Pioneering the Cross-Border Payments Landscape: Multilateral Platforms and the G20 Conclave’s Disruptive Impact
Multilateral platforms strengthen cross-border payments, enabling participants from different jurisdictions to exchange money directly, without relying on multiple intermediaries or legacy banking infrastructures.
It is a great choice for global payments, as it allows transactions from multiple jurisdictions to seamlessly transfer funds. Built with flexibility and scalability in mind, with a tiered structure, where indirect parties can use its centralised payment facilities without establishing a contractual relationship.
It is highly regulated by stakeholders from various countries, and also overseen comprehensively, where every participant complies with a single overarching rulebook making it a reliable source of secure cross-border transactions. In this blog, let us understand the importance of Multilateral Platforms and how it operates.
G20 conclave and its impacts:
The G20 conclave in the year 2020 made a significant impact in strengthening international payments and put forth a roadmap, that helps in streamlining remittance across borders. The main aim is to facilitate faster, cheaper, and more transparent transactions across borders. The main aim is to promote digital financial inclusion and enable universal access to affordable and safe financial services, by promoting cooperation among countries to enhance cross-border regulatory frameworks and promote standardisation.
One of the important decisions that took prominence was how multilateral platforms would enhance payment services and improve the efficiency of PSP’s digitalisation strategies. There are two approaches namely growth or greenfield approach, building upon the current multilateral networks, and creating a fresh universal infrastructure from scratch. The financial world would strengthen the currency exchange by drilling down the possibilities.
Multilateral Platforms– Transforming the Landscape of Cross-Border Payments
Multilateral platforms have innovated the traditional process by allowing more direct access between payer and recipient, which reduces the complexity cross-border payment methods. As they don’t require end users to use the same PSP as their partner for funds to transfer successfully, they are different from the usual banking system.
Multilateral platforms would strengthen cross-border payments, enabling participants from different jurisdictions to exchange money directly, without relying on multiple intermediaries or legacy banking infrastructures. Network models are an effective way to facilitate multilateral payments. Meanwhile, all PSPs on a common platform need to follow one collective set of rules regardless of domestic or international transactions. Multilateral platforms and interlinking arrangements are similar in benefits, costs, and risks, with comparable design choices.
Back-end arrangements for cross-border payments
There are four back-end arrangements for cross-border payments: namely correspondent banking, single system or closed loop, interlinking, and peer-to-peer. Multilateral platforms are often grouped with interlinking arrangements.
Correspondent banking facilitates international trade and financial inclusion by connecting banks across the globe. By forming relationships between smaller domestically focused PSPs and larger global institutions, these arrangements enable transactions to travel in chains of linked intermediaries from one jurisdiction to another – allowing for swift cross-border payments. In a closed loop or single platform system, payments across multiple jurisdictions are handled entirely within the same PSP, where the transactions are known as in-house and intragroup. The interlinking arrangement has a combination of contract agreements, technical links, and standards. These enable participating PSPs in two different countries to send money as if they are using the same payment system, without opening a bank account.
Peer-to-peer payments gained a massive boom in their operations powered by distributed ledger technologies, including crypto assets, stablecoin arrangements, and CBDC designs. These transactions allow individuals to send money directly to each other quickly, securely, and without the need for any intermediaries.
Multilateral Platform – Features:
Liquidity management: liquidity management is carried out by intraday credit, netting, and collateral management to ensure timely and secure settlement of payments.
Payment Messaging Services: Payment messaging services in multilateral platforms include authentication, initiation, submission, and conditionality, as well as standardised messaging, proxy lookup registries, pre-validation services, APIs for technical integration with third parties, limited or 24/7/365 operating hours, quantity and time limits, and capital flow management measures to ensure efficient and secure payment processing
Compliance and data processing: AML/CFT and fraud monitoring, KYC registries, and privacy and data management are essential components of compliant processing. Financial organisations need to implement these measures to prevent illegal activities, ensure regulatory compliance, and protect customer data.
Clearing including netting: Netting allows parties to settle their transactions on a net basis, rather than on a gross basis. Netting can be done on a bilateral or multilateral basis, depending on the nature of the transaction and the parties involved.
Settlement: legal decisiveness and technical settlement, settlement system type, settlement currency, settlement asset, and settlement risk management measures are important reflections in the settlement of financial transactions. Financial institutions can minimise settlement risk and ensure timely and efficient settlement of transactions.
Foreign exchange: Currency conversion in cross border payments is a settlement mechanism used to ensure that both parties in an FX transaction receive their payments simultaneously and without risk of settlement failure.
Network Models – Impact on Rules, Efficiency, and Cost-Effectiveness
The choice of network model can impact the development of a platform’s rules and procedures. In a hub and spoke model, the hub entity can operate with a minimal set of rules if the laws and regulations across the spokes are consistent. On the contrary, in a common platform model, the platform’s rules and procedures must be consistent with the relevant laws and regulations of each jurisdiction. Developing a common platform can be more time-consuming and costly, but once established, it can be more efficient to operate and maintain than a hub and spoke system. A common platform offers more consistent service to participants, better cost recovery, and can recover costs more efficiently.
Exploring Diverse Currency Arrangements for Enhanced Transaction Processing:
Multilateral platforms can be designed as a single currency, multicurrency, or cross-currency platform. Single-currency platforms handle and process transactions in one currency, and multicurrency platforms process using segregated account structures operating in multiple currencies.
Cross-currency platforms allow for currency conversion on the platform itself. The choice of currency arrangement depends on the purpose of the platform and various factors, such as the liquidity of the chosen currency, exchange restrictions, and exchange rate regimes. Several multilateral platforms have expanded their services to include more regional and global reserve currencies.
The Power of Multilateral Platforms in Overcoming Frictions Across Cross-Border Payments
Cross-border payments face several challenges, including legacy technology, fragmented data formats, funding costs, long transaction chains, weak competition, complex compliance checks, and limited operating hours. Multilateral platforms have the potential to address many of these frictions.
Let us in detail look at various factors altering the multilateral platforms.
Embracing Advanced Technology for Seamless Global Integration:
New multilateral platforms can overcome the friction of legacy technology by using the latest technology and avoiding reliance on batch processing. They can also implement new payment messaging standards like ISO 20022 to improve data quality and facilitate straight-through processing. APIs can further connect these platforms with existing payment systems and offer ancillary services like fraud monitoring and pre-validation. However, the implementation of these services may add complexity and costs, as well as potential regulatory adjustments. New platforms may face a trade-off between innovation and interoperability, and they may offer ancillary services like message translation to accommodate less advanced participants.
Optimising Funding Efficiency on Liquidity Pooling and Currency Exchange:
Multilateral platforms can lower funding costs by pooling liquidity and enabling easy currency exchange. Participants can hold accounts in multiple currencies and hedge against FX risk. The platform’s funding costs depend on whether it uses deferred net settlement or real-time gross settlement. DNS is less liquidity-intensive but exposes participants to credit risk. Pre-funding can reduce credit risk, but it may increase funding costs. Multilateral platforms cannot eliminate funding costs, but they have options to address funding issues, depending on the platform’s design choices.
Streamlining Payment Chains by Enhancing Efficiency and Reducing Costs:
By allowing the participants to send and receive payments directly, Multilateral platforms are shortening the transaction chains. Many multiple intermediaries are getting replaced, and challenges involved in the costs are also being curbed. In several payment corridors, PSPs depend on a chain of correspondent banks, which raises the overall price of the transactions. Multilateral platforms play a major role in reducing costs and increasing payment speed by connecting originating and beneficiary PSPs more directly.
Adopting Competition and Financial Inclusion by Empowering PSPs:
Multilateral platforms can increase competition by allowing payment service providers (PSPs) to connect directly and offer cross-border services in a particular corridor, instead of establishing separate correspondent banking relationships. They also serve as a single access point to a region, making it easier and cheaper for foreign entities to transact with banks, PSPs, and end users in that region, which may mitigate the effects of de-risking correspondent banking relationships. Multilateral platforms must create a level playing field between banks and non-bank PSPs and increase competition, lower costs for end users, and improve financial inclusion.
Enhancing Compliance and Security by Strengthening AML/CFT Measures:
Achieving high-quality compliance processes through comprehensive monitoring and transaction screening tools available in the Multilateral platforms is very effective. Having a comprehensive view of the transaction chain is helping several operators detect anomalies, and comply with AML/CFT regulations. Reference data of the anomalies or security breaches become very important to identify and curb the challenges. The platforms need to limit participation to enforce tighter regulations. By implementing several checkpoints, the platforms can streamline the complaint process.
Enhancing Operational Efficiency and Ensuring 24/7 seamless Operations
The choice of the multilateral platform makes a great impact on operating hours. If it serves across borders, touching different time zones, it is very important for the platform to operate round the clock, all the week, and throughout the year, to ensure a long settlement window. This has also impacted the operational cost, as it involves a lot of effort, technology, and skilled professionals to handle without glitches.
Conclusion:
Multilateral platforms for cross-border payments are an important tool for promoting financial inclusion, facilitating trade and investment, and improving global economic integration. As digital technologies continue to evolve, these platforms are likely to play an increasingly important role in the global payments landscape.
NetRemit, one of the flagship products from Macro Global has been providing cross border payment solution for banks, MTOs to ensure seamless operations We also enhance the capabilities of banks to ensure seamless transactions across borders. To partner with us call us at +44 (0)204 574 2433 or mail us at salesdesk@MacroGlobal.co.uk.
A Closer Look at the Smurfing & Structuring Technique in Money Laundering
Money laundering is raising as a major threat to the economy worldwide. With the advent of technology and using newer methods to commit financial crimes, many illegal proceeds are camouflaged and made to appear as legal assets. These crimes are very much organized, and their network is evolving, through which they hide their illicit activities from authorities all over the world. The other major threat that money laundering has is that the funds are directed toward terrorist groups, crime syndicates, drugs, and fund criminally minded networks.
Several methods for organising financial crimes such as placement, layering, and integration, are some of the widely used methods, which will be discussed in detail in this blog. The UN Report 2020 says that it is estimated that almost $800 billion to $2 trillion has been laundered. Alarmingly, this is equivalent to 2-5% of global GDP. It is highly essential for financial institutions to be cautious and bring effective AML measures, that would curb illegal activities. This blog post will unravel this white-collar crime, its types —its kinds, and its consequences.
Understanding Smurfing the Challenges it poses on financial institutions:
What is Smurfing?
Smurfing, in financial terms, refers to structuring or layering. It involves breaking down huge portions of money into smaller units, which becomes less suspicious while doing transactions and can avoid detection. The launderer may use multiple individuals or entities to conduct numerous small transactions, making it difficult for authorities to trace the source of the funds. Smurfing often involves cash transactions, as they are harder to track compared to electronic transactions.
How does smurfing work?
To understand how smurfing operates, it is important to understand the various steps involved and their methods. Smurfing is done using credit cards, multiple bank accounts, or shell companies. It is important to note that smurfing is not illegal in itself, but it is mostly used to support many other criminal activities such as tax evasion, terrorism financing, and drug trafficking.
This simple example would illustrate how smurfers operate. For instance, if they want to traffic $10,000, they digress the cash into small amounts. That amount would be less than the threshold of AML reporting requirements. The total money is divided into ten or twelve different bank accounts over a week. Thus, it becomes too challenging to suspect any illegal activity.
