Cross border Payments vs Money remittances: What sets them apart?
The number of people sending money across borders is increasing day by day owing to various purposes. Individuals, immigrants, businesses, consultants, freelancers, and many people are sending money to various countries in multiple currencies via diverse electronic modes as the means to pay for products, services, friends, or family offered globally.
Remittances prevail as a channel of income for many families as overseas workers send money back to their families through it. And cross-border payments facilitate payment to people/parties or businesses around the world for both personal and professional objectives.
In most cases, common people consider cross-border payments and remittance to be the same. Yet, they are different technically on various grounds such as purpose, types, regulation, exchange rates, cost, operational time, applicability, etc.
Let us explore in detail the distinct difference between cross-border payments and money remittance in the following section.
| Specification | Cross-border Payments | Money Remittance |
|---|---|---|
| Definition | Cross border payments are the funds transfer which are primarily made between two parties belonging to different countries in exchange for goods or services provided by individuals and businesses. Cross border payments involve both personal and business-related money transfers across borders. | Money remittance is a sum of money that is transferred from the Individual to the other residing in same or different country. It is primarily done on personal grounds to satisfy the financial needs of one’s family or promote their standard of living by offering education, purchasing properties etc. Money remittance corresponds to any type of money transfer that occurs between two parties either domestically or internationally. |
| Purpose | Most possibly, cross-border payments are used to transfer funds between two different countries to pay employees, suppliers, partners, etc.For example: Online purchase from different countries, Paying the importer in export business. | Money remittance is specifically used to transfer funds between two individuals.For example: Sending money to friends, paying tuition fees for students studying abroad. |
| Types | The payments are sent between countries through digital payment platforms such as PayPal and wire transfers. | The payments are transferred between the individuals in different as well as same countries via the following ways:
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| Regulation |
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| Time | As cross-border payment deals with business transactions in most cases, the payment takes a certain time, from weeks to months at times, depending on the payment service provider. | Since specific amount is transferred through money remittance, the payment is transferred in real time like the credit/debit card payment. |
| Security | Significant security breaches in the cross-border payments regime are typical. As regulations vary across nations, hackers have the accessibility to have control over the payment when the payments are transferred into a country that holds a lethargic security policy and regulation. | Compared to cross-border payments, money remittances are secure as it is regulated by FATF, and no deviation of regulation is available in the sender/receiver’s country. |
| Volume | Any volume of payment shall be transferred between nations in cross-border payments. | Generally, small/sizeable volume of data is remitted in money remittance. |
| Currency | In cross-border payments, the payment is transferred to the receiver in the currency of the sender’s country. | Conversion of the sender’s foreign currency to receiver’s local currency is involved in money remittance and hence the payment is received by the receiver in their local currency. |
| Exchange rates | In cross-border payments, the payment is exchanged at the receiver country’s currency rate. | In money remittance, the payment is exchanged to local currency based on the sender country’s exchange rate. |
| Application | Cross-border payments are meant for both professional and personal use. Most international business transactions take place through cross-border payments. | Money remittance is used for personal use like sending money to family members living abroad, paying their bills etc. |
| License |
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| Cost | As payment service providers are a vital part of cross-border payments, they need to be compensated and hence the cost of cross-border payments is comparatively higher. | The cost of money remittance to overseas countries is lower when compared to cross-border payments. |
| Cross-border Payments |
|---|
Definition Cross border payments are the funds transfer which are primarily made between two parties belonging to different countries in exchange for goods or services provided by individuals and businesses. Cross border payments involve both personal and business-related money transfers across borders. |
Purpose Most possibly, cross-border payments are used to transfer funds between two different countries to pay employees, suppliers, partners, etc.For example: Online purchase from different countries, Paying the importer in export business. |
Types The payments are sent between countries through digital payment platforms such as PayPal and wire transfers. |
