McKinsey And SWIFT Research Prediction on Cross-Border Payments
Forecasted Shift: McKinsey & SWIFT predict a change in cross-border payments
Future of Cross-Border Payments
Cross-border payments are crucial for global trade, with banks dominating this market due to their networks, regulatory adherence, and financial strength. Their substantial earnings, around $200 billion worldwide, come from fees (processing charges) and foreign exchange gains. These payments constitute 16.67% of global transaction values but contribute 27% of total transaction revenue, growing at 6% annually. McKinsey and SWIFT's research explores trends like emerging tech (DLT) and new players, considering regulatory shifts, international commerce, and changing customer expectations.
The article attempts to highlight the findings of McKinsey and SWIFT research prediction on Cross-Border Payments in the evolving landscape of global cross-border payments taking into account various trends and challenges shaping the industry. The research emphasizes the impact of emerging technologies such as distributed ledger technology (DLT) and the influence of new entrants. Furthermore, it addresses the changing regulatory environment, increasing international commerce, and evolving customer expectations.
Discussion Details
Current Scenario: Trends and Challenges
New players like TransferWise, Alibaba, and Amazon are increasing competitive pressure on established payment industry players, impacting segments like B2B and remittances. Despite healthy revenue per cross-border transaction, evidence shows changing dynamics and mounting pressure throughout the value chain. The industry must strategically plan for the future considering rising investment requirements and compliance challenges.
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Envisioning the Future: Radical Transformations
We envision radical transformations in the future of international payments, moving beyond short-term changes. Customer demands will drive technology adoption, resulting in new partnerships and economic models that reshape service provider expectations. While this vision may not materialize immediately, we identify eight evidence-supported longer-term trends indicating the market's clear direction, creating a new future for the cross-border payment sector, even if exact predictions may vary.
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Emerging Trends: Key Drivers of Change
The cross-border payment industry faces a pivotal moment, with emerging trends reshaping its landscape. Technology, regulations, customer preferences, and new entrants drive change, requiring strategic preparation from industry players. By embracing forward-thinking approaches, stakeholders can navigate the transformative journey and succeed in this redefined sector.
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Industry players must prepare for transformative changes.
Technology, regulations, customer preferences, and new entrants drive this change.
Shifting Customer Demands: Catalyst for Technological Advancements
Customer demands drive technology-based advancements in cross-border payments. Today's consumers seek seamless, fast, and secure payment experiences, prompting payment service providers to embrace innovation, explore DLT, and integrate new payment methods to meet expectations.
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New Players on the Scene: Competitive Pressure from Entrants
TransferWise, Alibaba, and Amazon are shaking up the traditional cross-border payment landscape. These agile and tech-savvy newcomers challenge established players with user-friendly platforms, competitive fees, and efficient solutions. Incumbents must innovate to stay relevant and maintain their market share amid growing competition.
Compliance Challenges and Investment Needs
In the evolving cross-border payment industry, complex compliance challenges and rising investment requirements emerge. Constantly evolving regulatory frameworks demand businesses to keep up with the latest rules and standards. Meeting customer expectations necessitates investments in technology, security, and infrastructure to stay competitive.
Strategic Preparation for the Transformed Sector
The success of the global cross-border payment sector depends on how industry stakeholders adapt to emerging trends. Strategic preparation is crucial to stay competitive. Embracing technology, understanding customer demands, and addressing compliance challenges can lead businesses to success in the evolving cross-border payment landscape.
Aspects of international cross-border payments and the way they are evolving in today's global economy.
1. Increased Cross-Border Payments: Global GDP growth and trade are driving an increase in international payments. Despite challenges like geopolitical risks and compliance issues, cross-border transactions continue to grow. The growth rate is expected to slow down, but business transactions are still the most significant category.
2. Factors Driving Growth: The growth in international payments is influenced by factors like retail remittances, global e-commerce, the role of small and medium-sized enterprises (SMEs) and globalizing corporate payments. These factors are shaping the future of international payment services.
