The World Bank estimates that by the end of 2016 there will be more than 700 billion dollars sent overseas between family and friends, with $646 billion sent in 2015. The cross-border payment industry is expanding at an annual rate of more than 10 percent and is in the process of fundamental change. Despite this expansion, the customer experience in making cross-border transactions is poorly aligned with today’s expectations. Consequently, nonbank market players in the financial services industry, often called Fintech companies, are set to take advantage of this misalignment by disrupting Foreign Exchange (FX) payments, and leaving fewer opportunities for the traditional major players.
Some fintech companies including TransferWise and Xoom have gained significant traction by offering superior consumer value propositions. These companies, which started with P2P payments, have expanded into the C2C online transfer landscape, an environment that is fueled by consumer demand, lower charging rates, and increasingly ubiquitous connected devices.
The aforementioned fintech company, Xoom, which was acquired by PayPal in July 2015 for $25 per share in cash or an approximate $890 million enterprise value, is a leader in international remittances. Xoom enables customers in the United States to send money to, and pay bills for, family and friends around the world in a secure, fast and cost-effective way, using their mobile phones, tablets or computers.
Outside the P2P and C2C environments, Fintech will look for a growth engine in future years through partnerships with telecom carriers. Telecom Carriers play a role in offering mobile wallets to mobile phone users who may not have regular bank accounts. By connecting directly to mobile wallets, the Fintech & telecom carrier ecosystem is facilitating the sending money by making it as easy as sending an instant message. Mobile Money partners are thinking creatively about building a broad ecosystem of Mobile Money as an international payments platform. As emerging markets sprint ahead in the adoption of mobile payments, cash is increasingly becoming obsolete.
WorldRemit, an online money transfer firm, has positioned itself as a disruptive force in this context: it lets users transfer money at far lower commissions than those charged by larger outfits like Western Union, and it does so using online and mobile technology. Today, WorldRemit lets users in 50 countries send money, and people in 117 countries receive it, giving senders the option to pay into bank accounts, cash pick-up points, or into mobile wallets that can be used for airtime top-ups. In addition to offering airtime top-up, bank deposit and cash pick-up options, WorldRemit is the leading provider of instant transfers to Mobile Money wallets.
In addition to P2P, C2C, and partnerships with Telecom, nonbank players have more recently begun to pursue the lucrative realm of cross-border payments involving businesses, starting with SMEs by linking cross-border payments with other services such as alternate sources of financing or fully digital FX services.
A traditional foreign exchange trade would include sourcing for the best price either electronically or via a voice broker. This environment has historically been dominated by investment banks. Customers are subject to a spread cost, whereby the quotes/prices they receive takes into account a spread from the screens, a spread from the interbank price, and a spread that is subject to the credit profile of the customer.
Global Fintech firms are attempting to disrupt this process by providing a platform that offers comprehensive foreign exchange solutions, including live mid-market exchange rates updated in real-time, customised foreign exchange rate alerts, a fully automated transaction information dashboard, multi-user and multi-subsidiary control panel as well as on-demand forex reports. The automation of the process eliminates the middlemen therefore reducing cost, enhancing transparency with prices, and enabling them to charge a transparent, flat fee, which is detailed before each currency trade.
Despite the disruption to the industry from Fintech, one edge that banks seem to have so far is the power of their licenses. Strict regulations and licensing can be a common barrier for FinTech startups to enter foreign markets and broaden the list of countries money could be sent to. Traditional banks are not remaining idle during this threat. Some banks are already investing in the future of cross-border payments. One example is Citi Worldlink, which enables business customers to use a single window to make multi-currency purchases, aggregating them for lower rates. Worldlink also lets users make electronic cash and check payments in more than 135 currencies without having local currency accounts.
An impressive number of banks are involved in relationships with FinTech companies to transform their FX payments solution.
The emergence of potentially disruptive technologies are revolutionizing age-old business practices by increasing diversity, giving businesses a wider choice to adopt payment solutions closely matching their business needs. These innovations have the ability to make international payments faster and cheaper, but the need to maximize cash flow, currency exposure and control risk is still a challenge. Overall, global remittance is going through a positive change. The year 2016 may be the time when the cost of remittance will see a drastic reduction as financial institutions are on their way to adopt the innovative technology to stay relevant.
- Annual fintech research by Life.SREDA VC & INSEAD – Money of the Future 2015
- RPW Report June 2016
- Global Payments 2015: A healthy industry disruption