Regulation
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Time As cross-border payment deals with business transactions in most cases, the payment takes a certain time, from weeks to months at times, depending on the payment service provider. |
Security Significant security breaches in the cross-border payments regime are typical. As regulations vary across nations, hackers have the accessibility to have control over the payment when the payments are transferred into a country that holds a lethargic security policy and regulation. |
Volume Any volume of payment shall be transferred between nations in cross-border payments. |
Currency In cross-border payments, the payment is transferred to the receiver in the currency of the sender’s country. |
Exchange rates In cross-border payments, the payment is exchanged at the receiver country’s currency rate. |
Application Cross-border payments are meant for both professional and personal use. Most international business transactions take place through cross-border payments. |
License
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Cost As payment service providers are a vital part of cross-border payments, they need to be compensated and hence the cost of cross-border payments is comparatively higher. |
| Money Remittance |
|---|
Definition Money remittance is a sum of money that is transferred from the Individual to the other residing in same or different country. It is primarily done on personal grounds to satisfy the financial needs of one’s family or promote their standard of living by offering education, purchasing properties etc. Money remittance corresponds to any type of money transfer that occurs between two parties either domestically or internationally. |
Purpose Money remittance is specifically used to transfer funds between two individuals.For example: Sending money to friends, paying tuition fees for students studying abroad. |
Types The payments are transferred between the individuals in different as well as same countries via the following ways:
|
Regulation
|
Time Since specific amount is transferred through money remittance, the payment is transferred in real time like the credit/debit card payment. |
Security Compared to cross-border payments, money remittances are secure as it is regulated by FATF, and no deviation of regulation is available in the sender/receiver’s country. |
Volume Generally, small/sizeable volume of data is remitted in money remittance. |
Currency Conversion of the sender’s foreign currency to receiver’s local currency is involved in money remittance and hence the payment is received by the receiver in their local currency. |
Exchange rates In money remittance, the payment is exchanged to local currency based on the sender country’s exchange rate. |
Application Money remittance is used for personal use like sending money to family members living abroad, paying their bills etc. |
License
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Cost The cost of money remittance to overseas countries is lower when compared to cross-border payments. |
Cross-border payments and money remittances are the two crucial fund transfer methods that assist individuals and businesses by facilitating international payment across the globe. They possess unique features and are employed by users based on their requirement scenario.
We hope that we have explored extensively the differences between cross-border payments and money remittance in detail here, bringing insight into their operation, purpose, application, efficiency and many more.
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From Know Your Customer (KYC) checks and payment gateways to foreign exchange and payouts, NetRemit gives you access to the world’s best marketplace apps for making and receiving cross-border payments.
With NetRemit white labelled Cross-Border Payment Suite, you can optimise your remittance success rate and set yourself apart from the competition.
What's unique in NetRemit?
- An air traffic control-style back-office platform (NetRemit Admin Center) to configure and control your brand and business rules for any single and multiple currency corridors.
- Boundless Marketplace Integration starts from KYC to Pay-outs.
- RaaS (Remittance as a Service) can meet all your remittance service needs (legacy migration, compliance, AML & KYC, and payout).
- Extensive Data-Rich Analytics with 40+ reports.
- Centralised CGI Gateway for Core Banking or Accounting platforms.
- Built-in incident service management module.
- You can set up a wide range of possible conversion rate slabs between the currencies you receive and the currencies you pay with.
- Enterprise-grade security enables businesses to connect and manage their operations globally.
- Flexibility to adopt Open Banking and Open Finance.
- White-label SaaS – All under your brand name. By leaving all the heavy lifting with us, you can focus on your core business growth and maximise your remittance success rate.
As your business expands, NetRemit enables you to scale, automate, and increase your profitability without interruption.
Exploring the Landscape of Cross-Border Payments: A B2B Perspective
Today, global economies are interconnected, and B2B cross-border payments are the backbone through which the economies boom. Real-time payments have favoured businesses as the factors like reliability and speed of payment have enabled growth and dependence on newer modes of payment.
