October saw the publication of the annual Global Payments report from leading management consultants, McKinsey & Company.
Bearing the tagline “A Healthy Industry Confronts Disruption,” the paper served up a comprehensive analysis of the current global payments landscape, and focused in on a handful of key factors McKinsey believe will come to shape it to a great extent in the future.
Among those factors were; the changing face of financial services for consumers, the likely modernization of transaction banking, and the ongoing process of upgrading domestic payments infrastructures. We’ll look at McKinsey’s take on these topics more closely in a follow-up blog, but for now we’ll turn our attention to the fourth factor on their list of reasons why the payments pie is a recipe for disruption: the state of cross-border payments.
Claiming that “Cross-border payments inefficiencies are opening doors for new players,” the report begins with an analysis of the current cross-border payments landscape by outlining some of the pain points for both consumers and businesses when moving money across international boundaries.
These undesirable elements essentially boil down to: Expense, speed (or lack thereof), and complexity.
In terms of expense, McKinsey estimates that consumers pay a fee of between €20-60 to make a cross-border transaction—not to mention the fact banks set their own exchange rate to reap further gains on such payments. But, as costly as the process is for individuals, it is B2B payments that yield the biggest cross-border revenues for banks, with business-to-business transactions representing 75% of all cross-border payments and having a total value of $155 trillion in 2014 (compared to $1 trillion in consumer-based payments).
As the report goes on to point out, “The high cost does not translate to high speed: these payments typically take three to five working days to complete. Often, there is also a significant lack of transparency in pricing, timing and tracking.”
This lack of transparency is just one of the complexities connected to cross-border payments. McKinsey cites others as the fact they must often be executed in-branch, demand “the filling in of many cumbersome fields,” and can initiate “lengthy manual document verification and sanctions checks” for businesses. The report also quotes figures we previously shared in a Traxpay publication, which point to the fact around 60% of B2B payments require time-consuming manual intervention.
Unsurprisingly, the paper concludes that the current state of cross-border payments is far from satisfactory: “Faced with significant margin erosion, banks have pared costs and pursed efficiencies in their domestic payments and other transactional products. Nothing of note has been done, however, to improve the back-end systems and processes that enable cross-border payments to work. To defend their position in cross-border transactions, banks need to move swiftly and surefootedly. Financial technology players move quickly, particularly where significant opportunities are clear.”
Among the “Financial technology players” McKinsey’s report identifies by name is Traxpay. On four occasions the paper singles us out as a leading innovator on cross-border payments, with special mention made of how our Dynamic Payments platform can “redefine the customer need by introducing alternate services such as conditional payments.”
By seeking to disrupt the status quo of cross-border payments outlined by McKinsey, we fit nicely into their description of what new players are bringing to the table: “Tomorrow’s solutions will go beyond utility models based on legacy systems and old-school correspondent banking to the adoption of future-proof digital technologies and industry standards that provide cross-country integration and greater transaction-level efficiency.”
McKinsey’s conclusion that cross-border B2B payments represent uncharted territory for FinTech innovations is the reason Traxpay exists, and we’re more than happy to be identified in their report as one of the few start-ups out to change the state of pay!