Patricia Hines, CTP Senior Analyst, BankingCelent
MAY 2018
CROSSING THE BORDER: DRIVING INNOVATION FROM INEFFICIENCY
Joseph StarkHead of AmericasEarthport
1
Today’s discussion
Drivers and Trends
Traditional Models
External Influences
Emerging Models
Simplifying Global Payments
2
What are the drivers andtrends affecting the cross-border payments ecosystem?
3
0.55
0.56
0.61
0.64
1.06
1.59
2.25
0.00 0.50 1.00 1.50 2.00 2.50
Hong Kong
France
Japan
United Kingdom
Germany
China
United States
Imports
Global trade drives the world economy
1.45
2.10
1.34
0.41
0.64
0.49
0.52
0.000.501.001.502.002.50
Exports Imports
Sources: International Trade Statistics 2016 TradeMap and Celent analysis
4
Small businesses represent 97.5% of exporters and 36.2% of export value
0
500,000
1,000,000
1,500,000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Small Business Large Business
28.9%36.2%
Value of U.S. Exports of Goods
Source: U.S. Census Bureau, A Profile of U.S. Importing and Exporting Companies, Celent Analysis
Note: Small and Medium Exporters are defined as those companies with fewer than 500 employees, those with missing employment data, nonemployers, and companies that reported annual payroll but did not report any employees on their payroll.
$mill
ions
5
• Bill payments• Online purchases/
e-commerce• Payment at POS• Charitable donations
Payment types
1
3
5
14 Business
Bus
ines
s
Consumer
C2B
C2B Examples
C2CC2C Examples• Peer-to-peer • Remittances• Personal services
payments
B2C Examples• Employee payroll• Contractor
payments• Reimbursements• Rebates & refunds
B2C
B2B• Supplier payments• Capital purchases• Intercompany
lending• Bank-to-bank
Payment Initiator
Paym
ent R
ecip
ient
Source: Celent
B2B Examples
Con
sum
er
6
B2B accounts for the majority of cross-border volume and revenue
4Global cross-border payments flows, 2015, US$ billion
Global cross-border revenues/ margin as percentage of lows, 2015, US$ billion
C2B B2B
C2C B2C
$405 $765
$135,815
$980
C2B B2B
C2C B2C
$20
$240
$15
$25
1.5%
Source: McKinsey Global Payments Map, Celent analysis
Total 2016 global payments revenue: $1.6 Trillion
6.2% 2.6%
0.2%1.5%
7
Borders still matter when it comes to making and receiving payments.
Are traditional cross-border payment services adequately positioned for today’s challenges?
8
Traditional cross border payment process using correspondent banks
US Based Bank
Japanese Based Bank
US Federal Reserve
Bank of Japan
US Correspondent
Bank
Japanese Correspondent BankCorrespondent
Banking Fee
¥$
Buyer Supplier
$
$
¥
¥
Process friction
Correspondent Banking Fee & FX conversion
SWIFT Messaging Network SWIFT Messaging Network
Source: Celent
9
Critical elements of uncertainty
• When will payment reach the beneficiary?
• What amount will be received after fees are deducted?
• What costs will the originator incur including fees and FX rate margins?
• How many intermediary banks will be involved?
• Will the beneficiary have enough information to easily record and reconcile to accounts receivable?
Cross-border payments have several critical elements of uncertainty
10
Potential expenses and savings associated with B2B cross-border payments
Source: The Cost-Cutting Case for Banks-Ripple, February 2016
International payment servicing cost breakdown
1.6
4.4
4.8
5.6
2.5
2.0
20.9 bps
Traditional Cross-Border Payments
2.31.7
5.6
2.5
14.1 bps
Ripple
Currency Hedging
Treasury Operations
Liquidity
Payment Operations
Basel III (LCR)
-33%
11
• Relatively high revenue margins persist due to a lack of external downward pressure
• Regulation and increased competition forced providers to reduce fees on domestic payments, resulting in operational cost improvements through front-end automation, process simplification, standardization and outsourcing, along development of new applications for existing payments products.
• With healthy margins, banks and providers have had little incentive for structural changes to cross-border payment models, back-end systems, and operational processes.
• As a result, operational cost per transaction for international payments continues to average well above $20
Lack of disruption in the cross-border payments space
Source: Global Payments 2015: A Healthy Industry Confronts Disruption, McKinsey Global Payments Map
12
What are the external influences affecting the cross-border landscape?
13
The promise of blockchain
Japanese Correspondent Bank
US Based Bank
Japanese Based Bank
US Federal Reserve
Bank of Japan
US Correspondent
Bank FX Transaction
Fee
¥$
Buyer Supplier
$
$
¥
¥
Process friction
US Based Bank
Japanese Based Bank
FX Transaction Fee
¥$
Buyer Supplier
$ ¥
FX Market Maker
Process optimization
SWIFT Messaging Network SWIFT Messaging Network
14
Fintech firms face a dizzying array of regulatory bodiesMoney services business (MSB) example
Source: Celent Analysis (Illustrative), 2017
15
How are emerging payment models creating innovation from inefficiency?