New digital platforms bind people and technology together and help businesses move online. It also changes the methods of payments involved and integrates newer technology along with automation. Over the years, the demand for a concrete remittance platform enhancing the B2B business across borders has helped cross bigger milestones.
The development of B2B Cross-Border Payments will have a direct impact on the economies and expedite the way the business operates. Several fintechs have started the progress, that would bring a concrete development in the way the payments operate.
Let us explore in detail about cross border payments and how they are impacting the B2B segments.
An introduction to B2B payments
The growth of financial transactions between businesses that involve the transfer of funds across international borders, for goods or services is on the rise. The transactions involve multiple financial institutions and currencies, which can include different regulations and fees. Various methods of money transfers include wire transfers, international ACH transfers, payment cards, electronic wallets, and cryptocurrencies are adopted commonly.
One of the major advantages for business people is that they can send and receive money across any part of the world, however, exchange rates, fees, payment processing times, and regulatory requirements make it one of the most complicated processes, leading to roadblocks. To ensure smooth transactions, it is essential to have reliable payment methods. Also, the awareness of the regulatory requirements in the countries they operate in and should conduct due diligence on their trading partners would enhance progress. Businesses are now looking for smoother and more efficient cross-border financial transactions, enabling them to capitalise on the benefits of global commerce.
B2B Cross Border payment Statistics:
According to the Juniper report, from the year 2022 to 2027, the growth projected in the cross-border B2B segment would grow to 26%, where the market size is expected to expand from $88 trillion to $111 trillion in 2027. Attributing to the factors such as price rise due to inflation and the development of stronger markets across various economic zones.
Another significant factor concerning the growth is automation, which speeds up the processes of accounts payable and receivable thereby enhancing the efficiency of payments processing, presenting a significant opportunity for B2B payment vendors. As with an assumption of 1,400 domestic payments on average globally in 2027, there is a great scope to unlock greater opportunities to manage to reconcile payments. Also, through automation along with the adoption of instant payments, by introducing new payment methods, and the use of the ISO 20022 standards, the growth is relentless.
Exploring Diverse B2B Money Transfer Methods:
1. Wire Transfer
Wire transfers offer fast and secure transactions and can be initiated over the phone by speaking directly to a bank’s representative or by accessing the online banking profile. It is one of the most preferred methods for transferring large sums of money, for businesses involving different countries, currencies, and time zones. It involves several layers of scrutiny, and verification to ensure the funds are deposited correctly. However, wire transfers incur fees from both parties and may have limitations imposed by banks.
2. ACH Transaction
ACH transactions are faster and more cost-effective than cheques. They are extremely safe, as they do not involve any physical documents. It is used for several payments like direct deposits of payroll, and electronic bill payments, along with one-time or recurring fund transfers between bank accounts. It is processed through the ACH network and highly facilitates fund transfers between banks. Several businesses, government agencies, and individuals manage their finances and make payments through ACH transactions.
3. Card Payments
It is one of the highly convenient and fast methods for making cross-border payments. It requires an issuing bank, acquiring bank, and the vendor’s financial institution. All banks need to be connected to ensure smooth payment transactions, enabling consumers worldwide to connect effortlessly. Card payments enable consumers to easily provide their details and authorise the payment. It is important to note that costs may include foreign transaction fees or currency conversion costs, which help ensure efficient payment processing.
4. Cheques
In cross-border transactions, cheques are one of the least preferred, as they have to cross different checkpoints that can cause delays, errors, and potential fraud, which can cause huge inconvenience. Moreover, the processing fees and also foreign exchange rates are calculated based on the countries involved, and the issuing banks.
5. Payment Gateway
The payment gateway has gained a lot of popularity for the diverse benefits it offers like the convenience it provides during transactions, simplifies the payment systems by handling the complexities of foreign exchange rates, lower transaction fees, and compliance with local regulations. Accepting multiple currencies from different locations, and security features such as fraud detection help to reduce the risk of fraudulent transactions. They may also offer other value-added services, such as recurring billing, subscription management, and dispute resolution.
