When will cash disappear? 3 international payments trends

Often at our office, we overuse the term ‘cash is king’, but more recently, we realise that cashflow is king, and cash as a payment option is disappearing.

International payments have paved the way for technological innovation, given the snail paced movements from incumbents, and massive revenue opportunities from high transaction international payments. Within the financial services sector, global trade is one of the only growing sectors, where trade is expected to grow at 4% CAGR for the next 3 years, expected to reach nearly $19 trillion in 2020 (according to a BCG White Paper on Accelerating Banks’ Transformation), which is no wonder digitalisation in this sector is rife.

Furthermore, international payments transactions are some 5% of global transactions, but account for 12% of revenue, therefore a big opportunity in fintech.

Yet today, when a traditional bank transfer takes 24-48 hours, a bitcoin payment can be made anywhere in the world within seconds at a fraction of the cost.

What are the trends?

In the international payments space, global trade is shifting rapidly to emerging markets such as Asia, whilst traditional trade in the Northern hemisphere remains stready. In terms of international payments themselves, according to the World Bank, the volume of financial transactions internationally accounts for some 10 times gross domestic product (GDP) worldwide, largely facilitated by SWIFT. Finally, as the cost of payments internationally have come down, there has been an increase in volumes of lower value payments (0 - $500) in the last two years, bringing down the average payment size globally.

In a world of new banking regulations such as PSD2 in the EU, incumbent banks are facing challenges around open banking, opening up API systems for disruptors and challengers in the sector. 

So what does this mean for international payments? We’ve identified 5 trends within the payments landscape that should be considered by anyone transacting or doing business overseas.

1.    Disruptors are dispersing the payments business

The payments ‘value’ chain has becoming disintermediated by new entrants such as Stripe and Alipay, which has very recently expanded its partnership with the Ayden payments platform to enable non-cash payments from Chinese customers, who spend some $300 billion abroad each year

Non-traditional banking players such as large retailers or marketplaces have stepped into the industry, owning the merchant-acquirer relationship and also introducing their own financial services products as part of their offering. As an example, Alibaba introduced Alipay several years ago to help its suppliers deal with cross-border payments without using a third party payment platform.

For CFOs and finance directors, the new ecosystem for international payments is increasingly challenging and complex, given the desire to ‘own’ the end-to-end customer journey whilst providing an affordable solution. Mid-sized financial institutions will face the most difficulty in becoming “infrastructure engines”, as they need the scale, database and volume to bring down cost in bringing together what is now a fragmented payment solution.

2.    Regulation continues to put pressure on payments

Following on from many cases of anti-money laundering, terrorist financing and know your customer / know your goods, trading internationally requires a sound compliance grounding to avoid fines, particularly in North America and Europe. Many larger banks have thus pulled out of international banking, particularly with smaller customers, given the amount of regulatory requirements and reporting to ensure laws are met in different jurisdictions. A study from Duff and Phelps recently predicted that compliance costs are predicted to double by 2022, which accounts for some 10% of revenue.

As a result of this, smaller less regulated fintech startups are expanding to fill these gaps and iron out inefficiencies, although their remit would be regional and local, not global. We’d expect to see a series of acquisitions and mergers to seek efficiencies and significant disruption in the payments space.

That said, it’s estimated that up to $40 billion USD in transaction values are entering through unregulated channels (such as bitcoin or blockchain based currencies), and this trend is expected to grow over the coming years, according to Currency Cloud’s World Payment Report 2015.

3.    Competition is bringing down margins

As we see the demise of branch networks and physical stores, many digital players are beginning to serve customers at lower operating costs, which has been more profitable. As a result of this, SMEs have seen positive margin reductions (cheaper cost of transferring money overseas) as they compete with banks, forcing larger financiers to cut margins.

By way of example, Kabbage, the short term business lending platform achieved $41m in revenues by 2015, which was said to be profitable, whilst having no physical stores. Similar things are happening in the trade finance space, with Letters of Credit earmarked for innovation and digitization, according to Trade Finance Global.

In the international payments space, the growth of GoCardless and Trasnferwise for Business has certainly taken a small dent into the international payments space, given that they boast some 1/7 cost versus banks.

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Eyeing up the size of the prize, there is certainly a great opportunity for those embarking the international payments game. Understanding the current position of the company, opportunities to leverage, merge, collaborate or compete are crucial to financial institutions, no matter how big or small.