The global payments space is increasingly crowded, even noisy. Next to Apple Pay, it’s a topic of conversation that’s all over the payments industry for obvious reasons – where there’s global commerce, there’s a need for global payments. But there are specific areas in dire need, such as small and mid-sized businesses, which account for 20 percent of the $26 trillion industry. They are underserved and off the charts in terms of needing better solutions.
In a digital discussion that took place on Tuesday, November 18, Todd Latham, VP of Marketing and John Hammond, Chief Commercial Officer at Currency Cloud, sat down with MPD CEO Karen Webster to show how their company has set out to solve this by modernizing a system of moving money that’s been pretty much static for 40+ years, yet drives about 85 percent of payments volume today.
To start off the conversation, Webster began by noting that it’s not surprising that many existing and emerging providers have chosen to target this piece of the “payments pie.” There are platforms, gateways and third-party innovators that have all taken a different tactic as they vie for their slice. All the while, incumbents are trying to figure out how to innovate, but not cannibalize, their important revenue streams.
Currency Cloud is a venture-backed company that’s been around since 2012 and is squarely focused on the global international payments landscape. It’s an alternative to banks, said Webster, that serve players in the space, whether they are individuals or businesses that simply want to move money to others cross-border safely, and in compliance with the myriad of regulations that exist and differ around the world.
The digital discussion, she said, was not entirely about Currency Cloud and what they do, but the state of global payments: what’s broken, why there’s a need for regulation, if and where virtual currencies fit in or not, and innovative ideas for fixing what’s broken.
THE INTERNATIONAL PAYMENTS LANDSCAPE: AN OVERVIEW
To kickoff the first section of the conversation, Hammond reiterated that the international payments market totals $26 trillion annually, or one-third of global GDP to put it into context. Small to mid-sized businesses remain largely underserved.
The chart below shows a breakdown of this market. The peer-to-peer segment is tiny – it makes up for $500 million. At the other end of the spectrum, there’s the corporate segment consisting of giant payments from oil to treasury payments within big multinationals. That’s the lion share of the global market, said Hammond, making up $15.7 trillion. Then in the middle, there’s a pretty meaningful bucket of SME trade.
At the top end of the market, within the corporate and commodities segments, there are experienced brokers and traders that understand the space, he noted. What they focus on in international payments is service, expertise and value. They’re dealing with the huge banks and are very sophisticated.
“Within the small P2P sector, there’s been an explosion of innovation recently,” said Hammond. “This has been dominated over the years by companies like Western Union and Moneygram, and what we’re seeing is new companies like Zoom coming into this space and bringing a much better, crisper digital experience with lower costs. At some point, this business will be relatively close to being free.”
The huge “forgotten segment,” however, is SMEs. These businesses are experiencing frustration when trading internationally – it’s very complicated for them. But, Hammond mentioned, the need for a solution among SMEs is more acute in North America and Australia than it is in Europe.
Why International Payments Are Broken
Big companies can negotiate a good deal from their bank, but consumers and SMEs get a bad deal, and there are three reasons why. One is that international payments are really slow. If you want to send money from the UK to Australia, for example, it takes about 2 days. For small companies, the only way to do this shorter is to pre-fund payments out to different companies.
Secondly, the costs can be huge. For consumers, they can be up to 15 percent. People don’t always really understand how much they’re paying. Even for businesses, going through a broker costs them 1-2 percent, and if they’re less savvy, 3-4 percent. For small businesses, that’s a meaningful amount of money straight off the bottom line.
Finally, there is much opacity in international payments – it’s really unclear how much you’re spending when you’re making a payment. Unless you’ve got the savviness and the time to understand what rate you’re getting and how it compares to the mid-market rate, you wont be really clued into how much you’re spending. And when you’re paying through the SWIFT network, added Hammond, which is the network of choice for most international payments today, there are fees called correspondent banking fees.
Hammond then brought up an example of this. A customer in France who needed to pay a bill in Ecuador. The customer sent $1000, and when their money arrived at the other end, it had gone through 3 different banks. Each bank had taken $30 off that transaction. When they went to pay that bill, $910 turned up. They then had to make another payment for $90, plus the $90 they knew they would be charged this time. They had to pay an extra $180 on that transaction.
“It’s really easily to hike charges in international payments, and people aren’t necessary wise to it,” he said. The way in which banks get away with this, he added, is because people trust their banks to deal with a range of financial services. Banks are “entrenched” in people’s lives. Banks therefore are able ot have this tradition where they can charge these fees and can simply blame the system for it.
