sibos 2013 dubai building dedicated products and services for low value cross-border payments

Because there’s a better way. © 2013 Earthport Plc. All Rights Reserved.

Building Dedicated Products and Services for Low Value Cross-Border Payments Sibos 2013

Neil Burton Director Product Strategy

Dubai

16th September

“An invasion of armies can be resisted, but not an idea whose time has come.”

Victor Hugo


Building dedicated products and services for low value cross-border payments

• Efficient services for traditional high value payments

• Emergence of non-bank providers with targeted low value offerings

• How the market requirements differ from, and demand a different solution set than, traditional payments services

• Where regulations and regulators are forcing change

• Options financial institutions are taking to better serve low value payments

• The business case to generate increased wallet and market share


The innovator’s dilemma

‘The Innovator’s Dilemma’ – Clayton Christensen

http://www.google.co.uk/url?sa=i&rct=j&q=innovator's+dilemma&source=images&cd=&cad=rja&docid=FIbZfFUXXinHxM&tbnid=VSgT3vvcteIJyM:&ved=0CAUQjRw&url=http://www.thegreenabacus.com/blog/2013/04/performance-oversupply/?utm_source=rss&utm_medium=rss&utm_campaign=performance-oversupply&ei=l1YnUsH1HeHW0QWPnYCQDQ&bvm=bv.51495398,d.d2k&psig=AFQjCNFpbyDWypDwJoAXyTmQA7wxjf_cLw&ust=1378396057038675


Analysts often refer to payments as a commodity business. This isn’t true for cross-border payments.

Cross-Border Payments Perspectives, Glenbrook Research Brief 2011

Domestic International

High value

Low value

RTGS

Non-bank providers

The payments market

CLS

Correspondent Banking

ACH


International payments

Destination: known

Arrival time: unaware

Visibility: murky

Correspondent banking 1.0 in the mid-1970s was about automating the telex.

A more efficient 2.0 emerged in the late 1990s, based on centralised global transaction processing,

The model is still too bank product centric, based on inherently inefficient multiple agreements.

Correspondent Banking 3.0 SWIFT


What ‘niches’ are poorly served?

1. Small to Medium Enterprises (SMEs)

2. Emerging markets and routes

3. Remittances

4. Financial Inclusion


1. SMEs poorly served?

The MEA region’s SMEs present an important opportunity.

• The Middle East has between 9-11m micro, small and medium-sized enterprises.

• SMEs produce 40% of Africa’s GDP and provide half its jobs.

Significant needs remain, especially in the areas of payments collections and disbursement, remittance processing and working-capital management for SMEs.

Better serving these SMEs could create > $40bn in new revenue Putting Growth Back on The Banking Agenda, McKinsey, 2013

The Coca-Cola branch in Somaliland is the only cashless Coca-Cola company in Africa.

Canadian Globe and Mail, Jun 21 2013

Because there’s a better way.

cash

Volume

Value

Corporate cash

management

E-commerce creates demand for open account across borders

Traditional structured products • Letters of Credit • Doc. Credits • Treasury Services

Low value transactions settled with cash, cheque & e-wallet

The traditional curve…

Because there’s a better way.

Volume

Value

78% of Chinese exports are made by SMEs

Open account trade will grow by nearly factor of 3 by 2020

Supply chains defragmenting

....is changing


2. Emerging markets poorly served?

• Nearly half of settlement processes within Africa involve banks outside of Africa

• Nearly 40% of Africa’s financial flows go to the USA, though it accounts for only 9% of commercial flows

• More than 80% of the USD transactions sent from Africa to the US have their financial beneficiary in another region

Africa Payments:Insights into African transaction flows, SWIFT, Sept 2013

In theory, Asian Global Challengers are in the best position to benefit from the rise of Asia. Yet few of them have either strong expertise in international trade and its products or their own platforms

The Transaction Banking Advantage, Boston Consulting Group, Oct 2012


3. Remittances poorly served?

• The GCC is the world’s second-largest originator of remittance payments, providing more than $70bn annually, flowing not just to such nations as India and the Philippines, but to the entire MEA region.

