Is There Much Opportunity for Start-ups in Cross-border Payments?
Sparked by my frustrations with trying to pay my friends abroad, this is a brief thought piece on the future of international payments — real-time, open-banking, SWIFT, Ripple, it’s all here … I even talk about crypto, but hopefully without getting ahead of myself
Fall on the eastern seaboard of the US is like nowhere else. It is particularly radiant where I went to college, a small liberal arts school nestled in the Berkshire mountains, the color of which, at a distance, is the hue of my alma mater. It’s late September, and my friends and I have come back to play some golf and beer pong, and otherwise catch-up near the campus where we had some of our most formative years. One of us has booked an AirBnB and everyone has been able to pay seamlessly, via Venmo, except me, living in the UK has its drawbacks … besides the weather.
Although the market for real-time cross border C2C payments — like the one in my example — probably isn’t massive, the lag, cost and overall complexity of getting money from one country to another got me thinking. At a domestic level, real time payments are the norm almost everywhere, and are a stark contrast to their cross-border cousins. Surely this is an opportunity.
According to McKinsey, 15–20 percent of e-commerce transaction value is already international, and this trend is only set to continue. Lower shipping costs, transaction security and decreased red tape are a few of the factors driving the increase in international B2B and B2C payments. The gig economy plays host to the largest harbor for these sorts of payments (Amazon, Ebay) but even niche players like Etsy are seeing an uptick, and I think this is where the most opportunity is.
In the age of the smartphone, smaller e-commerce platforms need easier access to international payments as they don’t have the sort of infrastructure that the larger players do, and are thus forced to use inefficient and pricy international payment channels, credit cards included.
But even more generally, the transaction prices for the majority of international payments are still high, albeit the downward trajectory has begun thanks to pressure from domestic systems. Premiums come mostly from things like regulation and FX, but this should change, especially as regulations ease. I don’t have a clear steer, but we should begin to see more transparency e.g. more accessible data. This will level-out the playing field and allow third party fintechs to enter the fray. The new entrants and increased competition will drive down the premiums, albeit probably only around niche solutions to begin with. Historically, margins for cross-border payment providers have been high. Despite only representing about 16% of global transaction volume, cross boarder payments equate to 27% of global transaction revenue. This is split between fees and FX, so it sounds like there’s ample room for opportunity.
The market direction is clear. Disruption in domestic payment providers has shown us that the future is customer centric: catalysts for future services and technology replacement will not be driven by providers, as they have been historically, but by customers who are seeking a more seamless and transparent experience. That’s why I think real-time payments will be valued internationally, as will other things like exchange rate tracking. Ultimately, providers will likely have data embedded into an open system of payments that links to the broader ecosystem. There will be opportunity for third parties, particularly in ecosystems that use cross-offerings or data services that will use more accessible information for insights into purchasing behavior for example, capturing new opportunities. Think TINK.
As far as how long it is going to take for this sort of technology to become more widespread, the jury is still out. Currently, most international payments take about 2–5 days to clear, but SWIFT gpi is seeking to change that. SWIFT is using existing infrastructure as a platform for real-time cross-border payments, providing real-time tracking and fee information, thereby increasing transparency as well. Also, by next year many of the leading global banks and infrastructures will have the new messaging standard, ISO 20022 — this should also open up opportunities for start-ups hoping to plug inefficiency gaps.
Speaking of new entrants, Ripple may have already come up with its own solution as it is both a platform and its own currency (although Ripple doesn’t have blockchain, it has a consensus algorithm, which I won’t get into now). The average international transaction time is 4 seconds on Ripple, compared to an hour or more for Bitcoin and a few days for regular banking systems. Ripple also has better FX rates, especially for uncommon currencies (there’s no double commission from using the USD as a mediator — thank XRP for that, Ripple’s mediator system). Ripple’s whole payment ecosystem is also super interesting. Like you can create your own currency to cater for a specific market, e.g. baseball cards or vintage action figures…don’t look at me. Ripple Net is also optimized to figure out the best market for these sorts of things, but I digress, this is a story for another time.
So why isn’t Ripple dominating the international payments market? Firstly, it’s highly centralized, unlike other crypto currencies. The tokens are already mined so the developers can act like a government and decide the supply. There’s also a possibility, as it is open sourced, that the code could be hacked… not ideal, and it can freeze transactions, which is the exact opposite of what a crypto should be. Banks are still in the testing phase, and don’t really use the tokens much (the XRP thing that makes the transfers cheaper and fast). Also, Ripple’s $50m investment in MoneyGram was probably under the guise that they also use XRP for payments and remittances, but instead MG are using visa’s Fast Send …so yeah, not sure what sort of signal this is sending.
As far as crypto goes more generally, like Ripple, governments and banks don’t really trust it yet, which makes it difficult to see the entire international payment network migrate to their platforms.
For now, we’ll have to rely on the fiat exchanges and bet on the improvement of the infrastructure that they’re built on. I think the fact that payments will be consumer driven, and not provider, will spell the most for fintech opportunity. Open banking, more accessible and embedded data will help, and we haven’t even talked about Machine Learning or AI yet.
Until this improves or I eventually draw some cash when I’m on holiday (sue me, I’m a millennial), one of my college friends will be down a few bucks. But it’s ok, we’re planning a ski trip soon, and I’m sure we can figure out the IOUs then.