Health Equity And European Health Insurance: Bridging Social Gaps – Global cross-border payment flows are expected to reach US$156 trillion by 2022. This trillion-dollar cross-border payments market is being rocked by a flood of new entrants who promise to address longstanding pain points. Established banks and money transfer operators (MTOs) will need to consider the impact of these changes on future strategy.
Cross-border payments are currency transactions between people or companies located in different countries. The mon sender will typically choose a front-end provider, such as a bank or mon transfer operator (eg Western Union, Transferwise), to initiate the payment. The receiver then receives the payment through the medium specified by the sender. Traditionally, cross-border payments flow through the CBN that most front-end providers use to settle the payment. But, in recent years, we have seen new back-end networks emerge to optimize cross-border payments and enable interoperability between payment methods and give senders a better chance of reaching the recipient.
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Historically, banks have been at the center of the cross-border payments market, led by a few dominant global correspondent banks with little competition. This resulted in several pain points for both private consumers and businesses, including a lack of transparency, long settlement periods, high transaction costs, and limited accessibility. While these factors are less likely to be a problem for transactions in liquid currencies (eg USD/Euro), they are particularly prevalent in cross-border transactions in exotic currencies. For example, a transaction from a local bank account in Germany to a bank account in Senegal can incur costs of over €100, depending on the value of the transaction, and can take up to seven days to clear. And even then, the sender often did not receive confirmation of the success of the transaction.
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Such conditions are ripe for disruption, and in recent years we have seen a variety of new players enter the market to do just that. The landscape has become increasingly fragmented and competitive with companies targeting different geographies, transaction sizes, and payment segments.
The size of the market ensures its attractiveness to new entrants. The total global flow of cross-border payments is growing at around 5% (CAGR) a year and will tip to exceed US$156t by 2022. Within this total:
But while many new entrants seek to change the nature and inherent dynamics of the entire cross-border payments market, most are focused on low-value transactions in the C2C, B2C, and B2B segments, which are currently underserved by banks and service providers. traditional payments. . These low-value transactions to, from, and between emerging markets offer the greatest potential for disruption driven by consumer behavior, increased trade with emerging markets, and greater financial inclusion.
The increased pace of change in the cross-border payment market is closely related to rapidly changing consumer demands. Consumers are less willing to pay for banking services as they expect them to be fast and intuitive. The increasing penetration of smartphones and the popularity of digital access points such as alternative payment methods (APMs) for remittances have created new demands that incumbents are struggling to meet. Alternative solution providers that offer faster, cheaper and more transparent cross-border payment solutions can gain a competitive advantage over banks.
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A major trend within cross-border payments is the increasing focus on the emerging markets of Africa, Latin America and Asia, as their share of international transactions increases. Overall, global cross-border trade is expected to grow around 5% (CAGR) between 2018 and 2022, with much of this coming from emerging markets where growth is estimated to be around 11% (CAGR) between 2018 and 2022. , stimulated by initiatives such as the African Continental Free Trade Area and China’s Belt and Road Initiative. In contrast, protectionist policies in developed markets, including Brexit and US trade tensions, are expected to slow growth to around 2% (CAGR) between 2018 and 2022.
As mobile phone ownership increases, more people around the world have access to banking services and electronic payment solutions. The percentage of mobile phone owners among adults in emerging economies has risen to around 83% (PEW Research), boosting financial inclusion: in 2017, 69% of the world’s population had a bank account and/or or a mobile wallet, up from 62% in 2014 (World Bank).
The figure is expected to rise in the coming years with mobile wallets forecast for significant growth. Global point-of-sale (POS) mobile wallet usage is expected to change from c. 22% in 2019 to c. 30% in 2023, while mobile wallet usage in e-commerce is projected to grow to more than half (c. 52%) in 2023, from c. 42% in 2019 c. 52% in 2023 (Worldpay). This growth is increasing cross-border trade volumes.