• Africa’s growing migrant-worker populations sent nearly $50bn via formal remittances in 2011.

• Money-transfer specialists such as Western Union and local exchange houses captured most of the resulting revenue, which exceeded $4bn.

Putting Growth Back on The Banking Agenda, McKinsey, 2013


4. Financial Inclusion - poorly served?

• Acquiring 20 percent of unbanked MEA domestic flows would produce $10 billion to $12 billion in additional payments revenues 1

• 58m citizens in Europe don’t have a payments account 2

• Rwanda has achieved 72% financial inclusion – more than half are served ‘informally, by MNOs and Saccos 3

1 Putting Growth Back on The Banking Agenda, McKinsey, 2013 2 http://ec.europa.eu/internal_market/finservices-retail/docs/inclusion/20130506-factsheet-3_en.pdf 3 http://allafrica.com/stories/201210060051.html

http://ec.europa.eu/internal_market/finservices-retail/docs/inclusion/20130506-factsheet-3_en.pdf


Can these ‘niches’ scale up?

10 x the speed

Country Time to double GDP

Britain 150 years

India 16 years

China 12 years x 100 times the population

= 1000 x the economic impact Winning the $30 trillion decathlon, McKinsey, 2012


Challenges for Banks

Product management geared to established MNCs • Design to flexibility or design to cost? • Complexity has increased the cost of financial intermediation

“The unit cost of intermediation ..is now significantly higher than it was at the turn of the 20th century. In other words, the finance industry that sustained the expansion of railroads, steel and chemical industries, and later the electricity and automobile revolutions seems to have been more efficient than the current finance industry.” Has the U.S. Finance Industry Become Less Efficient? NBER, May 2012




Regulation • Creating a two-tier world?

“If we become the tool of choice for imposing sanctions on a whole series of countries, then we really are on a road we think is not conducive to the global banking systems.”

Gottfried Leibbrandt, CEO SWIFT in The Banker October 2012




Regulation • Creating a two-tier world?

Heavily networked industry • Investment geared to existing assets - design to the past not the

future • First mover disadvantage?

“Infrastructure investment is concentrated on fine tuning…not on meeting present and future needs of the digital economy.” Facilitating Consumer Payment Innovation in U.S., Bruce J. Summers, Mar 2012

‘focuses on the end-to-end payment process, whereas past FRB payment strategies focused on interbank issues ‘ Payment System Improvement, Federal Reserve Banks, 10 Sept 2013


Sourcing core functions


Sample common business functional components

Function Examples* Secure financial messaging SWIFT Domestic clearing Vocalink, Equens Sanctions filtering SWIFT Popup & small merchant transaction acquisition Square Global low value clearing and settlement Western Union, Earthport Invoice matching and reconciliation OB10, Tungsten FX The Currency Cloud

*exceptions, omissions and mispositions excepted!


Earthport core attributes

• Differentiated • Predictable outcome, transparent, cost effective, reach to >50% of banked population

• Operational Metrics • Industry best STP rates result in high end client satisfaction

• Simple adoption • Standardised interfacing results in low effort, fast time to value


Other industries collaborate

When Boeing launched its 737 plane in the 1960’s, only 10% was outsourced. Today almost 80% of the 787 Dreamliner is outsourced.


In conclusion

• 'The problem established firms seem unable to confront successfully is that of downward vision and mobility'.

• 'Their customers were pulling them along a trajectory of 22% capacity growth in a 14 inch platform that would ultimately prove fatal'.

‘The Innovator’s Dilemma’ – Clayton Christensen

Contact details:

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+44 7802 790663

mailto:[email protected]

sibos 2013 dubai building dedicated products and services for low value cross-border payments

Economy & Finance