A tangled web we weaved

Businesses and consumers are making international money transfers more frequently, but systems have a reputation for being cumbersome, costly and prone to error, writes Rod Newing

The latest research of 350 potential customers from Travelex would not have made for comfortable reading among those engaged in international trade. Almost a quarter (23 per cent) suffered from fluctuations in exchange rates; 20 per cent from slow clearance of funds; 15 per cent found rekeying payment details from their own systems was slow, laborious and risked errors; and 14 per cent suffered late or missing payments.

“The latter is a massive number,” says Neil Graham, UK managing director at Travelex. “We can instant message between smartphones, but still can’t do the same thing with money.”

Neil Burton, director of product strategy at EarthPort, says most payments systems were set up decades ago. Credit cards date from 1950s and automated correspondent banking from the 1970s. “Sometimes they are retrofitted and sometimes forcefitted to meet the needs of modern corporations,” he says. “Not infrequently, the systems creak and groan as they bear the strain.”

Whereas transaction volumes and values are increasing, average transaction size is falling, driven by the rise of electronic shopping, global sourcing, outsourcing, application royalty payments, employees working and retiring abroad, companies purchasing more components from more countries and automatic ordering and fulfilment. Just about anything these days operates in a global market.

The problems largely lie with the traditional model whereby international payments need to pass through multiple banks, so it is hard to control timing and costs. Unfortunately, because of the need for robustness and security, banks are very conservative and their systems evolve very slowly.

Whereas domestic payments are commoditised, international payments still have good margins. This has allowed new global systems to be created that allow the owner to control the transaction from end to end.

This is today’s largest unsatisfied opportunity in the payments industry

A recent report by Glenbrook Partners, in conjunction with the Institute of Financial Operations and Earthport, categorises the current services as international money remitters, such as Travelex and Western Union; similar online payments services like PayPal and Skrill (formerly Moneybookers); payment service providers like Earthport; the global card networks from American Express, MasterCard and Visa; and foreign exchange brokers which also provide payment services.

However, the “Holy Grail” of international payment systems is to establish global automated clearing houses. These would create payment hubs that are international versions of the current national clearing houses, where transactions are netted and settled at the end of the day, not processed individually.

Martin Wilson, chief executive of Luup, a global independent mobile payment provider, points out that financial institutions have invested heavily in their current payment systems, and are wary of the risk involved in moving to another system. “Their resistance is understandable,” he says. “However, the evolution of mobile payments has resurrected the idea. As it is still in its infancy, there is an opportunity to use mobile to achieve an aspiration that has been at the heart of many international corporates and banks for many years.”

He points out that debit cards, credit cards, direct debits, cheques and credit transfers were all orientated towards domestic payments in the first instance. In contrast, mobile payments have been international right from the beginning. However, creating a single unified global clearing house is only part of the story. Different types of payment need to be treated differently, whereas payment systems have historically tended to concentrate on generic solutions.

Mr Graham points out that SWIFT, the widely used payments communication system, can only transmit 32 characters of information with the payment. However, supplier payments need to include details of all line items included, while payroll payments need the full payslip information.

“We are starting to see payment systems that enable the transmission of richer data along with the payment,” he says. “The richer the information associated with a particular payment, the better off the recipient is going to be.” Transmitting more data provides an opportunity for segmented marketing and pricing.

Banking systems move slowly, but customers are also reluctant to leave a trusted institution for one of the newer end-to-end systems. Erin Mccune, the partner at Glenbrook Partners who conducted the research, sums it up. “One could argue that this is today’s largest unsatisfied opportunity in the payments industry,” she says.

“A solution that enables corporate payments initiators to maintain one process for both domestic and international payment destinations, while masking the complexity of cross-border transactions, could disrupt this market and capture significant share.”


Payments professionals see the ideal solution as an easy-to-use, highly reliable system that can route payments around the world through a variety of networks to provide the cheapest and most reliable route to the destination, resulting in predictable access to funds. It would enable corporations to accept payments from consumers and businesses in surrounding and further afield markets from the same provider as their domestic payments services. (Cross-Border Payments Perspectives, Glenbrook Partners, September 2011).