3. Customer-Centric Approach: The focus is shifting from traditional providers to meeting customer needs. Customers want seamless and transparent experiences, and businesses need easier access to global payments.
4. Unified Experience Amidst Fragmentation: Despite the diverse payment options available, the goal is to provide customers with a fully integrated payment experience. Various payment rails will appear similar to users, making the process seamless.
5. Single Global Payment Area: Creating a unified global payment area is challenging due to differing regulations and market conditions. Regional payment schemes are currently more feasible, but efforts to achieve a global standard continue.
6. Addressing Fragmentation: As payment methods become more diverse, solutions will focus on ensuring secure and seamless interoperability across various payment systems and technologies.
7. Declining Transaction Costs: The cost of international payments is decreasing, making smaller transactions potentially profitable. To maintain profitability, providers may focus on niche services.
8. Importance of Liquidity: Banks have an advantage in managing significant payment flows due to their ability to handle large sums of money across currencies. This makes interbank networks essential for smooth global transactions.
9. Regulatory Challenges: Regulatory compliance is a concern for both banks and non-bank entities. Banks face higher compliance costs, while new players enjoy lighter regulations, but this is expected to change over time.
The above details highlight the growing importance of international cross-border payments and how businesses and service providers are adapting to meet customer needs in a rapidly changing global landscape. It also emphasizes the challenges and opportunities in providing efficient and secure payment solutions.
Seizing the Opportunity
Soon, international payments will become routine not only for large corporations but also for retailers, SMEs, and individuals. They will access solutions through integrated commerce or trade interfaces. Regional businesses will experience seamless execution, with added services like FX quotes or hedging generating extra revenue alongside affordable basic services.
While an immediate Single Global Payment Area is uncertain, parties should still achieve payments globally, regardless of diverse standards and infrastructures. Consumer behavior will strongly influence business payments, akin to Apple's impact on domestic payments and digitalization.
Amid pricing pressures, new players, and back-office transformation needs, banks will persist in their crucial role in cross-border payments and could even thrive amidst ongoing changes.
Understand future revenue models:
By 2025, cross-border payment costs will significantly decrease, following trends seen in telecom "roaming" and other sectors. During 1995-2005, efficiency improved by 40-60%. VoIP reduced charges for large clients, leading carriers to adapt and explore new income sources. Similarly, music revenues dropped to $5 billion in 2017, then rose to $17.3 billion post-2014 with subscriptions and streaming. For cross-border payments, a shift from fees to growth-focused strategies is essential. Providers should consider alternative revenue approaches for profitability, as seen in the telecom and music industries.
Revisit client propositions:
Companies that directly engage with customers must navigate increasing standardization and ever-changing customer demands. Customer expectations will be influenced by state-of-the-art digital domestic developments and niche players. Although a large-scale international payments infrastructure is unlikely to be provided by DLT (Distributed Ledger Technology) in the near future, as consumers and businesses become more familiar with these products, a low pricing expectation may develop. Prices may consequently drop to marginal cost levels very quickly.
However, banks and payments specialists still hold the majority of customer relationships and can defend them by proposing ambitious solutions, such as:
Streamlined International Payments with Low Costs
The international payments infrastructure allows for quick and predictable transactions similar to domestic payments. The operational costs for each transaction are nearly $1, ensuring affordability. Additionally, the system offers transparent and predictable pricing with minimal exception fees.
Payment Corridors & Convenient Purchases in Emerging Markets
The attention is on the fast-expanding payment pathways, mainly concentrated in the southern regions. The emphasis is on user-friendly purchasing features, similar to Amazon's "one-click" option, that offer a wide range of pay-in/pay-out choices, including cryptocurrencies. Additionally, these features support various use cases, catering to preferences for cash-on-delivery models in emerging markets like Russia and India.
Secure & Reliable Distributed Ledger Service.
An automated control system (like taxation or AML) that coordinates various tax laws and handles regulatory implications for both buyers and sellers would provide a service as secure and dependable as the dedication of distributed ledger technology, coupled with convenient compliance, and would foster unmatched confidence in security measures.