Money laundering involves a complex three-stage process, called placement, layering, and integration. In the first stage of placement, smurfs introduce their ill-gotten gains into money markets by cleverly structuring deposits to go unnoticed. In the process of layering, they involve various shell companies and offshore accounts as part of an intricate web designed to disorient law enforcement when tracing these sequentially transferred funds. Finally comes integration, where criminals can claim legitimate ownership of the money.
As financial institutions are required to report any transactions over a certain amount, it becomes easier for them to evade and bypass the checks. Though smurfing may look like an effective way to launder money, it will not become unnoticed on the radar of various financial institutions and AML regulators.
How to detect Smurfing:
First and foremost, financial organisations must have a clear KYC strategy to effectively prevent the exploitation of any weaknesses by malicious actors. Thorough customer due diligence is critical in detecting potential smurfing activities. This can involve verifying the identity and background of customers, understanding their business or occupation, and assessing the legitimacy of their transactions. By implementing structured monitoring, and analysing transactions, a large number of fraudulent transactions can be curtailed.
Customer behaviour and transaction pattern analysis are crucial components of fraud detection systems to identify anomalies or suspicious activities that could indicate fraud. By analysing the average amount per transaction and it is possible to identify transactions that are significantly larger or smaller than usual, which could be a red flag for fraud. Sometimes the money may be deposited from unusual places, or through different modes of transactions, which are different than usual. By scrutinising the spending pattern of the customers, the anomalies can be detected easily. It is always not just one type of change that is taken into account, but rather several factors are considered, which should be in conjunction with other fraud detection methods to ensure the highest level of accuracy.
There are several tools and techniques involved in fraud detection. Transaction monitoring tools are used by banks and other financial institutions to identify patterns of transactions that may be indicative of structuring. Duplicate document check involves comparing documents submitted by customers to detect duplicates or falsified documents, to detect duplicate or falsified documents. Counter the challenges of Terrorism Funding, requires monitoring tools, comprehensive due diligence, and watchlist screening to identify suspicious transactions and individuals.
Development in technology is transforming judgment-making in financial institutions. By combining activities such as social media lookup, data enrichment, and device fingerprinting into one process – what used to take many hours of human labour can now be automated in mere moments. Tthe accuracy rate increases while errors caused by manual work drop significantly.
Unexplained or suspicious transactions, inconsistent transaction patterns, or lack of a legitimate business purpose can be red flags for potential smurfing. Cash transactions are often used in smurfing activities and monitoring and flagging multiple cash transactions conducted within a brief period or across different accounts, particularly if they are below the reporting thresholds, would be a great way to curb illicit activities.
Using tools from FinTech to cater to challenges in smurfing, and tackle threats.
The growth of FinTech has marked a paradigm shift in how the banking system operates, bringing a lot of tools, and checks, and introducing various safety parameters, which can bring many safety measures. It can also early detect anomalies, observes patterns, and ensures seamless operations in banks and other financial institutions.
NetRemit offered by Macro Global, helps prevent illegal financial activities such as money laundering and terrorist financing, analyse transaction data in real-time, and detect patterns of suspicious activity. The system automatically generates an alert, when a transaction is flagged suspicious, which can be taken for further investigation, which helps financial organisations to save money, guard their reputation and save their time which would be otherwise spent on detecting and fighting crimes. Transaction patterns and customer behaviour analysis are automatically detected, and reports are generated based on that. Digital identity verification, automated risk assessments, and regulatory reporting help combat financial crimes.
NetRemit is also fortified with the investigation of real-time data, partnering with third-party service providers, spanning many zones and countries involving different currencies. Especially focusing on anti-money laundering (AML) and know-your-customer (KYC) regulations by verifying customer identities and monitoring transactions for suspicious activity with ken focus on sanction checks, PEP, Watchlists enhance compliance.
With an expert team, rendering consultancy support, by leveraging the power of advanced technology and advanced analytics, these tools can help financial institutions stay ahead of evolving criminal tactics and protect themselves and their customers from financial crime. Embedded with tools, and techniques that automatically analyse, detect, and raise a red flag in case of any anomaly detected would enhance the security, while real-time consultancy services and support will fortify the organisation to achieve business goals.
Developments in the area of fintechs are exponentially growing, which enables new platforms, tools, and techniques are continually evolving to detect fraud. With the advent to prevent money laundering, including smurfing, various financial institutions are increasingly adopting technology to enhance their battle against crime.
Types of smurfing in banks:
Surfers and fraudsters use several techniques and are classified as several types of smurfing.
Structuring: Cash structuring or transaction structuring is one of the most used methods of money laundering. The surfer will deposit the amount, which would be lesser than the threshold in different bank accounts to avoid triggering a suspicious transaction report (STR) or currency transaction report (CTR).
Splitting: Splitting involves breaking down a large transaction into smaller transactions to avoid detection. However, splitting may involve dividing the funds into smaller amounts and conducting multiple transactions over a longer period, rather than making multiple transactions at once as in structuring.
Layering: This type of smurfing involves creating multiple layers of transactions or transfers to further obfuscate the source of funds. For instance, a smurfer may transfer money from one bank account to another and often changes banks. This will be very difficult for the banks to trace the source of the funds.
Nominee Accounts: In this type of smurfing, a person or entity opens multiple bank accounts using false identities or using the names of others, and then uses these accounts to conduct multiple transactions on behalf of the actual beneficiary. This can help mask the true ownership and origin of the funds.
Currency Exchange Smurfing: This involves exchanging large amounts of cash into different currencies, often in smaller denominations, through multiple currency exchange transactions. Fraudsters use this method to convert illicit funds into different currencies to further conceal their origin and make them harder to trace.
Risks posed by smurfing:
Over the years, experts in financial institutions, banks, and MTOs have been combatting surfing, and have identified some of the challenges they are:
- Difficult to detect: Fraudsters using surfing use advanced techniques through which they avoid detection intentionally. This creates a lot of challenges for the AML system to identify or detect them.
- Avoids transaction reporting requirements: Illegal surfers pay much lesser amounts, which are not necessary for the banks to detect. Thus, they escape from the radar and do not get detected.
- Facilitates other illegal activities: Along with surfing, they combine other illegal activities, such as drug trafficking, corruption, or fraud, to conceal the proceeds of crime and enable further criminal activity.
Structuring:
Structuring involves conducting multiple transactions in amounts just below the reporting threshold to avoid detection. Structuring involves splitting larger amounts into smaller transactions to stay below the reporting threshold and avoid detection. The process of structuring causes severe damage to the banks, causing serious Legal and Regulatory Risks, when the bank or the financial institution fails to identify and report structuring activities. They may face legal and regulatory risks along with heavy financial risks, including fines, penalties, and sanctions imposed by authorities. They may also be subject to reputational risks, which can impact their brand image and customer relationships.
Conclusion:
Money laundering is a serious global threat as it funds inhuman activities. An increasingly popular technique to hide illicit financial activities is smurfing, where criminals take advantage of unwitting money transfer operators using offshore transactions or cross-border payments. This results in severe economic consequences, compliance burdens, regulatory challenges, sophisticated techniques, technological advancements, transnational nature, high-value assets, and political instability. Often, political instability and global unrest are outcomes of unregulated money in the wrong hands.
Effective combatting of money laundering requires coordinated efforts among countries to address these crimes. With robust regulatory frameworks, technological advancements, and international cooperation in place, several crimes were detected early, and several crimes in their earlier stages were aborted. Robust checks and balances in place would be necessary to combat money laundering and bring global harmony.
NetRemit a global cross-border payment solution for money transfers catering to international transactions, with fortified AML technology that safeguards all transactions and includes suspicious activity reporting, offering comprehensive safety to banks and other financial institutions.
To avail NetRemit, and explore a plethora of FinTech products from Macro Global, call us at +44 (0)204 574 2433 or mail us at salesdesk@MacroGlobal.co.uk. We are a revolutionary neo-gen FinTech company incepted to bridge the gap between Financial Organizations and the growing expectation of customers.
How Foreign Exchange (FX) works in Cross-border Payments
Goods and services are constantly being traded between countries, leading to increased cross-border payments. Hence, currency conversion has a critical role in international trade as it transfers the purchasing power to the foreign currency with reference to the foreign exchange market.
What is Foreign Exchange?
The term “Foreign Exchange,” or “Forex,” refers to the process of exchanging currency of a nation (US Dollar) for the currency of another nation (UK Pound) at a predetermined exchange rate. Market dynamics of supply and demand regularly adjust the exchange rates for all currencies.
The U.S. dollar, Euro, British pound, Japanese yen, and Australian dollar are the most actively traded currencies internationally. The U.S. dollar prevails as the most dominant currency in global trade, contributing to more than 87% of the daily value of all cross-border payments.
The need for foreign exchange was initially motivated by traders who needed to make international payments for their business purposes.
How Do Exchange Rates Function?
Foreign exchange trading is, at its core, the same as exchanging currency when traveling internationally.
Trade between professional bankers, hedge fund managers, and corporate giants dominates the foreign exchange market. Foreign exchange (FX) trading can also involve speculating for profit or insuring against future exchange rate swings, as well as transferring funds from one country to another. If a foreign exchange trader expects the dollar’s value to rise, they might buy dollars by selling euros. Meanwhile, a European firm could keep dollars on hand as a form of insurance against the depreciation of the Euro.
There are two major approaches to establishing the value of a currency:
- A floating rate.
- A fixed rate.
Floating Rate
The open market determines a floating rate based on supply and demand in global currency exchanges. Therefore, if the currency is in high demand, its value will rise, whereas the currency values fall when demand is low. Fair exchange rates depend on technical and fundamental variables that affect currency supply and demand.
After the Bretton Woods system’s 1968–1973 breakdown, several major currencies floated freely.
Since supply and demand both play a role in determining exchange rates, most of them are ultimately set by the dynamic trading activity taking place on the global currency markets.
Floating rates are influenced by an array of factors across nations such as
- Interest rate shifts
- Unemployment statistics
- Inflation numbers
- GDP figures
- Manufacturing data
- Commodity prices
- Central bank policies
Fixed Rate
The government, acting through its central bank, determines a fixed or pegged rate. The rate is determined with respect to another major global currency like the US Dollar, Euro, or Japanese Yen). The government will intervene in the market by buying and selling its own currency against its peg currency to keep the exchange rate stable. Certain countries such as Panama, Qatar, and Saudi Arabia pegs their currency to the U.S. Dollar.
Different Ways for Trading Foreign Exchange
Foreign exchange can be traded in three primary ways such as
- Spot Market
- Forward Market
- Futures Market
Spot Market
In this principal FX market, exchange rates are set in real-time, depending on supply and demand, and the currency pairs are traded.
Forward Market
Here, instead of executing a trade right away, FX traders can also make a legally-binding (private) contract with another trader to fix the exchange rate for a certain amount of currency at a future date.
Futures Market
In the future market, traders select a standardized contract to purchase or sell a fixed amount of currency at an established exchange rate on a future date. Unlike the forward market, this takes place on a public exchange.
Motives for Foreign Currency Exchange
Customers of banks often need to transfer funds between their own foreign accounts or to the accounts of others living abroad. There are many reasons to do a currency exchange, including:
- Commercial transactions
- Sending money to loved ones abroad
- Covering the costs of maintaining an overseas property
- Making payment for your imports etc.