“While FinTech is changing the landscape, it’s still a relatively small change. About 85 percent of payments still go through banks today,” said Hammond.
Different firms provide a very different type of service to their customers, but the mechanics of the payment are the same, explained Hammond. This is where companies like Currency Cloud come in.
“We take a wide range of different banking produces – FX hedging for real-time pricing, FX cash purchase to buy cash in a different currency, Local Payment (ACH) networks, and integration into the SWIFT network. We provide all of this to different companies via an API, allowing then to manage all of these services in one seamless end-to-end experience.”
THE API REVOLUTION
For the second part of the conversation, Latham chimed in to first over the background on APIs. APIs, he explained, allow companies to build unique customer propositions, leveraging the best solutions from different providers. There are a whole host of different companies including Amazon Web Services, Fiserv, Stripe, and Salesforce that have built their business on APIs.
“APIs have come an extremely far way. Years ago, they were something that a software company allowed you to use to connect to their piece of software,” said Latham. “The world is fundamentally different today – there’s a huge amount of competitive pressure and a large amount of dynamism, and companies have to move extremely quickly. The API has become a way of delivering that entire service to the consumer – it’s now about composing services, and delivering them to whoever needs that service.”
The corporation that requires the API, he explained, is now pulling in that information rather than allowing people to attach to a piece of software. So there’s been a change in the juxtaposition of the API economy.
The key, he said, is that people now want to use blocks to build their solutions.
“Now, what we’re starting to see is much more functionality being delivered in that block so that companies can now aggregate together a series of APIs and deliver that to their end-user as a fully complete, end-to-end solution. And developers are not becoming much more a part of this process.”
Why APIs Are Important To International Payments
Gartner predicts that 75 percent of Fortune 500 companies will have an open API in the next 5 years. According to Latham, that’s an incredible statistic – that makes us realize that this is a movement that’s over and above some interesting technology. Why is that?
Latham explained that Salesforce, for example, is one of the greatest success stories of the cloud era. There’s about $2.3 billion of turnover associated with that business. Half of that is delivered via its API. That’s taking a whole suite of ecosystem partners and aggregating them together.
“What that means is, to me as a consumer that consumes that API, is that Salesforce is not just a way to track deals, but also offers many other things to tag onto that,” Latham pointed out. “Suddenly, I can now access a whole host of different services to deliver to my customer, and I don’t have to build each individual thing that I want to take to market. That gives me speed to market and a completeness of solution.”
In FinTech, there’s whole host of various processes that have to happen. Currency Cloud and other FinTech companies do two things in the space, said Latham. First, they create a layer between the banking system’s API and do the heavy lifting for the consumers. The reason this becomes powerful is each individual component is so complex that building each one and integrating them into existing infrastructures becomes extremely time-consuming for businesses. The API makes things move more quickly, and puts together that complexity.
Second, each individual FinTech company is a specialist in this marketplace. That allows them to focus specifically on types of customers and the business transaction associated with them. They are tuning their APIs to deliver that service. What’s more, added Latham, everything is happening at internet speed, and that interface is incredibly important to these FinTech companies because that differentiates them from other players such as banks.
“We believe the cloud and the API economy are liberating businesses globally. Businesses can now compete on an even footing with those with greater capital capabilities and resources to build these infrastructures. It becomes much more about the quality of a business’s proposal to the consumer,” said Latham.
Now, many companies are emerging that are pioneers in this marketplace, whether it’s to connect consumers to investment opportunities, move money on behalf of others, or build an infrastructure to allow others to participate in an online, e-commerce world. These include companies like Payoneer, Stripe, Xoom, Moven, Dwolla, and more.
According to Latham, Currency Cloud’s value specifically is its end-to-end cross-border solution, beyond the FX rate. Through its API, it provides a payment engine that tracks and reconciles payments, real-time wholesale rates on currency, and a low cost, reliable payment network to 212 countries.
REGULATION IN FINTECH
In the third part of the discussion, Hammond began by noting that international payments have a lot to do with compliance – whether companies in the space like to admit it or not.
“As part of my job, I talk to banks a lot. The first thing they think we’re doing is helping the bad guys,” said Hammond.
The Payment Compliance Risk
The interesting thing to note about banks, said Hammond, is that the payment department is one of a multitude of departments. Transaction banking actually doesn’t make tons of money. But the fines (see below chart) dwarf the entire bank’s revenue.
“If you think about the fines in the context of the revenue stream, it’s just not worth it,” he said. So what’s the solution for this? Currency Cloud, for one, takes a conservative approach, and looks to have robust controls in place, without stopping technology from innovating and moving forward.