The payment gateway is compliant with local regulations and can provide the necessary documentation and reporting for tax and accounting. It is necessary to consider factors like fees, foreign exchange rates, and supported payment methods while selecting the right partner.
Factors driving the rise of B2B cross-border payments:
In today’s global economy, businesses require reliable and quick b2b cross-border payment solutions. There are several factors contributing to the growth of cross-border payments like faster access to funds, reduced payment risk, regulatory advancements, digital technology, modernised payments, and the establishment of fintechs rendering modern solutions to banks and other financial institutions.
Central banks across the countries have major control payment systems for instant payments and settlements. The rise in digital technology is fuelling B2B businesses to connect with more customers and adopt sales opportunities beyond borders. This trend has also enhanced the rise of online shopping across borders, impacting economic growth, bolstering the development of countries, and enhancing their GDPs.
Fintechs have decentralised payment solutions, admitting several SMEs to gain access to similar options as large enterprises. It is important to note that the combination of blockchain and AI streamlines b2b cross-border payments, automates transactions and reduces friction. Also, the factors like globalisation, e-commerce growth, digitisation, fintech innovation, regulatory changes, and economic growth are constantly fuelling the growth and prominence of businesses operating across borders.
Challenges with B2B cross-border payments
There are various factors to consider when dealing with substantial amounts of money sent and received globally, including the cost, security, processing time, and legal implications.
Data security
Several governments restrict data provision and is essential for banks to adhere to those constraints. Businesses and financial institutions in the UK and EU must comply with the General Data Protection Regulation (GDPR), which limits data sharing. Countries like UK, Japan, and EU member states give more emphasis compared to the United States. Unauthorised dissemination of personal information can result in penalties and severe punishments in these jurisdictions.
Payment processing
The cross-border transaction can be frustrating and time-consuming if it has interruptions. Insufficient payment information, Anti-Money Laundering examinations, and other fraud screening measures are some of the common causes. Since foreign money transfers are not as regulated as other transactions, the solution is sometimes tough and also time-consuming. All these factors put together cause severe blocks in the process.
Legal considerations
Due to different legal frameworks in each country, companies that expand abroad may face higher risks. Despite most developed nations following a civil law system, these systems can differ significantly from one nation to the next, which poses significant consequences for the understanding of mergers and other B2B agreements. Protection of intellectual property is one instance wherein substantial disparities between countries are evident. It is also tricky to enforce a contract’s language in domestic or international courts.
Fees & Exchange Rates
Non-cash payment systems involve additional fees, where the payees are required to incur upfront funds for currency acquisition and transaction initiation. Cross-border transactions incur higher bank costs, specifically when multiple parties are involved. Merchant banks levy the cost on buyers, whereas card issuers would charge customers for foreign currency transactions, including exchange rate fees, and more. Fluctuations in exchange rates between transaction initiation and settlement can lead to financial losses for both buyers and sellers. To mitigate this, businesses offer customers the option to use currency exchange rate aggregators during purchases.
Tax-related concerns
Tax systems vary widely from nation to nation. The buyer or seller must evaluate, which taxes could be imposed on the payment in its destination country, which could influence the deal’s profitability or equity. While tax treaties have been developed to prevent double taxation, they are often country-specific, keeping the likelihood that a recipient or payee will be subject to some taxation.
Compliance issue
Rigorous compliance checks will prevent risks like financial crime, fraud, and prohibitions for both payers and recipients. For instance, a simple case of a customer sharing a name with a person with a financial criminal history may lead to several anomalies. If payments pass through multiple domestic banking systems, additional checks may be necessary which is adding complexities even before the payment reaches an international boundary.
Unlocking the Potential: Strategies for Improving B2B Cross-Border Payments
Cross-border payment processing is vital as global trade grows, and financial inclusion attracts more individuals, contributing to global development. Banks adapt to the needs of the businesses, demanding new technology for transparency, adaptability, and cost reduction in cross-border money transfers. The need for efficient payment options globally is on the rise, where technological advancements, process improvements, and international collaborations drive progress.