Different nations possess different currencies around the globe. To simplify the exchange of currencies across nations, the adoption of exchange rates is mandated to ensure that the amount sent and received internationally is exactly equal.
Customers can get prices for exchange rates and complete international money transfers at their convenience using their preferred online bank or currency exchange service.
Who is Involved in the FX Settlement & the Process?
There are several participants involved in the foreign exchange (FX) settlement process. A secure and equitable FX settlement is the goal of the entire procedure, which involves numerous moving parts, which is discussed below:
The Banks
In foreign currency exchange (FX), banks play the role of intermediaries to facilitate transactions between the buyer and seller. They oversee the fund transfers between the parties and ensure that the settlement occurs uninterrupted.
The Central Banks
The exchange rate of the currencies between two countries is determined by the Central Banks of those countries. Also, they keep track of the cash flow by maintaining the stability of the FX market.
The Clearing House
A clearing house is a third party that promotes cross border payments transactions between buyers and sellers of two different nations. A clearing house is a subsidiary or independent corporation of a futures exchange that handles financial transactions such as account settlement, trade clearing, margin collection and maintenance, delivery regulation, and trade data reporting.
A clearing house is an organization whose mission is to increase market efficiency and financial system stability.
Settlement Process
The FX settlement process involves several different steps, including verifying both parties’ commitments to the trade, then transferring the funds between accounts and finally the settlement date itself.
How to Do Foreign Currency Exchange?
Because of the dynamic nature of international financial markets, the exchange rate is not always exactly one-for-one when two currencies are exchanged.
The exchange rate is determined in real time based on market conditions when a cross-border payment is initiated. At that exchange rate, the customer’s payment is converted to the target currency.
Currency market fluctuations can have a significant impact on the final amount received compared to the original amount paid, making the FX rate a key factor in these situations.
Foreign exchange charges (FX fees) are incurred whenever a company enters a new international market and begins accepting payments in currencies other than its home currency or whenever individuals begin making purchases in currencies other than their own. Credit transfers (CTs), direct debit arrangements between accounts, and other payment methods are all subject to foreign exchange fees.
Also, the overall amount being transferred, the location of the recipient, and the remittance service provider or a bank are all likely to contribute to the FX fees associated with cross border money transfers.
Things to Consider
Depending on where they are located and the currencies being used for their transactions and settlements, businesses need to be mindful of several things, including
- The participants involved such as the merchant, bank, card network, or non-card payment mechanism like a digital wallet, and the brokers to prevent unnecessary costs.
- The settlement times and risk, as it is crucial to make sure that parties have adequate funds to support settlement when there is risk involved.
- A clear commercial agreement with the financial counterparty regarding currency conversion.
- Recognize the source of the benchmark or exchange rate against which these financial terms would be measured (such as a central bank rate, the Bloomberg rate at a given time, etc.).
- Delays due to regulatory obligations such as AML and KYC checks, among others.
This allows them to prioritize their FX strategy in a way that ensures traders achieve the highest possible rate for their foreign exchange needs while still receiving timely, low-risk transaction settlements.
Risks Associated with Foreign Exchange
Foreign exchange has the potential for making or losing money because of the changes in the value of one nation’s currency relative to another.
Those who are engaged in global commerce, multinational corporations, and anyone involved in cross-border payments are all susceptible to the risks associated with the changes in currency value.
There are three main categories of foreign exchange risks which are as follows.
- Transactional risk,
- Translational risk, and
- Economic risk
Transaction risk
When transactions are conducted in a currency that is different from the organization’s base currency, there is a likelihood that exchange rates may change in a negative direction between the date on which the transaction was conducted and the date on which it was settled. This risk derives from real and potential import and export transactions.
Translation risk
If a company operates a foreign subsidiary in a currency that is different from that of the parent company’s reporting currency, the items on the foreign subsidiary’s balance sheet must be to be converted into the reporting currency of the parent company using accounting standards for consolidating the balance sheets.
Variations in the consolidated financial revenue due to shifts in exchange rates are known as Translation Risk. Stock prices react to the results. Another name for this is “Accounting Risk.”
Economic Risk
This is a possibility that a shift in exchange rates could lead to a change in investor views on the company’s business and subsequent cash flows. Considering this, the value of the company on the market shifts. For instance, when imports become less expensive due to the reduced exchange rate, a monopolistic product of the corporation faces competition. Forecast Risk is another name for this aspect of trading abroad.
Challenges To Overcome
Cross-border transactions outside the Single European Payment Area (SEPA) involve foreign exchange, which can pose challenges to businesses.
Some challenges include
- Paying for unnecessary double conversions can result in companies paying more than they should.
- Poor counterparty knowledge can lead to extra costs, as it is essential to understand all parties involved in a transaction. Understanding the location of counterparties and their banks can also help cut costs.
- Additionally, transacting across borders can involve complex settlement arrangements between banks and intermediaries, involving regulatory obligations and checks related to KYC (Know Your Customer), AML (Anti Money Laundering), and other issues.
Companies, banks, and payment providers should seek to understand these challenges and optimize their approach to cross-border payments.
How to Improve Cross-Border Payments?
Key factors for businesses to improve the settlement process in cross-border payments include the following
- Businesses undertaking cross-border payments should seek an open and straightforward approach by understanding who is involved in the process and avoiding redundant conversions.
- Companies should also choose partners with short chains to avoid unnecessary intermediaries between buyer and seller and reduce the risks and costs associated with FX.
- Integration of cloud-based services and modern, efficient APIs into payment businesses or bank systems results in faster and more efficient FX and cross-border payments because they can be processed much faster than if hosted in-house.
- For businesses, especially those handling higher-value payments, it is essential to learn about the infrastructure that drives settlement and clearing operations. This minimizes the chances of regulatory violations, including inadequate money for clearing and settlement.
- Businesses should also be cognizant of the time costs associated with complying with regulations and the potential ripple effects of longer settlement timeframes.
- Working with a payments provider who has access to a lot of liquidity and stable market circumstances will help you offer competitive rates for foreign exchange transactions.
- Businesses should also ensure sufficient funds for both them and their intermediaries to cover potential risks caused by slower settlement times.
Future of Cross Border Payments and FX
Businesses, banks, and NBFIs can expect to see greater competition in FX services and cross-border payments in the future. Higher-value and higher-volume corporate customers will see value-based offerings based on foreign exchange volume and business volumes.
Open banking, enabled by the EU’s PSD2, will lead to faster FX and cross-border transactions. However, these services will not reduce exposure to high FX fees and charges.
Blockchain-based payments have gained hype, but challenges remain, particularly with cryptocurrencies. The volatility of cryptocurrencies may make intermediaries reluctant to participate, and interfacing between fiat currencies and crypto remains complicated. The lack of “trusted party” status in many cross-border transaction scenarios could also block instant payments.
The advent of stablecoins like USD Coin is beginning to enable blockchain-based transactions, but businesses should focus on optimizing existing FX and cross-border payment arrangements until a secure and stable blockchain solution is widely available and accepted.
Questions remain over how to regulate these new payment methods and the effectiveness of instant settlement payments, especially with higher-value transactions subject to AML and KYC checks.
NetRemit
Our NetRemit is an advanced Cross-Border Payment Platform for Banks, Neo banks, Forex, MTOs, Retail Chains, and FinTech to facilitate international money transfers.
NetRemit offers you the opportunity to integrate all the major 3rd party applications in the market to fulfill all your demands associated with cross-border payments, beginning from Know Your Customer checks to payment gateways, and from FX to settlement, thereby streamlining the payment process and strengthening the security.
Macro Global along with its solution partners works together to provide an all-encompassing solution ie Remittance as a Service (RaaS) through our product NetRemit, from legacy migration to compliance to AML and KYC to payout.
As this platform promotes your attention on the business, you can boost your commission and foreign exchange revenues notably. There are also significant possibilities for expanding those revenues over time.
Plug and play our ready-to-use partner systems to have a quick, cost-effective, accurate, and seamless payment experience in a brief period of time.
Everything You Need to Know About Payment Reconciliation
All businesses revolve around the acknowledgment of payments. Yet, the financial statistics and cash flow are the primary forces behind the entire operation. In order to grow and succeed, a business must keep meticulous financial records. Maintaining a solid system for payment reconciliation is a prerequisite for the sustainability of any business.
This guide will give you an understanding of the core principles of payment reconciliation, helping you better manage your finances.
Payment reconciliation is a procedure used in accounting by businesses to ensure that all payments have been accurately documented in the system.
Payment reconciliation entails:
- Verifying that a company has paid its vendors, employees, and other parties in accordance with the amounts listed in its records.
- Ensuring that all transactional information, including invoices, purchase orders, and payment instructions, is precise.
- Checking the paperwork including bank statements, deposit slips, and cancelled cheques for any differences.
- Finding and fixing mismatches between recorded payments and payments that were actually made.
The concept of payment reconciliation is straightforward as it entails confirming consistency between internal and external/bank records. When they don’t match, an accountant or bookkeeper must find out why they don’t match.
This gets more challenging (and time-demanding) as a company expands in size and complexity, with more accounts payable, receivables, and payment sources.
Payment reconciliation is an essential part of any accounting system. Inaccurate financial accounts brought on by human error or omission can result in heavy fines and penalties. Businesses can rest assured that their payment data is complete and correct if they conduct payment reconciliations on a regular basis.
Need for Payment Reconciliation
The process of reconciling payments is crucial to the success of every business because it allows businesses to spot signs of fraud and correct any mistakes in financial records.
Like regular accounting practices, reconciliation can be performed on a regular schedule, such as once every quarter or once every month. You should perform payment reconciliation on a regular basis for a number of reasons:
- It is possible to detect potential scams and take corrective measures in a timely manner.
- This helps businesses identify errors like double entries, typos, and other data entry mistakes.
- An excellent strategy for ensuring that the bank statement and the financial statement are consistent with one another.
- Businesses need to reconcile payments regularly to ensure accurate tax returns.
- When you reconcile your payments, you reduce the risk of theft by workers or others.
- Reconciling your payments at regular intervals will allow you to monitor overdue or missing invoices and take the necessary steps to ensure they are paid on time.
- This approach will reveal any unauthorized firm payments.
- Regular payment reconciliation aids in record keeping throughout the fiscal year and facilitates closing procedures.
Types of Payment Reconciliation
According to the nature of the process and the kinds of payment transactions involved, payment reconciliation may vary from one type of business to another. There are typically five distinct kinds of payment reconciliation. They are:
Bank Reconciliation - It is the process in which an organization’s general ledger bank balance is checked against the balance shown on its bank statement.
Cash Reconciliation – This is the procedure of checking the accuracy of all cash-related records and transactions.
Account Reconciliation – It refers to the process of comparing two accounting records, such as invoices outstanding and accounts payable.
Credit Card Reconciliation – Checking monthly credit card statements for accuracy and completeness is called “credit card reconciliation.”
Global Currencies Reconciliation – Companies can improve their services and their customers’ experiences by using global reconciliation to spot shortcomings in the transactions and take corrective measures immediately.
