Tracking a package across borders is easy.
Tracking a payment across borders is complicated.
We live in a world where continual change is the norm, yet payments haven’t kept up – why? …. Here are some insights that could help future-proof your company and propel your business forward.
As a consumer, you can go online and order an item from nearly anywhere in the world, at almost any time of day, and pay for it with a single click. You can follow the path of your package on your mobile device as it leaves its originating destination and makes its way around the globe to its final destination.
Global flows are skyrocketing. In 1990, the total value of global flows of goods, services, and finances amounted to $5 trillion, 24% of world GDP. More than two decades later, the value of global flows reached $30 trillion, equivalent to 39% of GDP. (Source: McKinsey – Digital Globalization, 2016)
The forces of globalization and digitalization have combined to shrink distance. As the global population expands and new generations engage in cross-border commerce, expectations for speed, access, certainty and transparency will become even more prevalent.
Personal expectations blur into professional ones. If a package can move thousands of miles around the world easily and at relatively low cost, then why can’t we as bankers simplify and improve the archaic, multi-step, costly payments process – with fees along each step, varying service levels, patchy status reporting – that characterizes correspondent banking?
By 2050 the world population will grow 33% from current levels, with Africa and Asia accounting for 91% of that growth
Source: UN World Population Prospects, The 2015 Revision
By 2024, global transaction banking revenue is expected to reach nearly $2 trillion (up from $1trillion in 2014). Emerging economies is estimated to account for up to 70% ($634 billion) of this growth
Source: BCG – Global Payments 2015
Greg Murray, Global Product Head of High Value Payments for Bank of America Merrill Lynch, has thoughts on what we can and must do to change.
What are the top three cross-border payment challenges that banks need to solve?
First, greater transparency of fees and payment status, because clients expect transparency when making a payment just as they do when mailing a parcel. Second, the multi-stage process of moving money has to be more streamlined, acknowledging that we still need multiple banks in the process since few, if any, have the scale to singularly deliver a payment end-to-end. Third, we have to identify more efficient ways to achieve this while satisfying regulatory and compliance objectives because a payment is different than a parcel. Payment delays are most often due to incorrect or missing information rather than illicit activity. The more information provided by and to all parties up front, the fewer compliance-related delays will occur.
Cross-border payments haven’t evolved to keep pace with globalization. Payments make multiple stops at intermediary banks, with fees and delays at each step.
How do you see Fintech and industry initiatives impacting cross-border payments?
While Fintech provides some exciting opportunities, it is not a complete solution at this stage. Hybrid and electric technology has not wholly replaced the internal combustion engine in today’s cars; instead, it has prompted engineers to develop cleaner and more efficient engines. Fintech will have a similar impact on correspondent banking. We can, and should, learn from and work with, Fintech providers for the benefit of our clients.
Banks need to improve cross-border payments by enhancing the level of transparency and certainty, while retaining the global scale and ubiquity that makes banks the dominant customer choice.
SWIFT’s Global Payments Innovation (GPI) initiative, which now includes more than 80 global banks (including Bank of America Merrill Lynch) equating to more than 71% of all cross-border payments on the SWIFT network, is one means of achieving this. SWIFT GPI will facilitate payment status reporting via a unique tracking number and require participating banks to confirm completion of their stage of every payment. Member banks will also be required to declare their fees and disclose their service levels. This resolves the issue of tracking and transparency.
Bank of America Merrill Lynch has joined forces with other innovators like Earthport, which has a growing network of 60+ countries where they deliver payments through local clearing systems.
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40% of fintech startups and innovations are focused on payments, making it the epicenter of finance innovation
Source: McKinsey Panorama Fintech Database, 2015
Blockchain and distributed ledger technology (DLT) is a longer-term prospect. Three years ago it seemed potentially revolutionary but the consensus premise behind the technology was more public than banks were comfortable with. However, private ledgers could help close the information gaps that make multi-stage settlement a problem. With DLT, each bank could potentially verify the payment information simultaneously and, if all provide validation, the transaction could settle instantly, making for a more binary – and thus less uncertain – cross-border process.
In the future, blockchain and DLT could see increased use for certain transactions – such as inter-company payments or certain high-value treasury settlements that are now typically dependent on large pools of liquidity.
Will millennials change the cross-border payments business?
I think their banking habits will. For example, currently transactions are driven by how the sender wants to transmit a payment. In the future, thanks to changing demographics and the demands of a younger generation with multiple digital accounts, transactions will be increasingly driven by how the beneficiary wants to receive a payment. In an increasingly global economy, that means providing a myriad of choices.
HOW DOES ALL OF THIS ULTIMATELY IMPACT CORRESPONDENT BANKING?
When banks make the tracking and transparency changes needed to cross-border payments, a domino effect occurs. Transparency brings client empowerment, inviting more competition, which will likely lower end-to-end costs. What this means is a much better client experience for bank customers.
A better client experience breeds client loyalty and client retention. Isn’t that what banks want? If banks ignore the inexorable forces of globalization and digitalization, do not make these changes, turn a blind eye to client demands, and continue down the path that we have been on for decades, other parties will eventually deliver that much better client experience. And our customers will be their customers.
It’s just a matter of time. The choice is ours to make.
At Bank of America Merrill Lynch, we view disruption as an opportunity, not a problem. So in a world where continual change is the norm, we tailor solutions that help future-proof and propel our clients’ businesses forward.
- Globalization and digitalization are transforming the cross-border payments business
- Banks must enhance transparency and certainty levels for cross-border payments, while retaining global scale and ubiquity making them the dominant customer choice
- 40% of fintech startups & innovations are focused on payments. Banks should leverage these technology partners and embrace change.