These digital technologies like distributed ledger, AI, blockchain, and cloud computing combat international fraud, enhancing security for financial institutions and companies. Incorporation of third-party interfaces such as KYC and AML, along with competitive FX conversion, ensures compliance.
Growth in the B2B segment, enhancing infrastructure, streamlining processes, and reducing complexity are major factors helping the development. Switching from conventional payment methods to comprehensive payment strategies and optimised currency conversion platforms fosters positive development.
Governments are overseeing regulatory frameworks, and businesses collect customer information to meet regulations. Also, financial institutions conduct customer due diligence to comply with FATF on Anti-Money Laundering requirements, avoiding penalties. International money transfer businesses must understand cross border payments regulatory requirements and compliance standards to avoid penalties, delays, and reputational damage. By applying the essential strategies, B2B cross-border payment solutions enhance security, transparency, affordability, speed, and compliance for financial institutions. They can navigate local laws, exchange rates, and complexities, promoting financial inclusion and global development.
Navigating Cross-border Invoicing
In B2B commerce, invoices include more than just goods and service details and prices. Payment terms, such as due date, discount percentage, and tax rate, are specified in invoices. International invoices require additional considerations like accepted currency, payment method, and billing currency. Effective invoicing is crucial for complex and time-consuming cross-border B2B payments.
Key principles for invoicing clients abroad:
- Factors like price, quantity, accepted payment options, currencies, delivery, and payment deadlines are to be considered while drafting an agreement with an international client.
- Payment options like bank wires, ACH payments, credit cards, instant/real-time payments, or digital wallets are to be given prominence.
- Having a foreign bank account will reduce the need for wire transfer charges, and will give customers a domestic payment option.
- Gaining awareness of the complexity of international taxes.
- Ensuring the ERP system’s invoicing software accommodates cross-border payments.
Several countries, including Greece, and Hungary have mandated electronic invoices through government-approved platforms. VAT should be included based on domestic or international sales, often automated for efficiency. Automation, registration, and archiving of invoices help ensure tax compliance, reduce fraud, and align with common standards for seamless cross-border invoice exchange.
Several factors are taken into consideration to avoid penalties and disputes, like compliance with legal and regulatory requirements, including taxation, customs, and trade regulations. Invoices should include international trade terms, shipping details, customs declarations, and necessary export or import documentation.
Exchange rates become crucial when multiple currencies are involved. To enhance transparency and ease of business, international transactions in B2B require mandatory documentation and exchange of financial information.
Conclusion:
With over 15 years of experience in the fintech sector, Macro Global understands the intricacies of customer needs and has become a trusted partner for businesses seeking growth and efficiency. NetRemit from Macro Global is a highly secure and ISO-compliant cross border product suite designed specifically to address the challenges faced in B2B payments.
NetRemit seamlessly integrates with leading marketplace apps, facilitating essential functions such as Know Your Customer (KYC) checks, payment gateways, foreign exchange management, and payouts. NetRemit offers a comprehensive range of features and innovations that ensure a seamless experience for B2B cross-border transactions. By eliminating unnecessary intermediaries, minimising delays, and mitigating currency concerns, businesses can benefit from a quick, user-friendly, and cost-effective solution.
Contact us today at +44 (0)204 574 2433 or mail us salesdesk@macroglobal.co.uk to partner with us and unleash the limitless possibilities of technology in the financial sector.
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.
Neobanking Decoded: Demystifying the New Era of Banking
Neo-banks have turned into a more prevalent option for people as they satisfy the developing expectations of modern users. Its popularity is attributed to the fact that neo banks address the needs of customers in a way that traditional banks cannot. They aim to streamline banking processes and provide prompt service to satisfy customers’ demands.
Neo banks are the hottest trend in the financial sector. In recent years, an increasing number of customers have opted for this advanced, tech-driven, and creative approach to banking since it provides an alternative that is simpler to use. However, numerous people around the world have opened virtual bank accounts, and this is due to more than just curiosity about neo-banking.