Digital wallet Reconciliation – A digital wallet is the equivalent of a traditional wallet, only in digital form. This kind of reconciliation enables organizations to reconcile the financial transactions made using virtual credit cards, Apple Pay, Google Wallet, and other digital wallets, with documents.
Real-time Automatic Reconciliation: Real-time automatic reconciliation compares financial data from bank statements and accounting software to find discrepancies, which is done on a daily or hourly basis to fix errors faster. It is especially useful for businesses with high transaction volumes or complex financial reporting obligations.
How Does Payment Reconciliation Work?
Collecting and comparing data from the bank register and the ERP system is a fundamental step in the payment reconciliation process. The accounting department can confirm and keep tabs on all payments with a bank feed.
Retrieval of records
Customers’ payments, monthly bills, mobile wallet records, and any other documents relating to payments should all be gathered initially. The accounting staff then has to segregate data based on payment dates, amounts, and processing procedures in order to make meaningful comparisons.
Pairing
In this step, all individual transactions are compared against the respective bank’s statements. Transactions are considered complete if they match perfectly. Otherwise, they move on to the next phase.
Reconciliation
Accounting or operations team members must analyze payment issues and address them accordingly. When reconciling payments, it’s crucial to have a thorough familiarity with the financial records of the business.
Recording
Once all transactions have been matched up, the accounting team documents them in the general ledger or another financial system.
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Difference between Payment Reconciliation and Settlement
Payment gateway settlement is the process by which a merchant’s account is credited with funds after a successful online transaction. Imagine a scenario in which a customer of your online shop paid for an item using UPI. Payment Settlement is receiving that product’s payment in your bank account.
The two terms, “payment settlement” and “payment reconciliation,” refer to two distinct but related processes. It begins once the clearing and settling of payments is complete. The process of examining business transactions is known as payment reconciliation. Your business records are correct and up to date if transactions match.
However, if there is a difference in any of the transactions, it indicates that there is an accounting error, which must be identified and fixed before the end of the fiscal year.
Challenges in Payment Reconciliation
For businesses that process more than 500 payments monthly, payment reconciliation can be a major source of stress. The recent supply chain interruptions have made the situation even worse by delaying both delivery and payment. When reconciliation is done by hand, however, these issues only multiply.
- Data recording becomes difficult and time-consuming when dealing with multiple payment partners, each of which may have its own reporting formats, settlement cycles, etc.
- Relationships with vendors, suppliers, and contractors might suffer if payments aren’t made on time.
- Manually reconciling payments raises the risk of fraud since suspicious activity is harder to spot across the board.
- The month-end and year-end close for generating financial statements might be held up if companies don’t reconcile payments promptly enough.
- The accuracy of accounting records and reports may be jeopardized if payment reconciliation is not under control.
- Due to the inaccuracy brought about by manual payment reconciliation, businesses often struggle with cash management.
- Ineffective use of time and resources is inevitable when reconciling numerous huge files at once. This makes the reconciliation procedure more difficult and raises the possibility of human error.
- When refunds are involved, it becomes more difficult for the accounting team to properly match the transaction.
Best practices in Payment Reconciliation
Payment reconciliation boosts business growth and profitability. Many merchants find it difficult to adopt it in their businesses. Therefore, the best practices for payment reconciliation are listed below. They are incredibly efficient, so give them a shot.
Build Bookkeeping System
Consider automating bookkeeping with cloud-based applications. It speeds up payment reconciliation.
Prioritize People, Technology, and Processes
Most medium- and large-sized companies prioritize digital transformation and RPA. People must be emphasized alongside technology for effective implementation. So, balance technology with human resources.
Automate the Reconciliation Process
Automating the process with third-party software reduces human error and inconsistency. Invest in software that can interact with existing transaction reporting systems to increase productivity.
Choose the Correct Payment Gateway for Online Payments
You may receive and reconcile payments effortlessly with a dependable payment gateway.
Minimize Manual Processes
If your organization can’t automate everything, eliminate as many manual processes as possible to boost payments.
Set a Payment Reconciliation Schedule
Establish a payment reconciliation timetable for your organization. Reconcile weekly or monthly. Frequent reconciliation audits make the process easier.
Review the Process
Evaluate your organization’s reconciliation process for improved efficiency.
Employment of Essential Tools
Maintaining clarity and making sure everyone knows their roles is paramount in the payment reconciliation process. Modernizing manual processes and replacing them with accounting tools will save most organizations time. Reconciliation is easier than ever with a variety of cloud accounting software and automation tools.
How Automation Helps
The financial success of a business is strongly associated with the success of its day-to-day activities. Automation is the best approach to maximize revenues and reduce errors.
By replacing time-consuming manual reconciliation with instantaneous, automated payment processing, businesses can save significant resources such as time, cost, & energy. When a procedure is automated, it no longer requires manual documentation, data entry, or lengthy processing.
Due to automated reconciliation, closing the books at the end of the month is no longer essential. This may be done in real time, which means that closing can occur on time and financial statements will be more reliable.
Manual data entry has an error rate of about 1% on average, although one research found it could be as high as 4%. More income streams (such as recurring billing, one-time payments, etc.) mean more opportunities for human mistakes.
Automated reconciliations lessen the likelihood of such disparities and do away with the need for manual, error-prone, and laborious data entry procedures.
Use cases of Payment Reconciliation
Payment Reconciliation for Efficient Cross-border Payments
Automatic reconciliation is a major topic for development in cross border payments. Automation of the cross-border payment verification process helps businesses prevent delays due to mismatched data, fraud concerns, and accounting hold-ups.
By incorporating automated payment data reconciliation into cross-border payments, businesses can effectively reduce complexity, ensure seamless internal operations, and achieve simplified processes and remittance at rapid speed. Regardless of the volume of simultaneous transactions, automatic payment reconciliation assures that the middlemen are always in sync.
The right reports are then sent to the right people, speeding up the decision-making and problem-solving processes. It provides a clearer picture of client or company finances in real time and increases security by giving businesses greater power over their data.
Merchants may use one API to connect to payment gateways and monitor all activities from a single dashboard, regardless of PSPs or currencies.
The payment orchestration platform acts as a technical agent between merchants and PSPs/acquirers. An excellent cross-border payments application with a BI dashboard may ingest all platform data for easy analysis and sharing.
Open Banking Facilitated Payment Reconciliation
When a customer makes a purchase, their money first goes to the Payment Service Provider, and only then is it settled and reconciled with the merchant.
Open Banking streamlines operations through automated reconciliation. To keep track of incoming funds, a merchant needs just to provide the PSP with read-only access. In this way, operations personnel are notified immediately of any late or incomplete payments via the payment reconciliation method as soon as cash is received.
Open Banking enables real-time status updates on settled transactions, allowing businesses, merchants, and PSPs to instantaneously identify and reconcile completed transactions with the underlying payment.
Simplified Payment Reconciliation via Accounting Software
ERP systems’ fundamental accounting modules offer easy integration with bank databases of payment transactions for bookkeeping. The general ledger cash account for each bank account is linked to the bank statement through automatic bank reconciliations in the accounting software, which lets the user define cleared vs. pending bank deposits and checks.
Final Thoughts
An essential part of accounting, payment reconciliation, involves cross-referencing internal financial data with the bank and other payment records to verify that the amounts match. In addition to spotting mistakes and fraud, this provides insight into a company’s actual cash flow. By highlighting abnormalities for human examination, automation of the payment reconciliation process reduces the workload of the workforce. The closing process is sped up as a result as well.
The benefit that automation provides to businesses is hard to overlook. Cloud computing, Enterprise Resource Planning (ERP), and Accounting Software are a few further examples of technology that can aid in the payment reconciliation process.
In order to keep your books in order, it’s important to reconcile your payments regularly, as it will help your accounting procedures go more smoothly.
Payment Modernization explained and its take on Cross-border Payments
With the emergence of innovative technologies and the introduction of new payment methods, the payment industry is undergoing a major transformation that is shaping the future of payments. Payment modernization is an important part of this process and plays a key role in driving the evolution of the payments landscape.
The payment modernization trend is being driven by a variety of factors, including the need to simplify payment processes, increase security, reduce costs, and create new revenue opportunities. As a result, businesses are increasingly turning to technology-driven solutions to improve the customer experience and increase efficiency.
The most significant payment modernization trends include the move towards digital payments such as mobile, contactless, and cryptocurrency, the development of open banking solutions, the advancements in cross-border payments, and the adoption of innovative technologies such as artificial intelligence (AI) and blockchain.
Payment modernization is also a key imperative for financial institutions as industry transitions to real-time payments infrastructure. Across the globe, government and private organizations are collaborating to launch real-time payment schemes to support innovation in low-cost multi-currency payments processing.
Let us dive into the details!!!
Cross border Payment System: Then & Now
A legacy cross-border payment system is one that has been in use for a long time. It is complex, slow, outdated, prone to errors, and often difficult to integrate with newer technologies. They are also limited in terms of the types of currencies and payment methods they can handle.
These factors have resulted in delays in international payments and high transaction costs. The lack of transparency and security also hinders the effectiveness of these systems.
Therefore, the need for payment modernization has become increasingly apparent in recent years, as more businesses and individuals mandate easier, faster, and more secure ways to make cross-border payments. This is particularly true for businesses that manage international suppliers and customers, as legacy systems often cannot manage larger transactions and are not able to transfer funds in a timely manner.
However, with the advent of payment modernization, cross-border payments are now faster, more efficient, and more cost-effective than ever before.
One of the main drivers of this revolution is the usage of digital technologies. By utilizing digital technologies such as blockchain and distributed ledger technology, payments can be sent and received in seconds, while also providing an additional security layer. Besides, these technologies have enabled the development of new payment channels and services, such as mobile payments and online wallets.
This has made cross-border payments more accessible and convenient for both individuals and businesses, making them remain competitive in the global economy and in compliance with local regulations, as different countries have different compliance laws.
Key Features of Payment modernization
Payment modernization is an important process to streamline and optimize the payment systems with the following features.
Increased Security: One of the most notable features of payment modernization is the increased security of payment systems. Modern payment systems are designed to protect both the sender and the receiver from fraud and other malicious activities. This is accomplished through advanced encryption technologies, secure payment gateways, two-factor authentication, and other security measures.
Faster Payments: Today’s payment systems are designed to offer faster payment processing times and more efficient transaction processing. The use of digital payment methods, such as e-wallet solutions and mobile payment solutions, has enabled consumers to make payments instantaneously. Additionally, some payment solutions, such as blockchain technology, have sped up the process even further.
Payment Tracking: Payment tracking helps organizations to keep track of payments and ensure that all payments are received in a timely manner. Payment tracking can also provide valuable insights into customer behaviour and payment trends in cross-border payments.
Automated Payment Processes: Automation is a key feature of payment modernization. Automated payment processes can save time and reduce costs by eliminating manual tasks such as data entry and reconciliation. Automation also helps to reduce errors and improve accuracy. This can be a great advantage for businesses looking to reduce their payment cycle times and improve their customer service.
Integration: Payment modernization solutions are designed to be integrated with other systems and applications. This ensures that all payments are processed in a timely and efficient manner.
Multi-Currency Support: Supporting multiple currencies helps businesses to accept/ send cross-border payments around the world at ease. This helps to increase revenue and customer satisfaction.
