental change. The industry previously dominated by traditional correspondent banking relationships is shifting as more nimble Payment Service Providers enter the market with innovative alternative payment methods that compete with the traditional offerings on both cost and quality of service and address many of the major challenges initiators are facing. This white paper is intended for companies that need to initiate payments in freelance, royalty, marketplace, e-commerce and other business scenarios that are experiencing the pain inherent in traditional cross-border payment methods. This is also a resource for those looking to expand their business from domestic to international. Alternative payment methods are reviewed in the light of how each method resolves specific initiator problems, and the applicability of each method is discussed for different payment scenarios. A comparison table of the various payment methods is presented as well as a checklist of best practices recommended for initiators. 2 CONTENTS Traditional Cross-Border Payments 4 Payment Systems 5 Domestic Payments 6 Correspondent Banking 7 SWIFT 8 Segmentation 9 Challenges Facing Initiators 10-12 Payment Service Providers 13-15 Alternative Payment Methods 16 Debit Card 17 Low Value Payment Network (LVPN) 18 Electronic Wallet 19 Comparison Chart 20-21 Recommended Best Practices 22-24 About Payoneer 25-26 TRADITIONAL CROSSBORDER PAYMENTS Many of the challenges facing payment initiators today are a direct result of the way that traditional cross-border payments work. In this section we provide a brief overview of traditional cross-border payments in order to understand the issues they introduce and how alternative payment methods address many of these challenges. 4 PAYMENT SYSTEMS Payment systems employ cash substitutes and comprise institutions, instruments, procedures and technology to effect the transfer of monetary value between parties. Traditional payment systems are negotiable instruments such as checks and letters of credit. Electronic payment systems span debit and credit cards, electronic funds transfers, direct debits Internet banking and electronic wallets. National electronic payment systems are typically maintained and controlled by the Central Bank of a country. The Central Bank makes adjustments to the electronic accounts of participating banks without the physical exchange of money. Central banks typically deploy: Real-time gross settlement (RTGS) Net settlement systems for systems that support low-volume, supporting high-volume, low-value high-value transactions between transactions between businesses and banks. Money is transferred from one individuals. Net settlement systems bank to another in "real time" and on a settle transactions at the end of each "gross" basis. Once processed, business day and are an alternative to payments are final and irrevocable. RTGS systems. Traditional Cross-Border Payments 5 DOMESTIC PAYMENTS Domestic payments are typically effected through domestic net settlement payment systems within each country. Payment systems depend on both the payer’s bank and the beneficiary’s bank belonging to the same system. Domestic net settlement payment systems are characterized by relatively low transaction costs and a short time period required for funds to clear. Payment Initiator Payment Beneciary Beneciary Initiator Bank System Bank Domestic payment systems use common message standards, facilitating the removal of paper and manual processes by businesses, promoting straight-through processing (STP). STP enables payment instructions to be generated electronically as part of the business process, passed securely, efficiently and cost-effectively to banks, and matched and reconciled automatically via a universal reference number within invoicing, accounts payable, accounts receivable and other systems. Domestic payment systems are based on local laws and practices, and participation is typically restricted to existing domestic banking and financial structures. Traditional Cross-Border Payments 6 CORRESPONDENT BANKING Cross-border payments are complex because national payments systems do not generally support direct participation by banks in other countries. In cases where one bank does not belong to the payment system, a domestic correspondent bank is used to act on its behalf. Payment Initiator Payment Correspondent Initiator Bank System Bank Correspondent Payment Beneciary Beneciary Bank System Bank Most of the world’s major banks maintain correspondent banking relationships with local banks in each of the important foreign cities of the world. At least 80 percent of bank-to-bank cross-border payments currently take place through traditional correspondent banking arrangements. International correspondent banking is a large decentralized network. Each bank makes a decision as to how it wants to handle cross-border payments for its clients. These decisions can be different for paying and receiving funds, and for different countries or categories of payments. Each bank makes an independent decision about how to send, receive and settle payments. Wire is the de facto standard for settling cross-border payments by correspondent banks. In many cases, this is overkill for low-value cross-border supplier payments that do not warrant the high security and immediacy of payment qualities that RTGS systems provide. Traditional Cross-Border Payments 7 SWIFT Society for Worldwide Interbank Financial Telecommunications (SWIFT) is an industry-owned limited liability cooperative that supplies secure messaging services and interface software for financial transactions to more than 7,650 banks, securities brokers and investment managers in more than 200 countries. The SWIFT communication system is what makes it possible for the complex system of correspondent banking to work. SWIFT is not a payments system, but rather a standardized messaging system that banks around the world use to tell each other what they have done and what they want done with different types of transactions. SWIFT provides the message codes and protocols that help a receiving Bank understand the transaction that a sending Bank has sent it, so that the receiving Bank can act accordingly. SWIFT provides the messaging infrastructure for most electronic cross-border payments today. Traditional Cross-Border Payments 8 SEGMENTATION Banks typically classify the cross-border payment landscape into four broad product segments, each with its own competitive landscape, fee structure and independent delivery mechanisms. The chart below illustrates this segmentation. PAYMENT INITIATOR Individual Business Remittances Payout Individual e-Commerce BENEFICIARY Supplier Purchaces Payments Business Supplier B2B payments are made when one E-commerce purchases include physical goods as enterprise pays another. well as travel, entertainment and other digital goods. Payroll, retirement and benefits payments International remittances are payments made are made by enterprises to counterparties in by foreign workers to family members in home other countries. countries. This white paper addresses the rightmost quadrants of the diagram representing cross-border payments initiated by businesses. 9 CHALLENGES FACING INITIATORS2 The decentralized, non-standardized international correspondent banking network has inherent problems that can cause pain for payment participants. Some of the challenges facing initiators of cross-border payments include: 10 Absence of direct relationships with downstream banks. If a problem occurs (for example, a payment is not received), the initiator may not be able to trace the transaction quickly or reliably. Time required for a transaction to clear. Cross-border transactions typically take days or weeks to clear, and the period is often not known by the parties in advance. Limited data transport capabilities and lack of standards. With multiple intermediaries involved, it may not be possible to reliably carry data through to the receiving party, preventing reconciliation, payment tracking and STP. Cost. With multiple intermediaries involved, each charging a fee and/or taking some share of the foreign exchange revenue, these transactions can be expensive for participants. Often, end users do not know whether costs are also assessed to their counterparties. Price-based competition between banks is limited to a small number of corridors between specific countries. The World Bank estimates that globally, sending remittances costs an average of 7.99 % of the amount sent. 5 Most Costly Corridors Average Cost in USD 5 Least Costly Corridors Average Cost in USD South Africa > Malawi 14.88 Singapore > Bangladesh 0.79 South Africa > Zambia 12.92 Spain > Dominican Republic 1.23 2 Singapore > Pakistan 12.31 Saudi Arabia > Yemen 1.50 South Africa > Botswana 12.26 UAE > Pakistan 1.52 South Africa > Mozambique 12.25 UAE > Yemen 1.55 Average total cost includes the transaction fee and exchange rate margin. Source: http://remittanceprices.worldbank.org/en TraditionalChallenges Cross-Border Facing Payments Initiators 11 Lack of transparency relating to currency conversions that are implicit in the transaction. It is often unclear which party is responsible for exchanging currency and what margin is being added above the inter-bank