Let us explore all about neo-banking, the working of neo banks, its type, regulations, market performance, pros/cons, and a lot more about neo banking in this blog.
What is Neo Banking?
Neo banks are digital-only banking platforms that exist exclusively in the digital realm, offering traditional banking services to their customers through a mobile app or website. They simply do not exist physically.
Traditional banking procedures may be lengthy and unpleasant for customers. By adding a digital and practical layer on top of traditional banking, neo-banks offer a frictionless digital experience. Customers can easily sign up for accounts and start using the services on their own because of the streamlined structure of their technology.
Money transfers, bill payments, and direct deposits or mobile cheque deposits are just some of the banking services provided by neo banks. Additionally, some of these fintech companies include tools for budgeting and saving.
Salient Features of Neo Banking
Smartphone and internet usage are both expanding at a higher rate around the world today. Taking advantage of this scenario, “neo banks” offer services driven by digital infrastructure. Many people are turning to neo banks because they provide a wide range of services that are specifically designed for the needs of modern users. They are dedicated to making banking easier for customers and meeting their needs quickly. Compared to traditional banks, neo banks have the following characteristics:
- Neo bank is app-driven with modern, adaptable, and scalable IT infrastructures offering typical functions like account opening, fund transfer, and customer service that are quick and paperless.
- The absence of physical branches is a defining feature of neo banks, which differentiates them from traditional financial institutions.
- All neo banks represent early-stage financial service providers. They focus on simplifying banking operations and addressing user pain points.
- Putting the customer first is the main motto. Most neo banking services emphasize the customer’s banking experience. With mobile banking, clients’ lives are made easier, and time and resources are saved.
- Due to their digital character, neo banks make it simple for users to open savings accounts, complete with physical debit cards.
- Neo banks are quickly becoming a more realistic choice due to regular banks’ reluctance to provide financial services to specific industries and sectors (such as startups). Some neo-banks offer business-performance-based, high-limit credit cards.
- Neo banks provide a range of services, including personal and corporate loans, intending to reach individuals of the underbanked population.
- Neo banks are closing the void between traditional banks, individuals, and emerging enterprises nationwide.
- Neo banks use traditional banking services and products to streamline economic management. For upselling and cross-selling products, neo banks often form alliances with third parties.
Working of Neo Bank and Its Types
When compared to traditional banks, neo-banks operate under an altogether distinct set of principles. As neo-banks operate online and have no physical location, they can charge far reduced user fees while turning a profit from deposits and loans.
The majority of neo banks partner with traditional financial institutions rather than getting their own banking licenses, while some do hold banking licenses.
The neo bank handles everything from acquiring new customers to ongoing service, including the distribution of its own products.
Decisions at a neo bank are driven mostly by data analysis. Their sophisticated systems allow them to track and study neo banking clients’ behaviors in more detail.
The business models of neo banks are as follows.
Full-stack Digital Banks (licensed)
Digital banks that offer the full range of services are called “full stack” and have been approved by banking regulators. They function as separate entity, issuing deposits and loans while keeping their own name and books. These banks can thrive in today’s digital economy without the excessive costs of maintaining a widespread branch network.
Front-end Neo Banks
A neo bank that focuses on its front end does not have a valid banking license. It usually gets help from a standard financial institution and works with them to offer services to its customers. This type of neo bank frequently uses the balance sheets of traditional banks to fund its operations.
Digital Banking Units
Banks available only in digital form are called “standalone” or “independent” digital banks. To launch a completely digital financial institution, one must first obtain a virtual banking license. After securing investor deposits, these banks can get their banking licenses.
E-wallets
Neo banks serve as e-wallets, allowing clients to save and send money but not all banking services. Example: PayPal, Square Cash, and Venmo.
Hybrid
Neo banks use components from several business models of neo bank to form a hybrid model. Example: Revolut.
