The future of cross-currency payments

Sean Willis, BAML: banks can help corporates respond to rising volume, risk and innovation

The landscape of cross-currency (FX) payments is taking on a whole new look – creating challenges for corporate financial managers and the need for new banking solutions. Sean Willis, VP, treasury product manager, cross currency products, Bank of America Merrill Lynch (BAML), looks at some of the innovation in the works.

The volume of cross-border payments, particularly transactions in the $500 to $500,000 range, keep escalating for a variety of reasons. Global trade continues to recover, spurred on by new trading routes and alliances. Borderless e-commerce is on the upswing, along with cross-border business-to-consumer payments, due to workforce mobility and the fact that more companies are using foreign contractors and outsourcing overseas. In addition, new global business models – like those of web-centered businesses Airbnb and Booking.com – are contributing to the growing volume of these payments.

One illustration of this growth can be seen with the tremendous rise of borderless e-commerce. PayPal estimates that by 2018, online shoppers will be spending over $300 billion a year across borders, up from $105 billion in 2013.

At the same time, the FX volatility associated with these payments has continued to grow, due to economic and political uncertainties, central bank interventions, ambiguity in Europe and the long-term strengthening of the USD. Many of the “safe haven” currencies deemed as major currencies generally associated with less volatility have continued to fluctuate significantly, with some losing over 30% of their value over the last two years, as can be seen with EUR and CAD versus USD with exotics fluctuating much wider.

Payments risk viewed as a growing concern

Even as the volume of small- and mid-sized cross-border payments has been climbing, very few companies have been actively managing the FX volatility associated with such payments. It hasn’t been a major focus of corporations for a few reasons. One reason is that the relevant transactions – often payments to global supply chain partners – are typically handled by Procurement or Accounts Payable teams, which aren’t primarily focused on risk management. The cross-currency component of these transactions is treated as a byproduct of the payment process, rather than as a priority.

It also doesn’t help that managing and hedging high volumes of smaller payments is perceived as inefficient, both in terms of cost and the internal work flow changes that are required.

This inattention to FX volatility risk is increasingly being viewed as a problem, particularly as more and more CFOs and treasurers are required to explain to shareholders the impact that such volatility is having on earnings.

Payments innovation also requires a response

Along with the growing volume of cross currency payments and the need to manage the associated risk, corporate financial managers are facing decisions and challenges related to the incredible amount of innovation that’s occurring – and the opportunity to better manage payments that it presents.

We are seeing a proliferation of new technology and payment methods – from myriad digital wallet alternatives around the world, to “push-to-card” options like Visa Direct and MasterCard MoneySend, to blockchain technology and virtual currencies – as well as the emergence of numerous non-bank payment providers, who are creating innovative e-payment options, but which still ride on the rails of traditional bank or card payments.

How will the new technology and providers impact the ability to manage the risk associated with the rising volume of everyday cross-border payments? How will banks support corporates as they attempt to seize the opportunities presented by “disruptive” payments technology? And how will banks participate in future innovation in support of their corporate clients?

Banking solutions in the works

Banks are responding to these changes in the cross currency payments landscape by working on tools that will enable corporate clients to better manage payments risk, including FX volatility risk, as well as leverage new technology to speed up payments and allow businesses to better serve customers and vendors. Solutions in various stages of development include:

Integration of currency trades with payment workflows

Today, most banks offer separate online tools for booking an FX trade and initiating a cross-border payment. Bank efforts to integrate these tools are aimed at enabling payments to clients to more easily engage in hedging without sacrificing the efficiency for making high volumes of cross-border payments.

For example, a US company that has 100 employees in London knows in advance exactly how many GBP it must pay out to them on a monthly basis. With new integrated tools, that US company will be able to go online each month and enter into a forward contract that locks in the number of USD it will need to purchase those pounds, in order to mitigate FX risk, and use the same portal to execute delivery of the payments using the most efficient method, such as a cross-currency ACH payment. 

FX rate lock-in/guarantee for longer tenors

Banks want to enable clients to lock in spot FX rates for a longer tenor without having to use a derivative product (like a forward, swap or option) that they would need to record in their annual statements. This will allow clients to expand more freely, while mitigating exposure to FX volatility risk in a systematic fashion for their high volumes of low-value payments. This should reduce the worry usually associated with high quantities and large values of cross-border payments which can be a make or break decision for a product launch or for a global expansion effort.

Enabling bank payments to be delivered via consumer-directed channels (no bank account required)

The idea is to change the paradigm from corporates asking their bank to make a payment by wire, ACH or cheque, to asking the bank to make a payment to a certain party by using whatever payment channel the consumer wants or is best suited for their needs, regardless of where they are located. Such delivery channels could include a push-to-card technology, delivery via digital wallet. This new frontier will potentially open additional borders and create an easier experience for consumers in the long term.

Better consultative support for developing payment migration strategies

All of the new payment methods and channels can be dizzying. Banks are developing consulting capabilities to assist clients in deciding, for each payment, which instrument and which currency they should be using. For instance, when does it make sense for a company to migrate from making a particular payment via a USD wire to making it via an FX wire — or from a cross-currency draft to a cross-currency electronic payment? And should the company use an existing method or one of the new emerging payment channels?

New payment rails leveraging blockchain and other new technologies

The drive to move money instantly yet securely has the payment industry looking beyond traditional payment clearing rails for wires, low-value electronic payments, cards and cheques. Banks are involved in the discussion about what new rails might look like, and seeking practical applications to streamline workflows and accounting needs associated with cross-border payments using blockchain technology.

Indeed, the coming year promises to be a busy one for banks committed to global payment services, as they engage in not only their own product development, but also cooperative efforts with other banks as well as non-bank payment providers to support emerging corporate needs.