Collaboration between banks and fintechs can bring faster speeds to the international payments space
Collaboration between banks and fintechs has driven considerable innovation in the international payments market in recent years.
In the not-too-distant past, oversight of cross-border payments – in terms of their status and the associated handling fees – was limited and updates were difficult to access and slow to arrive.
This was, in part, due to the need for often long chains of correspondent banks to shift the money from a region the payer’s bank operated in to one outside its direct network. This created a process-heavy and costly operation, with each bank incurring its own paperwork and fees.
As a result, no single institution could have oversight over the whole chain, resulting in a lack of transparency and no easy way to know when the payment would be settled. One of the major pain points was a lack of clarity over the cost, where the recipient ended up with less money than expected due to fees deducted along the way.
Thankfully, international payments have come a long way in recent years in large part due to inter-bank collaboration – typically led by Swift – as well as collaboration between banks and fintechs. Swift gpi, for instance, has become an established part of the payment ecosystem, tracking international payments for large corporates and financial institutions in a standardised way and making the data readily available via a trackable and unique end-to-end transaction reference code.
This not only provides clarity over payment statuses and fees, but also accelerates the payment process and reduces the fees through streamlined automation.
Small is beautiful
But what about international payments made by smaller businesses and retail consumers? Certainly, consumers have become used to digital payments for goods and services and have sought the same for all their financial dealings, including cross-border payments. To meet this demand, Swift has developed a new service called Swift Go, providing a similar service to gpi, but for low-value payments.
Around the same time, Swift also came out with its Beneficiary Account Validation (BAV) service, which enables payers to check the account details of the recipient, preventing manual error and fraud. This is particularly important as payment execution speeds up, making it harder to intervene and stop fraudulent transactions where, for instance, payers may have been fed false payee account information.
These Swift innovations have made significant inroads in the space. But partnership between banks and fintechs has the potential to improve things even further.
Fintechs have the flexibility and nimbleness to spot gaps in servicing clients and create new solutions at speed. Banks have largely welcomed this stimulus. And, although fintechs provided a service that transfers money across the globe for low-value payments first, banks – working together – have caught up.
They also understand that to be cost efficient and bring the best service to their clients, they must collaborate with third parties that have the right strengths to complement their huge international networks and large balance sheets. And that includes fintechs.
Today, fintech innovation is already helping resolve some of the other pain points associated with international payments, including FX conversion. Many banks offer integrated solutions that convert incoming or outgoing payments into the destination currency instantaneously, rather than waiting for the trade to be executed manually within the treasury team.
These conversions take place at pre-agreed wholesale spreads, providing full transparency into the underlying processes and FX rates, which in turn ensures an attractive and unambiguous price for clients. What’s more, fintechs’ solutions enable banks to offer FX conversions in a much wider range of currencies, reaching beyond any one bank’s network to create a global offering.
This is perhaps just the tip of the iceberg in terms of what bank-fintech collaboration can achieve in the payments space – and the appetite for more collaboration is high. The second Payments Services Directive (PSD2) has helped move things forward in this respect, promoting an “open banking” environment in which banks and other providers of financial services can seamlessly share data to widen the number of market entrants. This has made it far easier for banks and fintechs to work together.
Yet this is just the beginning of the journey and there is still work to be done to realise the benefits. If banks from all geographies do not commit to this new centralised regulation, they may find that fintechs end up providing solutions that cut them out of the processes.
That said, Swift’s BAV roll-out, underpinned by APIs, gives hope that this kind of technology and integration will be embraced by banks – and some already have their own in-house solutions for this kind of API-based pre-validation in their domestic markets. If PSD2 does become uniformly implemented, it will provide a solid foundation for continued collaboration to keep banks competitive as costs become lower and speeds become faster.
Fintechs are nimble and creative as they attempt to solve inefficiencies in international payments systems while focusing on user experience. Valuing the pace and innovative mindset of fintechs is key for banks, and partnering with them – in the right way – will be critical for the industry if it is to realise the benefits of modern regulations and technologies.