Adaptable and Versatile Payments
Payments can be as flexible as cash but offer greater versatility, giving clients control, visibility, and traceability during transactions, including recoverability and the use of smart data. These services will become part of daily life, starting with niche segments like retail, remittances, and select SMEs. Remittances have already experienced disruption, moving from cash collection to digital interfaces. New firms like Worldremit and Azimo have emerged, changing the competitive landscape. One suggestion from the interviews was that That the banks need to address the failure of connecting smaller emerging market to international financial network and leveraging their systems.
Closing the Gap: Enhancing Cross-Border Payments
Due to potential price erosion, global payment systems must narrow a cost gap of more than 90% versus domestic systems. Key inefficiencies encompass misaligned back-office operations, interbank claims, pricing management expenses, and fraud/AML oversight. Cross-border payment expenses tied to FX, network management, and compliance also contribute, though to a lesser extent. Although liquidity trapped in the nostro-vostro network can be expensive, its effects are less severe in areas with low interest rates. Furthermore, scale plays a vital role in international payments, potentially requiring additional consolidation.
To bridge the performance gap between domestic and cross-border payments, banks should prioritize the following:
1. Transparency, automated data completion using common reference data, and pre-validating user input all help to increase STP and serviceability.
2. Reduce exception costs for payment services billing through standardized billing formats and predefined charging formats.
3. Simplify the cost of financial crime investigations by utilizing financial crime utility services and advanced analytics solutions.
4. Optimize treasury operations, focusing on intra-day liquidity reporting and efficient liquidity utilization.
5. Implement an enhanced clearing and settlement model to complement the existing nostro-vostro system, considering factors like settlement set-up, messaging standards, and technology.
To achieve this transformation, banks need a fundamental upgrade of capabilities in automation, robotics, data analytics, and customer design. Agile operating models with a customer experience mindset are essential, emphasizing shorter go-to-market times and increased marketing effectiveness.
In the future, banks operating in real-time, error-free, with integrated services will be the ones earning sufficient margins, while smaller banks may face disintermediation.
Efficient Cross-Border Collaborations: SWIFT's gpi Success
Collaboration among banks is crucial for achieving efficient and effective payment services. Industry initiatives like SWIFT's gpi exemplify successful group efforts, connecting 250+ banks and facilitating over $100 billion in cross-border payments daily, which accounts for more than 30% of SWIFT's total cross-border traffic. By adhering to multilateral service level agreements, participating banks ensure fast, transparent, and traceable cross-border payments. This streamlined process leads to fewer interbank investigations, and real-time processing allows over 50% of international payments to be credited to beneficiaries' accounts in less than 30 minutes, some even in seconds.
Establishing Value Chain Roles and Partnerships
Establish a clear role in the value chain and build your partnership network. Introducing a new era of "Zollverein" 5 alliances. Significant pressure will lead to value chain fragmentation, especially in the crucial back end with economies of scale at stake (Data from SWIFT). Just as the German Customs Union formed in the 19th century, transaction size reduction will drive this change. Some companies will strengthen their overall value chain presence. More often, they will focus on specific points and consider divestments. Key areas include:
Conclusion:
McKinsey & SWIFT’s research predicts significant changes in the landscape of cross-border payments, driven by emerging trends, technology, and customer demands. Despite challenges, cross-border payments are a vital component of the global economy, accounting for a substantial portion of transaction revenues. New players and technologies are challenging traditional players, urging them to innovate and adapt. Regulatory compliance, investments in technology, and addressing fragmentation are key to success. The future envisions a more customer-centric approach, seamless integration, and potential shifts in revenue models. Collaboration among banks, such as SWIFT's gpi initiative, showcases successful efforts to streamline cross-border payments. To remain competitive, stakeholders need to strategically prepare for the transformed sector, embracing technology, understanding customer needs, and navigating evolving regulatory landscapes.
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