Lower Transaction Fees: Advancement in payment systems has led to lower transaction fees, while still maintaining a healthy profit margin. This is due to increased competition between payment providers and decreased costs associated with processing digital payments.
Analytics: Various analytics and reporting tools offered by improved payment system can help businesses to analyse their payment data. This helps businesses to make better decisions about their payments.
Improved User Experience: Payment solutions are now more intuitive and user-friendly, allowing users to make payments quickly and easily. This is due to modern user interface elements, such as mobile-friendly payment forms and more streamlined checkout processes.
More Payment Options: Consumers have more payment options for both domestic & cross-border payments than ever before in the updated payment systems. From traditional methods, such as cash and credit cards, to more modern solutions, such as cryptocurrency and mobile payments, consumers can now choose the payment method that best suits their needs.
These advanced features are making domestic & cross-border payments more convenient and accessible for individuals and businesses and helping to drive the growth of the payments industry.
Benefits of Payment Modernization on Cross-border Payments
Payment modernization offers several benefits towards cross-border payments which is listed below:
- Faster transaction processing time
- Increased transparency and accuracy of payments
- Lower costs and improved efficiency
- Reduced risk of fraudulent activities
- Improved customer experience
- Increased liquidity and cash flow optimization
- Increased compliance with international regulations
- Easier access to global markets
- Greater scalability and flexibility
- Improved data security and privacy
Impacts of ISO 20022
There were too many standards to keep track of, each one varying across regions and industries, and in some cases, financial institutions even had their own proprietary standards such as
- ISO 15022 for cross-border settlement,
- ISO 8583 for credit and debit card settlement,
- FIX for stocks & trading,
- SWIFT (MT) in banking and
- DTCC is an example of market infrastructure employing proprietary standards.
The proliferation of standards (both ISO and private) has led to inefficiencies, inconsistent results, and a lack of opportunities for customisation in cross-border payments.
Moving ahead, ISO 20022 is a worldwide open messaging standard with the goal of creating a unified message language for use by financial institutions in different regions and countries. We can expect improved payment processing, visibility, and reconciliation if data quality increases.
Payment modernization relies significantly on ISO 20022. These norms strengthen data structure, allow for more flexible messaging, and bridge the gap between domestic and cross-border payments.
Several instant payment systems, such as the Unified Payments Interface (UPI), the Single Euro Payments Area (SEPA) Instant Credit Transfer, and the Real-time Payments Network, might be significantly improved if ISO 20022 standards were adopted. It paves the way for improved liquidity management through streamlined monetary dialogue.
ISO20022 makes it possible for banks to start using data analysis tools and value-added services like Request to Pay and electronic invoicing, which can give them insight into their customers and bring in additional money.
Once the ISO 20022 standard is in place, financial institutions will be able to use the detailed information contained in the ISO 20022 payment message format to better serve their clients.
The greater the number of financial institutions that use ISO 20022 messaging, the closer the financial services sector will get to establishing a universal payment language.
Critical Factors in Implementing Payment Modernization
Financial institutions today must either develop their own proprietary system or rely on a third-party modular payments platform to satisfy the needs of their customers, adhere to the latest payment regulations, and keep costs in check.
In their quest for payment modernization, financial institution should keep in mind the following:
Approach the migration in stages
Redesigning the entire financial transaction infrastructure at once could fail, resulting in wasted time and money. Choose a unified system that allows for a gradual transition to new payment methods, including instantaneous payments and high-value transactions.
Cloud-based deployment of the payment application
Use a cloud-native, scalable platform that can adapt to changing payment processing volumes for maximum operational agility and efficiency.
Invest in flexible and future-proof solutions
Choose a system that can easily incorporate additional channels, devices, and forms of payment. It should be flexible enough to incorporate various payment methods that yield immediate and substantial benefits.
Leverage microservices and open APIs
Use a modular platform with microservice design to launch and expand new transaction types like Request to Pay (RtP) with API integrations to deliver third-party payment services on top of existing payment rails.
Strengthen the data infrastructure to facilitate payment modernization
Find a platform that unifies payment messaging types (ISO 20022). Using this information, analysts can execute predictive performance management and open the door to new payment options and data/insights services.
Integrate anti-fraud and compliance measures across the supply chain
Invest in a platform that prevents fraud or integrates a fraud management solution into the present infrastructure to safeguard high-risk real-time payments made through digital channels.
Security Considerations with Payment Modernization for Cross-border Payments
The importance of secure cross-border payments in today’s digital economy cannot be overstated. As the sophistication of payment methods increases, businesses have a greater responsibility to ensure the safety of their consumer’s data and the effectiveness of monetary transactions.
Businesses need to take precautions against fraud by authenticating and authorising all payments, encrypting sensitive information, and verifying customer identities. By adopting these practices, businesses will improve the safety and efficiency of their consumers’ financial transactions.
The Future of Payment Modernization for Cross-border Payments
Both businesses and consumers have a lot to gain from payment modernization for cross-border transactions. It is enticing since it intends to streamline and improve financial transactions throughout the globe. Payments could be processed instantly in real-time with the help of modern automation tools, leading to quicker transactions and a better overall experience for customers.
Cost reductions, higher levels of security, improved accuracy, and increased productivity are just some of the advantages that can accrue to organisations and customers when innovative technologies are used as a part of payment modernization. With such modernization approach, cross-border payments should become much simpler, safer, and more effective.
It is to be noted that the process of payment modernization continues to extend and will develop further in tandem with recent technologies and the needs of consumers. Even if it might not be able to future proof the new approaches, the rising standardization, and adaptability of technology makes the journey a breeze.
Cross Border Payments Regulation 2 (CBPR2): The New Amendment
The original Cross Border Payment Regulation, CBRP1 (924/2009) is a European Union (EU) regulation that took effect in September 2009. It established a level playing field for charges on cross-border payments, among other things. Charges on cross-border payments in Euro had to be the same as charges on national payments of the same value.
The Cross-Border Payments Regulation requires the banks and other financial institutions to provide customers with greater transparency on international money transfer charges for certain card transactions conducted within the European Economic Area (EEA). When a cardholder uses the card to achieve certain transactions involving an exchange of currency in a non-euro EEA currency, the bank is required to send the cardholder a message.
Regulation (EU) 2019/518 (Amending Regulation) amends the CBPR (Cross Border Payments Regulation) by extending the fairness of charges principle to any non-euro currency of an EU member state and introducing new transparency requirements on currency conversion charges. CBPR is in effect in the United Kingdom until December 31, 2020.
UK (United Kingdom) CBPR Regime
The UK regime applies to any “national payment” or “cross-border payment” in sterling or any EU currency that involves a currency conversion. A “national payment” is made entirely within the United Kingdom, meaning that both the payer’s and the payee’s payment service providers are in the United Kingdom.
Introduction of CBPR2
CBPR1 significantly reduced charges for intra-Eurozone cross-border payments in Euro. Fees for cross-border Euro payments from non-Eurozone EEA states, on the other hand, remain high. According to the recitals, currency conversion charges continue to be a significant component of these charges.
CBPR2 imposes transparency requirements to raise consumer awareness of the fees associated with Euro cross-border payments. The Payment Services Regulations 2017 (PSRs) already require payers to disclose charges and exchange rates. However, according to recital 6 of the CBPR2, “those information requirements have not achieved sufficient transparency.” CBPR2 thus goes further, significantly altering CBPR1 with some new transparency standards.
Regulatory Requirements for CBPR2
The CBPR2 regulations are intended to increase the transparency of currency conversion costs throughout the payments industry. Bank and other e-money institutions, PSPs (Payment Service Providers) must publish the FX markups on relevant transaction currencies on a public website. They should send an electronic message to their cardholders outlining the total FX mark-ups on qualifying transactions starting April 19, 2021. FX mark-ups must be calculated as a percentage (%) of total cross-border card fees with the daily ECB reference exchange rate.
Transparency requirements in CBRP2
The new Regulation establishes new transparency rules for currency conversion fees for card-based transactions and credit transfers.
Transactions involving credit cards
When providing currency conversion services through an ATM or at a point of sale, the currency conversion charge must be expressed as a percentage mark-up over the most recently accessed euro foreign exchange rates issued by the European Central Bank (ECB). This disclosure must be made before the transaction is initiated.
CBPR2 requires Payment Service Providers (PSP) that provide currency conversion via card-based transactions to explicitly disclose their FX profit margins by requiring the disclosure of the mark-up against a publicly referenced rate. Furthermore, the payer’s PSP is required to disclose the mark-up to customers via electronic message (i.e., text or email) following the transaction. It establishes greater transparency which boosts competition and reduces costs. It is likely to cause consumers to reconsider their payment methods to get a competitive exchange rate.
Credit Transfers Online
CBPR2 also fosters a disclosure requirement for any credit transfers made online through PSP websites or mobile applications. According to the new regulation, the estimated charges for currency conversion services applicable to the credit transfer must be disclosed.
While not as onerous as disclosing the percentage markup, it goes beyond the PSRs’ requirement to simply disclose the “exchange rate used” and the “amount of the payment transaction after an exchange of currency.” Now the Payment Service Providers are required to disclose the exact amount of the currency conversion markup. The disclosure requirement only applies if the charges are “applicable to the credit transfer.” If a money transfer institution offers multi-currency accounts could first perform the FX conversion and corresponding transfer between the sold and purchased currencies.
Following this conversion, it would only carry out the subsequent credit transfer to the beneficiary. Currency conversion fees would not be “applicable to the credit transfer” in this case, and thus the disclosure is not required.
After receiving and authorising a payment order from a Point of Sale or a cash withdrawal from an ATM for a payment denominated in another EU currency, card issuers must send an electronic message with the percentage mark-up without undue delay as of April 19, 2021. This information must be made available for free and through a widely available and easily accessible channel.
Nonetheless, the provider must provide the user with the option to opt-out of receiving these electronic messages.
Impacts of CBPR2 on Individuals, Businesses, Banks, and other Payment Service Providers
Broadly speaking, the application of the equality of charges principle effectively means that individuals and businesses in non-eurozone countries will have the same conditions as residents of the eurozone when making cross-border payments in the euro. Furthermore, the new rules aim to protect consumers from excessive charges and to increase transparency requirements for currency exchange rates and transfer fees used in cross-border payments.
The Regulation’s transparency principle will enable customers to compare various currency conversion charges and pick the best currency exchange option for their benefit. Furthermore, as customers become more aware of these fees, banks will be forced to rethink their pricing models, with obvious downward pressures, contributing to better and more cost-effective access to financial services.
However, financial institutions may face difficulties in implementing these rules.
1. Unclear terms definition
The new provisions in CBPR2 on transparency rules for currency conversion charges are likely to spark heated debate over their interpretation. Misinterpretations that could result in penalties for noncompliance with CBR2 rules could thus be avoided.Customers will benefit from clarification of such definitions as well so that the absence of accuracy of the charges embedded in the exchange rate does not result in those fees being excluded from additional fees shown to them.The terms “point of sale,” “ATM,” and “card-based transactions,” which are critical for determining the scope of application of the new obligations, are not defined in the regulation.
If the meaning of those terms appears obvious, as they are commonly used in the industry, industry players know that the devil is always in the details in payments, and this lack of definition will lead to divergent interpretations and, potentially, different supervisory practises across the EEA.
