The beauty of international trade is how profitable yet fragile it is at the same time. Most companies are in the game to generate sales by exchanging goods, product parts, or raw materials globally. However, they face multiple inefficiencies and reduced profits when trading with foreign business partners.
One of the main problems is the expensive and slow transfer of money. According to 2020 World Bank data, the average fee (including currency markups and transaction fees) for international money transfers takes up 6.8 per cent of the total spending. A company that orders products abroad for, let’s say, $10,000, then loses almost a full $700 on that transaction. And as global cross-border payments are growing at about 5 per cent annually (CAGR), expected to reach a total volume at $156billion by 2022 – just imagine the losses companies are making due to costly payments.
Suren Ayriyan is Managing Partner and CEO at TEMPO Payments, a European-wide anchor for Stellar blockchain payments. The company offers online, offline and digital backed remittances to nearly 100 destination countries with over 300 physical agent locations as well as a secure bridge to purchase and sell digital assets.
Having worked for various financial institutions across the globe, Ayriryan is well placed and experienced on how blockchain technology could have a lasting impact in different areas of the world. Here, he shares his thoughts on how banks need to act in the face of international payments disruption, and how blockchain can help.
Challenger payment providers have begun to look for solutions to costly payments and long wait times, and the massive adoption of blockchain has accelerated innovation in this space. With blockchain, companies can transfer money in a split second, with unprecedented accessibility and minimal safety risks.
Let’s take a look at how fintech companies are using technology to improve payments and why banks need to respond to keep up their game.
The bad and the ugly of international money transfers
Today, most traditional financial institutions rely on electronic money transfers – the standard method being Wire/SWIFT. SWIFT is a reliable method, but customers still face some hurdles on the way.
The first challenge is accessibility. Most foreign bank accounts must be authorized to receive international transfers – extending the bureaucratic process and leading to delays with first-time payments. Furthermore, around 1.7 billion people in the world don’t even have a bank account – making it difficult for some businesses to trade goods with many smaller businesses or individuals.
Second, there’s the currency issue. As most business partners invoice their products in their currency, there’s an extra burden falling on the money sender. The sender must check their bank’s exchange rate, transfer the corresponding amount, and often pay a markup fee (on average 3 per cent). As these transaction
fees and high markups on exchange rates vary from bank to bank, day to day, businesses can’t really predict how much they will have to pay for each transaction. At some banks, exchange rates are determined after a transaction has already been processed, pinpointing the financial unpredictability of electronic commerce.
Banks and remittance companies require go-betweens to get the money from city A to city B. Often, they also have to follow several regulated processes to ensure the money arrives safely. This entire process can take up to five business days – depending on the amount being transferred, the countries the parties operate in, and the local time of the transaction (after business hours will significantly delay the transaction).
Some services offer same-day transactions, but they usually charge higher fees for this “luxury” or come with a hidden fine print. In the end, a transaction from a local bank account in France to a bank account in Swaziland can cost more than €100 and take up to seven days – the higher the transaction value and the less the currency is traded, the more pain points customers should expect.
Innovative payments providers have fast realized the opportunity hidden within these gaps. Providers such as Wise or Money Transfer have focused on quicker process handlings. But users still face waiting times, the need to put transfer money to these digital accounts first, and recipients are often obliged to collect their cash in person. Lastly, transaction fees and fluctuating currency markup rates are still relatively high.
Is blockchain a silver bullet?
Blockchain technology has several advantages over traditional electronic payment methods and plays a key role in replacing traditional product centricity by introducing a customer-centric vision.
Let’s say a Nigerian company wants to buy sparkling wine in France. The two companies will exchange tokens instead of fiat money via blockchain. The Nigerian business purchasing sparkling wine will order a certain number of cryptocurrency tokens with which they close the deal. The blockchain provider is the only intermediary, forwarding the payment in euros to the business partners in France.
Companies using blockchain technology can offer much cheaper transaction fees. The math is simple: The fewer expenses companies waste on transactions, the more money they can book as revenue. As a result, a business becomes more competitive in international trade by offering lower prices.
Further, blockchain technology significantly shortens transaction time (currently at 4.6 seconds). It only takes an eye’s blink for companies to make payments and dispatch goods immediately.
Another important benefit of blockchain is improved transparency and security. Especially in B2B markets, where companies regularly transfer large amounts like $10,000, there is a lot at stake. Using electronic payments, if a mistake happens, a refund process can take up to five weeks, putting a strain on business relationships. In contrast, blockchain simply doesn’t allow for errors as the technology denies the transaction if a recipient doesn’t exist or the destination’s address is wrong.
It’s not too late for banks, yet
In the payments industry, a transaction’s price, speed, and safety make up the entire consumer experience. Financial service providers need to adopt a customer-centric vision to keep up with the vastly emerging payments market.
First, financial institutions worldwide need to become more transparent. How do the high fees come about? How long do transactions really take, and where are there opportunities to optimize them (e.g., by offering services during night hours). If they continue keeping their customers in the dark about the why of their terms and conditions, they’ll wonder soon enough where their customers have gone.
Banks have an urgent choice to make. B2B customers trading on global markets are increasingly looking for omnipotent solutions. That’s why challenger fintech businesses offer digital accounts with multicurrency features, putting them on a par with banks. Financial institutions could, therefore, invest in developing state-of-the-art technology. Offering bank accounts and speedy, cheap global transfers would allow them to remain competitive in the market and drive customer loyalty.
Instead of investing in expensive tech, banks might prefer to partner up with a technology provider to get deep technical integration and co-create customized solutions. While this is certainly doable, it requires extensive investments in infrastructure and technology.
As a way out, traditional financial institutions start showing positive attitudes towards modern fintech: Innovators are seen as less of a threat and more of an opportunity for payments companies, increasingly partnering with them (42 per cent compared to 35 per cent last year).
The global payments sector is one of the competitive markets where fintech and bank cooperation is not only desired but inevitable. Without it, banks and traditional payments providers will slowly fall behind the numerous fintech companies using cutting-edge technology, winning over more and more clients.