iBanFirst On The Future Of Cross-Border Payments

Cross-border payments are rarely quick and transparent, and moving money across borders through the traditional channels is becoming more difficult. Despite the efforts of regulators, correspondent banking relationships continue to decline, according to the G20’s Financial Stability Board in a Reuters report late last week. Increased due diligence burdens, including heightened Anti-Money Laundering and Know Your Customer checks, are causing banks to pull back from their correspondent banking relationships, according to the Financial Stability Board (FSB), creating a 4.1 percent drop in correspondent banking last year.

The FSB is particularly concerned about how this decline might reduce certain markets’ ability to send and receive money abroad, and how it could heighten the risk of driving global transactions underground. The smallest economies are being hit hardest by the decline in correspondent banking, analysts said.

Businesses, especially smaller firms, are similarly facing new challenges as a result of correspondent banking’s decline, which is hampering their ability to grow. Even for companies in markets with robust correspondent banking operations, high and hidden bank fees, foreign exchange volatility, and a lack of speed and visibility into the status of a transaction have all opened up opportunities for FinTechs in the cross-border business payments market to address these points of friction.

Innovators have explored a variety of strategies, from prepaid card solutions supporting different currencies to blockchain infrastructure, with tactics ranging from addressing particular friction points to pushing for an entire overhaul of the global payments system.

While there are now more choices for businesses to send money across borders, Pierre-Antoine Dusoulier, CEO and founder of iBanFirst, says it’s often simply habit for companies to rely on their banks and the traditional correspondent banking network for their global payment needs.

“Mentalities and cultures remain an obstacle to the development of FinTechs,” Dusoulier recently told PYMNTS in an interview, discussing the challenges of global payment FinTechs in gaining traction in the market. “There is still a long way to go in order to democratize FinTech services, shake up habits and change attitudes, as companies and financial managers often trust their bank blindly.”

But legacy infrastructure continues to challenge even the FinTechs pushing for modernization of cross-border payments. In iBanFirst’s case, the company allows businesses to open up their own iBanFirst accounts to hold money in several different currencies, allowing beneficiaries paid by a corporate customer to receive funds in their own currency. While Dusoulier said the system often moves money faster than traditional methods, intermediary banks can slow the process down.

Companies like iBanFirst can address may of the points of friction of cross-border payments, including heightened transparency into fees and FX rates, and visibility into the status of the payment as it moves. Businesses often endure these issues, he explained, because they lack understanding about the process.

“Because processes are not optimized in banks regarding international money transfers, a company suffers from expensive costs, as well as hidden costs,” he said. “Most CFOs believe they benefit from real-time exchange rates but in truth, there are always additional fees that most rarely understand.”

Viewing payments and exchanges as “two separate activities” is one way traditional FIs have failed to optimize the cross-border payments process. Smaller businesses in particular often lack access to experts who can discuss FX rates, and FX volatility risk means “a CFO cannot be 100 percent sure of the real price of an invoice” when bills are in different currencies, Dusoulier noted.

But FinTechs that address issues like fees and visibility are often still forced to rely on the traditional interbank payment system themselves, and according to Dusoulier, this presents an opportunity to tackle friction of cross-border payments from a larger vantage point.

“There is a real need for modernization,” he said, pointing to iBanFirst’s participation in SWIFT’s global payments innovation (gpi) initiative. Earlier this year SWIFT said one-quarter of all cross-border payments that pass through the SWIFT network are sent via gpi as the initiative presses for enhanced transparency and speed between participating banks and FinTechs.

“It’s clear that the global payments industry needs to evolve in order to provide customers with a modern service that meets their expectations,” SWIFT Head of Banking Harry Newman said in a statement at the time.

For corporate payers, one of the biggest benefits of gpi is the function that connects a code to a transaction, allowing relevant parties to gain visibility into where a payment is at as it moves. There are limitations to this strategy, however: the effectiveness of gpi — like the effectiveness of correspondent banking overall — relies on bank participation.

Dusoulier said there is potential for blockchain to yield “huge gains in efficiency,” with some proponents of the technology saying that cryptocurrencies could allow payments to bypass the traditional banking system and, therefore, many of its shortcomings. It’s far from the guaranteed direction of the financial services market, however.

“There are definite opportunities to be taken, but to date, it also creates many unanswered questions that have yet to be solved,” he said. Using cryptocurrencies to pay foreign business partners could address many points of friction, but bypassing traditional banks may raise issues of compliance, while cryptocurrency volatility is another key issue, said Dusoulier.

In Europe, where iBanFirst is based, cross-border payments friction is only part of widespread efforts by the public and private sectors to improve payments. There remain many question marks, from blockchain or cryptocurrencies’ role in global payments, to the future of correspondent banking.

Regardless of the path that cross-border payments innovation takes, Dusoulier said it is imperative that the end-user remains the focal point of any progress.

“The growth in access to data means this is only the beginning of the revolution in terms of payments,” he said.