Some of these concepts are defined in other EU laws, which should help in some ways; for example, “card-based (payment) transactions” and “point of sale” are defined in Regulation 2015/751 on interchange fees for card-based payment transactions (the MIF Regulation). However, without a final declaration that they should be used in this case, one cannot rely on them with certainty in the lack of a comprehensive reference to those definitions in CBPR2.
2. High Implementation costs & technical costs
Transparency requirements for transaction payments may result in high implementation costs and significant technical challenges for PSPs. Financial institutions will need to restructure their IT systems and reform their contractual terms to provide the information required for cross-border charges to all involved parties. As a result, they will need to create a new, technology-enabled framework that ensures compliance most cost-effectively.
- Furthermore, as financial institutions for cross-border payments become more digitalised, financial institutions will need to adapt to the new digital era’s developments and enhance their web banking services, such as client advisory tools, online banking, and mobile applications.
Overall, the lack of clarity is regrettably low, particularly given that the new Regulation will have a significant impact on the industry and may necessitate significant technical improvements to infrastructures.
Call our experts at +44 204 574 2433 to have a discussion further on CBPR2 and find out how we can help you in setting up a better governance, risk and compliance framework?
ISO 20022: Transforming Cross-Border Payments Messaging
What is meant by ISO 20022?
Banks and financial institutions around the world are preparing to transition their payment systems away from SWIFT messages and towards the new, properly structured, and data-rich ISO 20022 financial messaging standard that enables interoperability among financial institutions, market infrastructures, and bank customers.
The IS0 20022 standard encourages the inclusion of better-structured transaction data in payment messages, with the goal of improving the customer experience by allowing for less manual intervention, more accurate compliance processes, higher resilience, and better fraud prevention measures.
By 2025, it will be the universal standard for all reserve currency high-value payments systems, supporting 80% of transaction volumes and 87% of transaction value globally. SWIFT and the European Central Bank have set November 2022 as the standard’s go-live date in Europe.
ISO 20022 and cross-border payments
The ISO 20022 standard will shift how banks communicate cross-border payment instructions. To continue processing payments, all banks must be prepared to handle this new standard, and customers must also be prepared for changes. Some banks have already started to prepare. Others are still falling behind.
Cross-border payments usually involve one bank sending a message to another bank, which then passes the message on to the next bank in the chain – as a result, all banks must be equipped to receive, process, and pass the full ISO 20022 payment data from one counterparty to the next. Otherwise, the chain will be broken, potentially resulting in the loss of vital information. If one bank is perceived as a weak link, others that are better positioned to support a new message format may be bypassed.
The ability of the ISO 20022 standards to enable the provision of additional remittance information, which is critical for reconciliation, as well as improving transparency and traceability, which is a crucial component for automation – something desperately needed in the cross-border payments process, is a critical component of the ISO 20022 standards within cross-border settlements. Adoption of these standards has the potential to revolutionise several real-time payment schemes, including UPI, SEPA (Single Euro Payments Area) Instant Credit Transfer, and the Real-time Payments Network.
Why these ISO 20022 standards are important for Cross Border Payments?
When it comes to initiating financial transactions and reporting financial activity, adhering to the standards, and regulations are critical. An international standard is a method of facilitating seamless integration between service providers and customers, as well as enabling the efficient, consistent, and secure exchange of information.
Large global financial institutions have traditionally developed, approved, and implemented standards without obtaining feedback from other organisations. This has resulted in inconsistency and a lack of customisation, leaving overburdened IT departments to handle on-boarding, testing, and ongoing partner relationships.
The ISO 20022 financial messaging standard was intended to address this by providing a flexible framework that supplies a universally accepted business message syntax, allowing user organisations and developers to exchange transaction information globally using the same message structure, form, and meaning.
Once ISO 20022 standard is put in place, banks can begin utilising the rich data embedded in the ISO 20022 payment message format and sharing this additional information with their customers to provide added insight into each transaction.
The data could also be used to automate KYC (Know Your Customer) and AML (Anti Money Laundering) activities more seamlessly, lowering the risk of fraud. Corporates will undoubtedly expect their banks to be fully prepared from the start, so banks should strive to comply with ISO 20022 payment messages as soon as possible to remain competitive.
What are the benefits of ISO 20022 standards?
- Corporates will be able to reconcile their cross-border transactions more easily by attaching richer data to the payment itself. More data can be analysed and used to improve customer experience.
- Greater interoperability among various payment systems and interfaces because of a common language.
- Cost savings because of setting up consistent, compatible messaging between countries, financial institutions, and individuals.
- Faster payment speeds by cutting holdups, bottlenecks, and uncertainty when making global payments.
- Improved transparency and visibility: Improved visibility and real-time perception of liquidity flows will allow for better forecasting.
- Improved integration and compliance: Improved analytics will result in a tighter compliance process, enhanced security, and fraud prevention.
- Improving STP (Straight Through Processing) rates: By setting up an identical processing format at all stages of the chain, ISO 20022 significantly improves STP rates and lowers maintenance costs for all formats.
- Regulatory and security enhancements: The increased level of detail needed, as well as the implementation of identical standards, protocols, and formats, enable better regulatory reporting, more safe payment information, and customer data to notify business strategy, and streamline security procedures.
- Developing new revenue streams: It enhances liquidity management by enabling new levels of financial communication. It enables the adoption of data analysis solutions and added value services, such as Request to Pay and e-invoicing, that could supply customer insights and generate new revenue streams for banks.
- Standardising non-Latin alphabets: A crucial factor is that the standard will allow for longer non-Latin alphabet references, with a character set ten times larger than MT messages and carrying significantly more information. This is a feature that has received a lot of attention in China.
What do banks need to do - and quickly?
When transitioning to MX message types, banks should concentrate on two key areas. The foremost thing is to equip itself to handle structured party information. The second one is the ability to use all the other information shared via ISO 20022 payment messages, such as invoice details, tax data, supplier information, and so on.
Most banks, particularly those that rely on legacy systems to process cross-border payments, are simply not prepared to support the new structured message formats and associated third-party information. They will be unable to pass on the benefits to their customers unless they modernise their infrastructure.
The legacy systems of banks were designed to store data such as customer addresses in an unstructured manner. Changing this can be extremely difficult. Because ISO 20022 requires the processing of much larger data volumes than traditional legacy formats, bank systems and databases must be capable of processing these larger volumes at a higher velocity for real-time payments, daily cash flow management, compliance checks, and fraud detection and prevention. As per ISO 20022 standard, all parts of the address must be stored in separate fields.
Hence banks must extend all relevant payment-related IT systems and create a more structured version in their Core Banking System and other data sources. This was originally one of the intended requirements of Target2, but the industry-backed away from it because many believed it was too difficult to achieve.
Banks must inform their corporate customers about the other data that may become available and how it will be used. Furthermore, those customers should be sufficiently briefed and included in the end-to-end testing process.
Banks should have the possibility of using the SWIFT translation service. This effectively converts messages from the old format to an ISO 20022 compliant format, allowing the information to be passed on, but banks using this service who are unable to process the messages themselves will be severely limited in their ability to create and deliver value-added insights and services to customers. Access to the rich data available in ISO 20022 payment is critical for banks looking to evolve and offer innovative new services.
Because of the increased interest in developing faster and more affordable cross-border payment infrastructure, there has been a lot of innovation in the space, ranging from traditional payment providers like SWIFT to fintech using blockchain and distributed ledger technology (DLT).
Banks should aim to be ready six months before the ISO 20022 payment message cutover in November 2022. Migration to ISO 20022 is a meaningful change, but it will supply significant competitive advantages for both financial institutions and the corporates, assuming everything is managed properly.
Despite the obstacles to global ISO 20022 implementation, it is important to note that the movement to ISO 20022 has been positive, and instant payments are expected to gain traction and market share in the future. Furthermore, in addition to supplying significant potential for cross-border settlements, the ISO20022 standard is likely to improve efficiency gains in other areas, such as domestic and cross-border B2B payments and P2P payments.
Macro Global works very closely in ISO 20022 landscape to bring cross-border payments into the modern era. Learn more about our NetRemit – Cross Border Payment Suite and how our NetRemit is influencing the future of payments.
Cross-Border Buy Now, Pay Later (BNPL) Challenges, Opportunities & Strategies for Banks
Buy Now Pay Later (BNPL), which focuses on no-interest short-term loans, became popular during the COVID-19 outbreak. In markets around the world, it continues to be widely used as it offers new opportunities for merchants, issuers, card networks, and customers who limited access to conventional credit.
There are enormous opportunities in BNPL, as evidenced by recent launches from businesses like Apple, NatWest, Santander, and Zopa as well as new products from those already active in the market, like PayPal. Major players are currently concerned about the possibility of increased competition.
Cross-border BNPL is still a significant untapped market, though. Financial service companies entered the market and changed the debt landscape by globalising BNPL, which caused a wave of adoption among businesses.
There are currently more than 150 BNPL providers worldwide. These businesses are a sizable presence in the payments space, including occasionally for cross-border payments. They collaborate with merchants to offer a range of BNPL services as a payment method at checkout.
Intriguing opportunities are offered by short-term instalment loans at every level of the payments ecosystem, but there is risk involved, as there is with most financial opportunities. Before investing in the infrastructure required to support BNPL payment options, merchants must take these risks into account, especially those that conduct business internationally and in multiple currencies.
Banks can apply BNPL strategies in a variety of ways to their operations. Let’s examine the size of the opportunity, the factors driving its rapid expansion, and the options available to banks looking to enter this market.
Cross Border BNPL – The Future is wide open
Customers find the term Buy now, pay later (BNPL) more appealing and it is a growing trend that’s upending the credit sector. Fintechs have been working hard to provide BNPL options for both physical stores and e-commerce purchases. Customers’ needs are the focus of BNPL’s convenience and personalization offerings.
By 2028, BNPL is expected to increase from $4.1 billion to $20.4 billion. In many markets, particularly Scandinavia, the UK, the US, and Australia, it is now considered a “must-have.” Its presence in the EU is expanding quickly, led by nations like Germany, Italy, and France.
The adoption of BNPL has initially been assessed in e-commerce, but Fintechs are quickly expanding into in-store payments. As more businesses join e-commerce marketplaces and traditional consumer goods companies start selling directly to customers, the adoption (and expectation) of BNPL has accelerated even more.
Ascent’s 2021 survey shows that 62% of users think BNPL could replace their credit cards. Credit card volumes might continue to decline as BNPL adoption increases. According to Payments Journal, three of the biggest banks in the US reported a decline in credit card purchase volumes of more than 20% in 2020 alone.
BNPL is well-liked by people of all ages. Over 40% of consumers in the 55+ age group have also used BNPL, though younger consumers are more likely to continue with the most convenient form of payment.
The fact that BNPL is still being used shows that, when done properly, it can be a workable, profitable, and win-win payment choice. Merchants must control their exposure to the risks while making sure they gain from the large upsides.
The Cross-border Buy Now, Pay Later (BNPL) industry is under a lot of pressure due to various environments which we will see in detail in the below section, but there are unquestionably still huge opportunities in the sector.