How Regulators Can Support FinTech
For the economy to realize the benefits of FinTech, the regulatory environment needs to evolve. While there are standards out there, they are not universal. Every bank takes its own interpretation of the regulation – that makes it very difficult for any FinTech firm to adhere to. The key things that need to happen in the environment are:
- KYC / AML principles become universal
- Risk owners established within the transaction. Who’s held accountable for each transaction?
- Banks encouraged to take a risk-based approaches to FinTech firms. Banks have to think about their approach accordingly – they can’t just refuse to work with Money Service Businesses.
- Regulation coordinated for crypto-currencies
- US Federal licensing for Money Service Businesses
In some cases, said Webster, FinTech innovators understand that they have to be compliant at some point, but rather than putting their money into compliance, they put their money into product development.
However, according to Hammond, that doesn’t work. In this case, there are two regulators – the regulators, or the governments, and the banks that enforce those regulations.
“The reality is the regulations are relatively easy to get through, but what’s challenging is that the banks are the ones that ask the hard questions. You can avoid investing in compliance, but it will make it very difficult to get yourself banked,” explained Hammond.
Latham added that one huge thing a FinTech company can offer the marketplace is to simplify that – to embed that into the technology.
“If it’s a technology company first and a financial company second, the reality is that that technology is the way to present business processes,” said Latham. “There’s a whole load of knowledge at Currency Cloud, and what our technology does is turn that knowledge into systems and processes. We are then able to pass that encoded knowledge to our customers.”
Last but not least, the digital discussion ended on the topic of virtual currencies. While Hammond explained that Currency Cloud cannot operate in a virtual currency environment, as regulations and compliance requirements don’t permit them to do so, they still find the area extremely interesting.
As an analogy, Hammond brought up the music-focused online service provider Napster. When Napster came along, it challenged the status quo of some big record companies that had global licensing agreements. What it showed was that consumers don’t want to walk into a shop to pay $15-20 for a CD, they just want access to all of this music instantaneously. That opened up discussions about legality, and how artists aren’t getting paid. It also changed the landscape forever – now, 60 percent of music in the US now is consumed digitally. This happened, Hammond said, largely because Apple came in and legitimized this marketplace, allowing them to build a business. Now what we’re seeing is a third generation with companies like Spotify.
“Music and new media is something everyone touches – as is money. The same thing that happened with Napster is happening in the digital marketplace for money. For Currency Cloud, it’s not so much whether it’s a good investment, but it’s about the blockchain, the mechanism that allows execution to occur. This is where it starts to get fascinating,” explained Hammond.
The blockchain takes a whole series of information that relates to the previous blockchain and starts to create memory and history, and a business process associated with that. It’s also distributed, meaning that information is being aggregated together, all over the place.
“This is very interesting. So are we starting to see the way that the digital money is moved globally? Could we create an environment where that money can be moved instantaneously using this technology, legitimized and linked to a business process so that the sequence of activities that need to occur do so digitally, and release that money instantaneously?” proposed Hammond.
With the number of cryptocurrency organizations that exist today, he added, something is clearly happening in this marketplace – and that has a lot to do with technology.
“This wave we’re seeing, to Currency Could, is that Napster wave,” he said.
To wrap up the session, Webster noted that Spotify and others like it are only as good as the selection of artists that they offer. One of the corollaries to bitcoin is the possibility that the blockchain is only as good as the vehicles that use it to move money. Is the blockchain, asked Webster, in and of itself viable without bitcoin or some kind of cryptocurrency?
According to Hammond, the blockchain is a fascinating piece of the process. But the vehicle used to move money across it might be a cryptocurrency, or it might contain a traditional currency.
“What we’re seeing is that the barriers are coming out – but what I love about this marketplace is that innovation will drive it,” said Hammond. “It may be that the combination of the cryptocurrency and the blockchain is the way to go, or it may be that we’ll lose the cryptocurrency bit, and some major currencies or institutions will legitimize a way of sending that money across that technology.”
In the end, what’s so great about FinTech, he said, is that the market and consumers will decide, and innovation will emerge because the marketplace supports it.
In a final statement, Hammond reiterated his astonishment around digital currencies today.
“The extraordinary scenario to accept today is that you can send a physical item to another country in a day, but you can’t send digital currency to another country in a day. If I do, I send it over the SWIFT network, which is the only opportunity to do so, and someone takes something out of my box. That’s really what’s driving this change.”
For the complete digital discussion, view the video recording below.