Together, these trends create a need for new business models and value propositions that address pain points in the existing process with correspondent banks.
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These trends and the traditional pain points around cross-border payments – delays, high costs and lack of transparency – have given way to the arrival of two groups of new niche players: digitally enabled wire transfer operators and back-end networks.
Deal directly with shippers, consumer or merchant, and offer digital cross-border payments as your core business. When dealing with liquid currency pairs (for example, USD/EUR), these providers often establish direct banking relationships within sending and receiving countries, with net payments flowing between these countries. However, in many emerging markets, opening a bank account can be challenging and capital controls often hinder outgoing payments. Financial inclusion in these countries is also trending downward, and payment methods are highly fragmented. These conditions mean that digitally enabled mon transfer operators are often dependent on partners, such as back-end networks, in these countries.
You typically do not have a direct relationship with the sending or receiving party, but instead partner with these parties’ bank or wallet providers. By establishing partner networks through direct connections with local banks and APMs in liquid and illiquid markets, back-end networks enable interoperability within cross-border payments. For example, a Paypal account can transfer a Euro deposit to an M-Pesa account in Kenya Schilling. As this is not possible with CBNs, front-end providers are increasingly using these alternative back-end networks instead of using traditional bank rails.
The high fragmentation of the global payments market and the different regulatory requirements mean that back-end networks generally focus on a certain set of countries or regions. As a result, a shipping partner, such as an MTO, will need to connect to multiple back-end networks to offer a truly global solution to customers.
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Back-end networks typically use an aggregator model. Payment aggregation reduces costs, since most cross-border fees are incurred as a flat fee per transaction. Additionally, to enable real-time payment confirmation, back-end providers typically require pre-financing from their shipping partners as collateral. This pre-funding by the sending partner allows back-end providers to credit the recipient’s account in real time once the transaction is initiated.
The aggregator business model is particularly applicable to transactions within the C2C, C2B and B2C segments, which are typically low value. Back-end networks can settle these transactions faster, cheaper, and with more transparency than those processed by CBNs.
Aggregation models are less successful in the B2B segment, where average transaction values are typically above US$50,000. Guaranteeing the ability to pre-finance such high values would require senders to significantly increase working capital requirements. These models also offer less potential for cost reduction, as the current unit economics for B2B transactions are better, due to the higher average value and fixed nature of the fees. For these reasons, almost all high-value B2B cross-border payments are still processed through CBN.
New entrants to the cross-border payment market will continue to put pressure on traditional transfer operators such as Western Union and Ria. While these players once monetized a large network of physical branches, with high fees for senders and receivers, the growth of digitization and mobile wallet penetration in emerging markets is diminishing these advantages. Challengers are gaining market share on the sender front-end, while mobile wallets are gaining traction as a means of payment for remittance payments. We expect these trends to continue, with established players lagging behind the innovation of new entrants.
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On the back-end, banks and MTOs are finding that aggregators are a cheaper and more reliable option compared to managing their own direct connections, especially for low-value transactions. This is particularly true for exotic countries with challenging business environments. Cross-border back-end networks are also highly scalable, and the market generally exhibits “winner-take-all” characteristics. We expect to see the rise of regional “aggregator champions” and a significant increase in collaborations between banks and MTOs and these aggregators.
For cross-border transactions between developed markets, CBNs remain relatively efficient and reliable; we expect banks to continue to dominate these segments.
In emerging markets, the picture is more differentiated. Banks are expected to continue to dominate high-value transactions where costs are comparatively low and high working capital requirements deter aggregators. However, if this working capital hurdle can be overcome, we expect a significant increase in collaborations between aggregators and banks, as well as MTOs. Meanwhile, these collaborations are likely to fall within the low-value B2B transaction segment, as aggregators provide cheaper and more reliable solutions.
Aggregators may seem like interesting targets for big MTOs and banks, but we don’t expect
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