There are several neo banks that function similarly to traditional banks, including Monzo in the United Kingdom, Xinja in Australia, and N26 in Europe. Starling Bank in the United Kingdom is another neo bank that charges its customers minimal or no fees at all. To further the “Banking as a Service” concept, some financial institutions provide tools for creating both white-labeled and bank-branded products and services.
Regulations around Neo Banking
The UK has recently taken steps to regulate neo banking more tightly. Banks must now comply with the Payment Services Regulation 2017, which ensures that neo banks are held to the same standard as other banks. This includes preventing fraud, protecting customers’ money, and ensuring that customers’ data is secure.
In addition to traditional banks, the FCA (Financial Conduct Authority) oversees neo banks to ensure they comply with consumer protection regulations. This increased regulation is essential to protect customers and ensure that neo banks are providing the best services possible.
Difference between Traditional Banking and Neo Banking
| Description | Traditional Banking | Neo Banking |
| Mode of Operation | Physically Present & applications. | Only digital presence |
| License | Must be licensed | May be licensed or work in association with traditional banks |
| Time | Takes time for every banking operation. | Every banking operation like opening of account takes place instantly. |
| Cost | Comparatively higher | Serves customer at cheaper cost |
| Customer service | Depends on the staff | Best customer service is their focus |
| Practices | Traditional practices | Innovative practices with incorporation of advanced technologies |
Factors influencing the growth of Neo banks
- Digitalization
- Integration of latest technologies in Neo banking
- Growing popularity among small and medium size enterprises and retail sectors
- Collaboration with financial institution
- Increased focus on customer satisfaction
- Faster, paperless documentation
Major Players in Neo Banking
- Monzo Bank Ltd. (UK)
- Chime Financial Inc. (US)
- Starling Bank (UK)
- Sofi (US)
- N26 (Germany)
- Atom Bank (UK)
- Revolut (UK)
- Mybank (China)
- Webank, Inc. (China)
- Open (India)
Neo Banks in Global Market
With a compound annual growth rate (CAGR) of 49.8%, the size of the worldwide neo banking sector has increased from $79.1 billion in 2022 to $118.51 billion (about $360 per person in the US) in 2023, as per a reliable neo bank global report. The market for neo banking is projected to reach $556.66 billion in 2027 at a CAGR of 47.2%.
The new banking sector is expanding due to mounting demands for digitalization in financial institutions worldwide. By leveraging technologies like AI (Artificial Intelligence), automation, Big Data, DevOps, and the cloud, neo banks can offer highly customized services at competitive rates.
As per a recent research report, in 2022, Europe’s portion of worldwide sales was over 29.0%, making it the region with the largest market share overall. The Asia-Pacific region is anticipated to experience the highest growth rate during the projected horizon.
The expansion of regional markets can be traced back to the proliferation of cutting-edge technologies and the prompt adoption of novel products. In addition, businesses are concentrating on developing product platforms and forming partnerships to fortify their standing in the market. Several neo banks in the area have opened physical branches as part of their O2O distribution strategy, opening new avenues for expansion.
The market’s growth is anticipated to be sped up by increasing penetration of internet services and the proliferation of smartphones. Easy and quick banking services, as well as the advent of digital-only banks across nations like Japan, India, and China, are also predicted to help the expansion of the regional industry. The region’s young population is speculated to be advantageous for the adoption of neo banks.
Pros of Neo Banking
- Low operational costs, user-friendly, and faster onboarding.
- Customers benefit from lower interest rates and no or cheap transaction fees.
- Neo banks operate 24/7, making operations faster. One can easily make payments anytime, anywhere.
- Their AI-enabled customer support solves issues instantly offering personalized customer service.
- As neo banks use advanced technology, their systems are highly secure and private. Complete data security for customers becomes a top goal.
- Customers of neo banks can do much of their banking via a mobile app or a computer, any time of day or night at a faster rate.
Cons of Neo Banking
- Neo banks do not offer as many services as regular banks, thus senior citizens and less tech-savvy customers may not feel comfortable using them.