16
Segment
P2P Remittances (C2C)
Cross-Border eCommerce (C2B)
Cross-Border Card Networks (C2B)
Cross-Border Payroll (B2C)
A dizzying array of non-bank segments and providers in the cross-border payment space
Source: Celent Analysis (Non-Exhaustive), 2018
17
Segment
Supply Chain Networks (B2B)
Foreign ExchangeBrokers (B2B)
Cross-Border PaymentNetworks (B2B)
A dizzying array of non-bank segments and providers in the cross-border payment space, continued
Source: Celent Analysis (Non-Exhaustive), 2018
18
• Cross-border payment platform • Private blockchain using proprietary digital currency (XRP) as a bridge currency
• Real-time transactions• Registered money service business• Targeting low-value payments
• Building Visa B2B Connect using Chain’s Core blockchain infrastructure
• Private blockchain • Near real-time transactions• Targeting high-value payments
B2B Cross Border Payment Models
Visa B2B Connect
• Cross-border payment network • Connects to correspondent banks• Clients include banks and corporates• Supports payments and acceptance• Real-time transactions via Federated Ledger• Targeting low-value payments
• Cross-border payment network • Connects to domestic ACHs• Real-time transactions via Ripple• Registered money service business• Targeting low-value payments
Earth Payment Network
19
How can collaboration between fintechs and banks simplify global payments?
Collaboration is key
20
Valuation of the cross border
payment industry with expected
growth to $218tn by 2022
$150 Trillion
75% of Fintech
91% of Banks
Agree their primary business objective to
collaborate and enable traditional
firms
Incorporate collaboration with FinTechs in their
future growth strategies
Rapid growth in cross border transactions has lead to both banks and FinTechs working together to best support the growing
demand and optimize commercial opportunities
Opportunities not threats
21
The trust and scale of the incumbents combined with the speed, UX and function of FinTechs creates significant value
Source: World FinTech Report Survey, Capgemini, LinkedIn, Efma, and MaRS, 2017
Key reasons FinTechs partner with traditional financial services firms, 2017
30.0%
17.3%
20.9%
31.8%
55.5%
59.1%
60.0%
66.4%
Others
Expertise in Risk Management
Expertise in Regulations
Access to Capital
Better Distribution Infrastructure
Gaining Customer Trust
Achieving Economies of Scale
Brand equity
Our global network, international expertise and years of experience allow us to give your business the freedom to grow
UK FCA regulated
Introducing Earthport
Settling billions of dollars in payments annually direct to over 200 countries
Robust & Sophisticated Compliance
Largest independent ACH Network
FX & Treasury Management
Settlement management
Payment tracking/SLAs
No credit risk Flexible connection options
22Regulated by the FCA – Licensed by the NYDFS
Earthport Model
Flexible funding & FX options Superior Compliance, risk and regulatory experience Message validation and enrichment A suite of settlement methods 200+ countries
One integration multiple benefits
23
24
Global connectivity
Form
at tr
ansf
orm
atio
n
API
SFTP
APIDirect connection
Admin portal
Payment instructions Receivables & Exception flow
Form
at tr
ansf
orm
atio
n
Not
ifica
tion
/ rep
ortin
g sy
stem
s
SFTP
Web services
Send to Bank
Earthport Partner bank
Credits (received funds and returned
transactions)
Process via appropriate route
The value of knowledge
25
Best in market risk, regulatory and compliance expertise is a significant differentiator
• Specialized risk and fraud tools to allow growth rather than restrict it
• Maximize growth potential while minimizing operational overheads and risk
• Ensure complete adherence to the complex regulatory requirements in all markets
Robust and sophisticated risk, regulatory and compliance services to suit the needs
of any global business
26Risk assessment
toolsSuspicious
activity reporting
Client funds in a separate ‘trust’
account
Transaction monitoring & incident
management
Segregation of accounts
Externally audited
Sanctions screening
Counterparty risk
assessment tool
Compliance at our core
26
27
Other Europe
CameroonGabonCentral African RepublicChadCongoEquatorial GuineaSenegalCote d’Ivoire
BeninBurkina FasoGuinea-BissauNigerTogoEgyptMoroccoSouth AfricaZambia
GhanaNigeriaKenyaUAEUgandaTanzania
ME/Africa
Canada USA
North Americas
86Countries v ia local ACH
ArgentinaBahamasBarbadosBrazilChileColombiaPeru
JamaicaTrinidad & TobagoUruguay
200+ countries total
AustriaBelgiumCyprusEstoniaFinlandFranceGermany
GreeceIrelandItalyLatviaLithuaniaLuxembourgMalta
NetherlandsPortugalSlovakiaSloveniaSpain
Euro-Zone+
Other EuropeAlbaniaBosnia-Herz.BulgariaCzech Rep.CroatiaDenmarkHungaryIsraelLiechtensteinNorway
Poland RussiaSwedenSwitzerlandTurkeyUnited Kingdom
Asia
AustraliaBangladeshChina Hong KongIndiaIndonesiaNew ZealandPakistan
PhilippinesSingaporeSri LankaThailandVietnam
South Americas
The worlds largest independent ACH network
Seamlessly manage payments globally through a single relationship with Earthport, reducing complexity and meeting your customers’ expectations for cost, predictability and transparency.
World’s Largest International ACH Network
The world through one relationship
28
29
Patricia Hines, Senior [email protected]+1 704 969 0763
@PJHines
https://linkedin.com/in/patriciahines
Joseph Stark, Head of [email protected]+1 646 946 0121