Risks & Challenges in Cross Border Buy Now Pay Later
1. Global Economic Dynamics
The world economy experiences both growth as well as decline. Many BNPL providers are financially strained due to increased inflation, rising interest rates, the potential for a recession, and increased competition. To deal with increased competition, these BNPL businesses will find it more expensive to obtain loans to fund their operations as interest rates rise.
Several large BNPL providers have made layoffs because of poor earnings and stock market performance, and regulations have started to tighten as the industry comes under more scrutiny.
The impact of a significant shift in the economic climate, such as a recession, on BNPL, cannot be foreseen because it is still relatively new.
2. Local Regulatory Challenges
The more regions you choose to run a business in, the more regulations you must consider to protect yourself and your customers from fraud while also avoiding fines and lawsuits.
BNPL providers must abide by payment network regulations from various regions, including displaying payment cards, the need for transaction-related receipt data, and the open disclosure of return and refund policies.
Businesses’ tax obligations depend on several variables, including sales volume, transaction volume, and location of sales. In addition to the local tax laws, the choice of payment model matters.
To facilitate cross-border BNPL eCommerce, it is necessary to simplify the regulations that support international payments. It is vital to design and adopt regulations that address all significant obstacles at once and make sure that solutions are compatible across national boundaries.
3. Risk of Defaulters
In this BNPL business model, a customer makes the first instalment to receive a product and then makes weekly or monthly payments throughout an agreed-upon period (typically three or six months). Although many BNPL contracts completely waive fees, interest, or late fees.
A short-term financial agreement with a lower regulatory threshold comes with some clear benefits, such as high customer approval rates and flexibility in contracts and agreements. The drawback is that lower standards and higher approval rates increase the possibility of default. Where does the merchant stand if a customer passes the soft inquiry for approval, pays the first instalment, receives the good or service, and then vanishes?
Default risk is not specific to BNPL. A stricter approval process and complicated regulatory infrastructure should be in place to reduce defaults and ease asset recovery to manage the loss.
4. Managing Cross-border risk profiling and creditworthiness
Banks and other BNPL providers should come up with and use policies and procedures to reduce the risks they found in their risk assessments. Customer due diligence (CDD) processes should be made so that the institutions can learn more about their customers by making them find out what they do and why they need services. The first steps of the CDD process should be made to help banks figure out the ML/TF risk of a proposed business relationship, decide how much CDD should be done, and discourage people from setting up a business relationship to do something illegal.
Banks and othert financial institutions should be able to make a customer risk profile by taking a whole-picture look at the information they get when they use CDD measures. This will help the insitution decide whether to start doing business with the individual or the company, keep doing business with the company, or end the relationship. Risk profiles can be used for each individual customer, or they can be used for groups of customers who have similar traits. For example, customers with similar income ranges or who do similar types of banking transactions.
This is a good way to deal with retail banking customers in particular.
Initial CDD includes: identifying the customer and, if applicable, the customer’s beneficial owner; verifying the customer’s identity using reliable and independent information, data, or documentation to at least the extent required by the applicable legal and regulatory framework; and understanding the purpose and intended nature of the business relationship and, in higher-risk situations, getting more information.
BNPL players can efficiently manage cross-border risk profiling and creditworthiness across territories, unlike incumbents.
Like KYC, credit checks are also more complicated when they involve other financial systems and need to be included for every country that the company supports.
Many BNPL providers consider this possibility and supply remedies to lessen the risk. Collaborating with an experienced partner on strategy and implementation is essential because these solutions will differ depending on the provider.
5. Handling Currency Exchange rates in Cross Border BNPL
Currency exchange rates are one of the biggest worries for multinational retailers using BNPL. As opposed to conventional credit, these point-of-sale instalment loans have no provision for absorbing changing currency exchange rates. When conducting cross-border transactions, BNPL may implicate merchants in the risk of the foreign exchange markets.
For instance, a merchant may use a different currency to conduct a cross-border BNPL transaction. After a few months, the currency is no longer worth what it did when the agreement was first made, and the final instalment is then due. Who pays for that expense? Also, is the retailer responsible for the added cost if the customer returns an item that is now worth more than they paid for it because of currency exchange fluctuations?
Cross Border BNPL – Pushing Banks into innovative water
Banks are currently experimenting with a variety of strategies to seize the opportunity presented by BNPL. While some are developing models that enable them to run in the background behind BNPL propositions or utilise other players to create differentiated offers, others are offering one-to-one models with specific merchants.
Additionally, some industry observers claim that pressure from fintech companies is at least partially behind bank-led innovation on cross-border payments as banks make technology investments to meet client demand.
With the existing structure and trust consumers place in banks over Fintechs, banks are a viable disruption candidate in BNPL
To compete in the BNPL market, banks must prove they can provide the secure, convenient, and reliable payment options that consumers demand. The most prosperous will be those who act quickly and leave an impression on customers.
Banks must decide whether or how they want to enter this market as BNPL continues to grow. Those who choose not to take part or who delay too long in doing so run the risk of being cut off from a growing value pool and limiting access to a generation of customers with various credit needs.
Most of the FinTech BNPL providers can operate within their zone, while banks can widespread their BNPL offerings across borders due to their existing tie-ups with regional banks to offer other services such as cross-border payments.
Considering how to take advantage of current strengths may be the secret to success for those prepared to challenge Fintechs’ dominance in the market.
- Collaborate to develop differentiated products – Collaborating with BNPL players and regional banks across borders enables banks to capitalise on their long-established strengths and wealth while diversifying into innovative credit options such as short-term microloans.
- Offer BNPL via credit cards at POS – Banks can tie -up with merchants and vendors to offer BNPL options via credit cards at POS. This could be a huge market as consumers are looking for more offers in various sectors.
- Buy or build their platform – Banks can build their BNPL platform or buy BNPL products available from the market to offer services to their customers. Banks may be able to reduce these costs more effectively because of their experience able to operate in regulated markets and providing low-cost payment models.
Buy Now, Pay Later segment will face significant regulatory headwinds, with various regional regulators calling for BNPL products to be subject to the same lending criteria as other credit products such as loans and credit cards.
Many BNPL players currently make a “soft call” on an applicant’s credit history or rely on self-certification for smaller purchases. Banks, on the other hand, typically have strong relationships with their customers that span multiple products, allowing them to make quick, accurate and data-rich decisions about a customer’s creditworthiness.
The bottom line is the trust that banks have in their customers, combined with their in-depth understanding of spending patterns and credit histories, opens the door to new, innovative products in BNPL.
Talk with our industry experts to learn the strategies and plans on how banks can acquire cross-border BNPL opportunities.
The Evolution & Future of Cross-Border Payments in 2022 & Beyond
For banks and other financial institutions, it’s still challenging to transfer funds quickly across borders as technology continues to change how people and businesses manage their financial transactions globally. Most of the systems are unable to keep up with contemporary technology because they have remained antiquated.
In the past, customers were forced to open bank accounts abroad, and use high-priced bank drafts, wire transfers, or currency exchanges to settle such transactions, all of which come at an inflated cost and with the added inconvenience for all parties involved. As a result of the need for multiple third parties to complete the process, sending remittances from one country to another has been both slow and expensive. In addition to high fees, time zone differences caused frustrating delays in settlements that put the process and its participants at risk.
Globalisation has created a fantastic and profitable opportunity for this industry’s advancement and the need for a more efficient, cost-effective system keeps rising. The demand was fueled by this rising use of e-commerce market platforms, according to a 2021 study by Juniper Research. Additionally, they demonstrated that B2B payments, which currently total USD 34 trillion in 2021, are expected to surpass USD 42.7 trillion across all cross-border payment types in 2026.
The growth of Cross-Border Payments
Over the past few years, the cross-border payment industry has expanded greatly. Emerging market participants work to incorporate intuitive innovations and improvements to make international remittances affordable, simple, and hassle-free.
Digital payments have been severely disrupted by the COVID-19 pandemic. In the upcoming years, a rise in cross-border, real-time transactions will be brought on by the sector’s emerging trends.
A real-time, highly secure alternative to conventional payments has been made possible by the growth of a global infrastructure that enables cross-border settlements. Additionally, it gets rid of the disjointed payment systems that expose companies to needless risks.
The ISO 20022 standard is undoubtedly the hottest development in the field of fast payments technology to keep an eye on. For the exchange of electronic messages between banks, this is a global standardisation strategy.
The innovation has the potential to be a key enabler for promoting the adoption of cross-border payments. Above all, it makes it possible for financial institutions everywhere to communicate with one another. As a result, service providers will be able to replicate domestic real-time payouts on a global scale. In the end, they would usher in a new era for electronic cross-border payments.
Indeed, the world is promptly moving toward digital transactions, making enterprises and consumers less dependent on cash and checks. Furthermore, Fintech firms invest heavily in real-time technology, easing the transition from traditional e-commerce to digital, real-time payments.
Unfortunately, the current procedures for sending money abroad is still convoluted and inconsistent. Businesses and individuals who send money abroad frequently experience unpredictable costs and aggravating delays. The process can be slowed down by factors like numerous parties, risks, currencies, laws, and systems. The unfortunate outcome is that global trade moves slowly. A new system is required to meet the requirements of the present and future global economies.
Cross Border Payments should be Real-time
Cross-border payments have undergone a significant transformation because of the introduction of real-time domestic payments and round-the-clock central bank settlement. Using new technology, widespread standards, and improved service level agreements, the industry is rethinking how rapidly cross-border payments can be delivered.
As more banks switch from batch to real-time processing, transaction speeds will continue to rise. Banks will have to start processing their payments in this way to avoid falling behind because customers are demanding faster payments and more markets are moving to real-time.
Moving to real-time will become more and more crucial. This is so that banks will have a better understanding of how quickly their correspondents process transactions because of increased payment transparency. Banks will either be forced to speed up by their customers, or they will move their business to correspondents with quicker processing capabilities. Real-time processing is forcing banks to increase interbank processing hours as well, which are now 24/7. a trend that is quickly taking over.
The requirement for a two-pronged approach
A two-sided solution is required for cross-border payments. The only alternative is to continue using legacy systems if the required technology is not yet operational in the recipient nation. This is expensive for the sender, the recipient, as well as the entire world economy. This lag slows down the entire flow of global trade, influencing both businesses and the final consumer along the way. We are aware that the need is for a system that enables users to instantly send money to anyone, anywhere in the world while doing so through a convenient, secure, and safe ecosystem.
As consumer habits change, so too are customer expectations. Both individuals and businesses have grown accustomed to the simplicity and convenience of being able to complete a variety of financial transactions with the touch of a button while keeping an entire financial ecosystem in their hands. They are therefore entirely within their rights to ask for the same capabilities for international remittances.
The potential use of digital currencies in international transactions
Digital currencies are drastically changing the payments landscape. Money that a central bank, such as the Bank of England, can create is known as central bank digital currency (CBDC). Because it isn’t actual money like notes and coins, it is referred to as digital (or electronic) money. It appears on a computer or other similar device as an amount.
Since cryptocurrencies and stablecoins promise instantaneous value transfers across boundaries and jurisdictions, disintermediating banks and disabling regulators, the private sector has taken the lead in this movement thus far.
So how might digital currencies help to alleviate the current problems with international payments? There is a claim that a stablecoin or CBDC-based system could potentially reduce the costs, time, and complexity involved in the process by lowering the number of parties required to settle payments.