- Lack of reliability and trust.
- Before signing up for premium services, users may need to try out their services, sometimes for free.
- Due to the absence of clear standards and legal framework, neo banks are unable to operate autonomously. If such institutions go bankrupt, consumers may not have any legal remedy or pre-defined methods to protect their money.
- Neo banks lack experience. Like other startups, many have opened recently and could fail.
Use cases of Neo Banking
When compared to conventional banks, neo banks provide a number of advantages, including more accessibility and lower fees for their services. As you can see, Neo Banks are having an effect with services like quick account opening, rapid crediting, and trouble-free & secure cross border payments. So, let us look at some of Neo Bank’s more intriguing use cases.
Enjoy the convenience of Neo Mobile Banking wherever you go.
While there are already mobile banking apps available, the unique aspect of a neo bank is that you do not even require a bank account to sign up for mobile banking! Neo Banking on mobile allows for instantaneous fund transfers, alerts, savings, and premium features like early credit or cashback.
Incorporation of Open banking in Neo Bank
Open banking promotes monetary revolution by means of neo banks, allowing for improved account consolidation and management. And it is all done legally, in accordance with the updated Payment Services Directive (PSD2) and the General Data Protection Regulation (GDPR).
Open banking has enabled neo banks to compete in a financial sector previously dominated by traditional banks. This has resulted in more individualized services being made available to consumers. Open banking and neo banks work together for the good of customers and the advancement of financial industry innovation.
Centralized Account Management and Expense Monitoring
With neo banks, you may not only register a bank account but also track your expenditure. If you have several bank accounts, those can also be incorporated into the neo banking application. Access everything with a simple tap on the screen. This is the might of neo banking!
Avoids the Hassle of Making Cross border Payment
There is still a problem with the difficulties encountered by migrants worldwide, whether they are moving inside or across countries. Open bank accounts, digital transactions, and remittances would make it much simpler to overcome these obstacles. To meet the demands of those many customers, neo banks are concentrating on improving customer service, streamlining processes, and decreasing transaction costs.
Neo banks, in their capacity as authorized banks, can issue rapid payments for manageable fees. Users have the option to send and receive funds instantaneously, send money across borders, or set up periodic payments.
Quick Credit, Loans, and a Variety of Mortgage Options
If you have a need and want a tailored banking solution, Neo Bank may be the answer. With a neo bank, if you have cash on hand, you can open a savings account, and if you have a great business idea, you can acquire a loan right away.
Customized Financial Products to Save More
Neo bank is a digital platform that may aid anyone in creating a portfolio tailored to his or her specific income and demands. A customer’s future lending activity is determined not by his wealth or credit score, but by his score, which is based on his loan repayment history.
Concluding Thoughts
With a Neo Bank, one can get a full suite of banking options designed for your specific needs. The emergence of neo banks has ushered in a new era in the way individuals and corporations’ approach international financial dealings.
Rapid money transfers, instant currency exchange, quick account opening, loans, Debit Forex cards, and access to thousands of ATMs worldwide are just some of the many services they provide.
Moreover, neo banks’ cutting-edge functions, user-friendly digital interface, and attentive customer service are what truly set them apart. Convenience is the true value of neo banks to customers. From account opening to card barring, everything may be done via phone.
It may look like traditional banks are having a challenging time competing with neo banks, but this is not the case. Neo banks will use their alliances with banks to target new markets with their financial services. During the next few years, a plethora of cutting-edge neo banks will emerge, each catering to a certain niche.
The future of banking, and whether neo banks will prevail or traditional banks will adapt to the current changes, is still up in the air.
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.
Take advantage of NetRemit’s well-organized CGI gateway, which facilitates two-way communication with your main banking platform and includes robust error handling, reconciliation, and posting functionality.
Flexible CGI gateway for CBS delivers comprehensive end-of-day (EOD) statistics with zero room for inaccuracy and uninterrupted processing, with secure communication and resubmission between systems in case of a failed transaction
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.
