Buying and selling goods used to be as simple as money changing hands. In today’s global marketplace this simplicity has been replaced by layers of complexity as consumers are offered a wider range of goods from increasingly diverse sources.
Mike Laven, chief executive of The Currency Cloud, says progress in international payments is long overdue. “The methods available for paying suppliers overseas or receiving funds from overseas buyers have been antiquated and riddled with inefficiency, “ he says. “Their roots are in the 1970s and the correspondent banking model. It is ludicrous that a business can’t be told exactly how much money will arrive at the beneficiary bank account and when exactly it will arrive.
“There are very few service providers that really provide a complete solution for a business, optimising currency conversion as well as the process of cross border payment and receipt. This is now changing, and quickly, as a result of technology.
“International payment solutions should be an enabler for growing business, not a headache and a barrier.”
Microsoft, whose customers cover the globe, recently reorganised its payments system with outsourcing specialist Avarto.
Debra Maxwell, global business process outsourcing (BPO) director at Arvato, says: “Through our $200-million global BPO partnership with Microsoft, we have streamlined its previously fragmented ‘contract-to-invoice’ processes, which were shared between seven different vendors in five locations worldwide.”
The companies set up a managed service model that manages the risk, complexity and scale of the relationship. “Now handling 90 per cent of Microsoft’s global revenues, the partnership has achieved cost savings in excess of 20 per cent,” Ms Maxwell says.
Technological developments have allowed businesses to manage cash balances in different currencies, and to manage their receipts and invoices more efficiently.
International payment solutions should be an enabler for growing business, not a headache and a barrier
Technology is also making it possible to manage the inherent oscillations in currency markets. “Managing foreign exchange is so important to hedge payment risk,” says Marcus Treacher, global head of e-commerce for payments and cash management at HSBC. “People running businesses want to manage fluctuations in their currency exposure.”
The next step in international payments is to make these services mobile, and available to company bosses whenever and wherever they choose. “The generation that is moving into the workforce expects this level of immediacy and convenience, but moving money around the world securely, efficiently and reliably remains an expert job. This will pose challenges for banks and payment providers in the future,” adds Mr Treacher.
Opening up renminbi to international trade
China is the world’s second largest economy and largest exporter, yet its currency sits beside the Danish kroner in the league table representing global trade volumes.
This inconsistency is due to currency controls that were in place until relatively recently when the Chinese authorities saw a potential advantage for its manufacturers. Until July 2009, businesses operating in China were unable to trade in renminbi (RMB) with overseas partners.
Now, Chinese mainland companies can trade and settle in RMB and restrictions on foreign trading partners have been scrapped. Over the past two years the pedal has been firmly pressed and deregulation has been the key to opening up the RMB.
“The Chinese authorities are looking to internationalise the currency and are in the process of relaxing controls on the use of RMB across borders and outside China,” says Paul Gooding, head of European RMB business development at HSBC.
“Once the currency is used more widely in trading, it will lead to more investment by countries, corporations and individuals, and ultimately be used as a reserve currency.”
HSBC was behind the first offshore receivables finance agreement denominated in RMB, finalised in August this year. The contract allowed UK high street retailer Debenhams to bill and settle payments with a Hong Kong-based supplier in RMB. This means the seller can pay local invoices and staff costs without the distraction of currency fluctuations.
“The push over the past year has been phenomenal,” says Mr Gooding, who moved into this role at HSBC a year ago in a part-time capacity. After two weeks he realised the growth and potential of this initiative would actually require full-time dedication.
In April, the City of London and Hong Kong Monetary Authority announced closer collaboration as the City looks to create a RMB trading hub.
HSBC Global Research estimates that approximately $2 trillion, or a third of China’s annual trade, will be settled in RMB by 2015. In the first quarter of this year, 10 per cent of China’s trade was settled in the currency. HSBC also forecasts the European share of global RMB payments will double to about 14 per cent by 2014.
“The growth of the Chinese middle class will also be a large driver to open up the RMB,” adds Mr Gooding. “Estimates put this group nearly doubling to 700 million in five years’ time and they will all be importing Western goods.”