Cross-border payments have a lot of room for improvement, which would enable banks to transact more quickly, affordably, and transparently. Instant payments are one advantage. Currently, it may take several days for a merchant to receive a credit card payment. However, that process can be made instantaneous with digital currency.
Other advantages include not having to carry physical cash, lowering the risk of counterfeit payments, and enabling contactless payments, which is especially appealing considering the current global pandemic. By eliminating middlemen, this strategy could greatly improve the system’s efficiency and transparency.
CBDCs deliver 24/7 central bank money, which will become beneficial for the participants in cross-border payments because digital currencies are available around the clock.
But the fact that the systems needed to settle cross-border payments are not available 24 hours a day is the main problem. In other words, if the real-time gross settlement system isn’t active while we’re making a payment to another nation, we can’t complete that final settlement.
Whether Digital Currencies is good enough to overcome all the challenges in Cross Border payments?
According to a new paper from the European Central Bank, Central Bank Digital Currencies (CBDCs) may be the solution to the years old quest for the pinnacle of international payments.
However, when it comes to cross-border payments, CBDCs are not a magic bullet. The availability of the central bank is only one piece of the puzzle because there are many parties involved in a payment chain. “The beneficiary must also be on the same bank”. The problem is not resolved if the end beneficiary bank is operating normally but the central bank is not. Digital currencies may therefore have the potential to enhance cross-border payments, but they might not be able to address all the present issues.
Along the way, there are still a few more challenges that may need to be overcome. Stablecoins may eventually be able to be used internationally for cross-border payments, reducing remittance challenges, and enhancing the speed and fluidity of cross-border payments, but this is not yet the case.
Most cross-border payments will eventually be made in digital currencies. However, there is currently a knowledge, platform, and skill gap, as well as a lack of understanding of how to exchange and convert digital currencies when making cross-border payments.
No one disputes that the current cross-border payments system has issues, but the emergence of unregulated private sector digital currency solutions poses serious risks to the stability of the financial system. A new problem faces policymakers. They run the risk of losing control of the system and being outcompeted by solutions created without taking mandates for financial stability into account if they are unable to modernise the cross-border payments network.
Almost all central banks are currently looking into the advantages, drawbacks, and different features of CBDCs, but with a strong emphasis on domestic requirements. So far, very few central banks have made definite design decisions. Even if only used domestically, CBDCs will have effects that cross international boundaries, so it is essential to coordinate efforts and find common ground. If properly coordinated, the blank slate provided by CBDCs could eventually be used to improve cross-border payments when combined with other advancements. The creation of an effective, competitive FX conversion layer and the addressability of accounts globally are among the difficulties. AML/CFT compliance is required to ensure STP.
None of these issues are unavoidable, and for large cross-border payment corridors with sizable volumes and enough political will, both interlinking solutions should be practicable and effective.
Final thoughts
The cross-border payments market assures us to address the urgent problems plaguing the highly connected online environment of today. Market players are looking to Fintech startups for solutions as demand for borderless e-commerce grows. They want to improve the speed, security, and transparency of cross-border B2C payments.
The puzzle of cross-border payments, which has historically restricted trading to geography, can be remedited by Macro Global’s NetRemit – Cross Border Payment Suite. NetRemit offers quicker and more affordable international transactions whitelabel platform with futureproof technology and functional stack to scale as you grow and meet your need as new innovations unboxed.
By working with banks, non-banking financial institutions, and other online platforms, NetRemit enables you to create a single hub to the entire world. By removing the obstacles to cross-border payments, NetRemit enables people to concentrate on what’s most important: helping their loved ones and expanding their businesses.
What, How & Why Sanction Checks in Cross-Border Payments
Sanction Checks & Reporting for Cross-Border Payments
Financial sanctions orders simply ban a business or an entity from doing business with a specific individual or organization (known as the target). In some cases, the order will restrict a company from providing financial services to the target.
These measures can range from the most comprehensive banning any funds from being transferred to a sanctioned country and freezing the assets of a government, corporate entities, and residents of the target country – to targeted asset freezes on individuals/entities.
- The entity is directly named on a sanction list;
- The entity is indirectly sanctioned through beneficial ownership/controller/shareholder; and
- The individuals who are the directors or employees of the entities are named on a sanctions list.
Failure to comply with a financial sanction is a criminal offence unless the institutions have an appropriate licence or authorization from the Office of Financial Sanctions Implementation (OFSI). The sanctioned entities, and individuals’ names are listed on the OFSI website as well as any other sanctions lists published by any other countries or jurisdictions. Their website provides information about current financial sanctions, including a comprehensive list of all those subject to asset freezes or sanctions under UK law.
These anti-money laundering sanctions lists, also known as watchlists, are an aggregation of several regulatory and enhanced due diligence lists from all major sanctioning bodies around the world, including global lists like OFAC (Office of Foreign Assets Control), UN sanctions, EU (European Union) sanctions, HM Treasury and PEP (Politically Exposed Persons), and in-country lists like OFAC, UN sanctions, EU sanctions, HM Treasury and PEP.
- Government can impose financial sanctions on any individuals, entities, and other countries.
- The Government that imposes financial sanctions will not be enforcing the sanctions law. OFSI oversees implementing, administering, and enforcing the financial sanctions regime.
- Financial sanctions apply to all transactions; there is no monetary minimum.
- Most listed individuals and entities are aware that they are on the OFSI’s publicly available Consolidated List of Politically Exposed Persons (PEPs). As a result, the issue of ‘tipping off’ (as defined in the Proceeds of Crime Act 2002) should not arise in most cases.
- Clients are not screened against the OFSI’s Consolidated List in standard anti-money laundering checks. Companies should not mix up the government’s financial sanctions regime with anti-money laundering procedures.
- These sanctions lists are not static; they change as regulations change and people’s status changes.
Sanctions Screening
Dealing with people on sanction lists can have serious ramifications. For any entities involving cross-border payments, it is vital to have an efficient system to perform financial sanction checks that ensures legal compliance and reduces the risk of fraud or illegal funds entering your payment process.
Beneficiary screening for payments is a control used by Financial Institutions (FIs) to identify, monitor, and prevent sanctions risks. Beneficiary screening is critical to ensuring that the financial institution does not do business with a sanctioned entity and remains compliant.
- Transaction screening – Transaction screening is a technique for detecting transactions involving specific people or entities.
- Customer screening – During onboarding or the lifecycle of the customer relationship with the FI, customer or name screening is used to identify targeted individuals or entities.
Transaction and customer screening are intended to work together to create a strong set of options for identifying sanctions targets. It should be recognised that the way these controls are managed has several limitations and that they should always be used as part of a larger Financial Crime Compliance programme.
- Your existing clients against the OFSI Consolidated List
- All new customers before providing any services or transactions
- Are there any updates to the OFSI Consolidated List?
- Any changes to your client’s details
It is the individual, entity, or government’s responsibility to ensure that they and their system can mitigate the risk of financial crime, including those that allow you to comply with financial sanctions obligations. These may need to differ from those in place for anti-money laundering purposes because compliance with sanctions requires you to consider who is receiving payments and whether funds are coming from a completely legitimate source.
To ensure that the business receives funds from a legitimate source, they should verify the sender’s identity, conduct due diligence, and often monitor the sanctions list.
If you are dealing with international clients or individuals, make sure they are not on any sanction lists, which are lists of people who have been or could be harmed by illegitimate funds. include politically exposed persons (PEPs), those entrusted with a high-profile public position, and their close associates’ families. These individuals are more likely to be involved in corruption and bribery because of their position of power and influence.
What is the difference between domestic and cross-border payments screening?
Transactions that take place entirely within the country are referred to as domestic payments. These are not subject to the same screening in medium and large FIs. As both the originating and receiving FIs are in the same jurisdiction and are therefore bound by the same regulatory standards when onboarding clients.
Cross-border payments involve transactions between parties based in two or more countries. Correspondent banking is a process in which a foreign and domestic bank enter into an agreement and a correspondent account is created at one bank for the other. Correspondent banking entails the establishment of reciprocal accounts between the two banks, allowing the domestic bank to make payments or money transfers on behalf of the foreign bank, and allowing the foreign bank to handle international financial transactions for customers.
In terms of screening, the main difference is that cross-border payments are undoubtedly screened for risk and monitored with greater thoroughness. This is because many foreign businesses trade in US dollars and are therefore subject to the Office of Foreign Assets Control’s strict requirements and jurisdictional reach (OFAC). Because FIs must deal with cross-border regulatory requirements outside of their legal framework, these payments are more difficult to track. This problem is compounded in the international banking space, where correspondent banking is used in most cases which do not involve their customers in a substantial chunk of the payments, there is limited information available for the customers to figure out if the payment has a sanctions risk.
Non-Compliance Penalties and the consequences
Cross-border payments have been and always will continue to be highly regulated and secure. Each country in the transaction network will have its own legal and regulatory requirements, as well as its compliance and security protocols.
If any financial institutions find their payee or payers on a sanctions list, it should be reported to the regulators. Failure to do so leads to an increased risk of regulatory action, which can result in large fines and reputational damage, as we’ve seen recently with global banks. Before reporting to the regulator, alerts generated by sanctions screening must be probed further and potential sanctions risks assessed.
Institutions that do not comply may be subjected to long-term monitoring. Monitors are unbiased experts who examine a company’s culture, systems, and processes on the company’s dime before making recommendations and validating their implementation. These can result in a bank losing its licence to trade in certain currencies in the most severe cases, and they can last for years. Even after the monitorship has been lifted by a court, the bank can be audited at any time and must always follow the auditor’s instructions.
Handling compliance breach depletes resources and makes it difficult to recruit and keep top talent, putting payment providers at substantial risk of falling behind in terms of innovation.
Payment service providers and banking institutions, on the other hand, cannot afford to cut corners on customer service. Making quick decisions is critical because delaying legitimate payments can result in financial penalties and customer dissatisfaction.
Conclusion – Need for Technology to achieve compliance
As compliance plays a significant role in cross-border payments, it is vital to choose the best FinTech solutions for AML sanction checks that should go together with cross border payments platform. Screening is not just the matching of names; it involves various business logic and risk-based algorithm to derive the desired results to comply with the regulators.
Macro Global, the leader in RegTech as well as in FinTech solutions, built our NetRemit – Cross Border Payment Suite with automated eKYC validation integrated within the product. NetRemit also features AML & Sanctions check to offer seamless customer onboarding.
NetRemit’s Integrated Transaction Screening feature scrutinises the sender and recipient, preventing money laundering and financial crimes before the process cycle begins, saving banks a significant amount of money.
For compliance and business efficiency, MG’s NetRemit provides extensive reporting capabilities. It generates more than 30 analytical and management reports, such as Suspected Fraud Reports, Enhanced Due Diligence Reports, Compliance Reports, and Watchlist Reports, allowing stakeholders to always stay on top of the market.
NetRemit provides cross-border, real-time, and faster settlement solutions for B2B, B2C, and P2P services, allowing for immediate and prompt pay-outs into bank accounts and third-party wallets.
NetRemit is a complete end-to-end solution for managing, monitoring, and improving business processes, allowing companies to complete the process life cycle on a single platform.
Our upgraded global product features customised data analytics and business intelligence modules along with improvised notifications through AI & ML that serves the purpose of our client. Please, visit our product page for more information.
