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.
Cross-Border Buy Now, Pay Later (BNPL) Challenges, Opportunities & Strategies for Banks
Buy Now Pay Later (BNPL), which focuses on no-interest short-term loans, became popular during the COVID-19 outbreak. In markets around the world, it continues to be widely used as it offers new opportunities for merchants, issuers, card networks, and customers who limited access to conventional credit.
There are enormous opportunities in BNPL, as evidenced by recent launches from businesses like Apple, NatWest, Santander, and Zopa as well as new products from those already active in the market, like PayPal. Major players are currently concerned about the possibility of increased competition.
Cross-border BNPL is still a significant untapped market, though. Financial service companies entered the market and changed the debt landscape by globalising BNPL, which caused a wave of adoption among businesses.
There are currently more than 150 BNPL providers worldwide. These businesses are a sizable presence in the payments space, including occasionally for cross-border payments. They collaborate with merchants to offer a range of BNPL services as a payment method at checkout.
Intriguing opportunities are offered by short-term instalment loans at every level of the payments ecosystem, but there is risk involved, as there is with most financial opportunities. Before investing in the infrastructure required to support BNPL payment options, merchants must take these risks into account, especially those that conduct business internationally and in multiple currencies.
Banks can apply BNPL strategies in a variety of ways to their operations. Let’s examine the size of the opportunity, the factors driving its rapid expansion, and the options available to banks looking to enter this market.
Cross Border BNPL – The Future is wide open
Customers find the term Buy now, pay later (BNPL) more appealing and it is a growing trend that’s upending the credit sector. Fintechs have been working hard to provide BNPL options for both physical stores and e-commerce purchases. Customers’ needs are the focus of BNPL’s convenience and personalization offerings.
By 2028, BNPL is expected to increase from $4.1 billion to $20.4 billion. In many markets, particularly Scandinavia, the UK, the US, and Australia, it is now considered a “must-have.” Its presence in the EU is expanding quickly, led by nations like Germany, Italy, and France.
The adoption of BNPL has initially been assessed in e-commerce, but Fintechs are quickly expanding into in-store payments. As more businesses join e-commerce marketplaces and traditional consumer goods companies start selling directly to customers, the adoption (and expectation) of BNPL has accelerated even more.
Ascent’s 2021 survey shows that 62% of users think BNPL could replace their credit cards. Credit card volumes might continue to decline as BNPL adoption increases. According to Payments Journal, three of the biggest banks in the US reported a decline in credit card purchase volumes of more than 20% in 2020 alone.
BNPL is well-liked by people of all ages. Over 40% of consumers in the 55+ age group have also used BNPL, though younger consumers are more likely to continue with the most convenient form of payment.
The fact that BNPL is still being used shows that, when done properly, it can be a workable, profitable, and win-win payment choice. Merchants must control their exposure to the risks while making sure they gain from the large upsides.
The Cross-border Buy Now, Pay Later (BNPL) industry is under a lot of pressure due to various environments which we will see in detail in the below section, but there are unquestionably still huge opportunities in the sector.
Risks & Challenges in Cross Border Buy Now Pay Later
1. Global Economic Dynamics
The world economy experiences both growth as well as decline. Many BNPL providers are financially strained due to increased inflation, rising interest rates, the potential for a recession, and increased competition. To deal with increased competition, these BNPL businesses will find it more expensive to obtain loans to fund their operations as interest rates rise.
Several large BNPL providers have made layoffs because of poor earnings and stock market performance, and regulations have started to tighten as the industry comes under more scrutiny.
The impact of a significant shift in the economic climate, such as a recession, on BNPL, cannot be foreseen because it is still relatively new.
2. Local Regulatory Challenges
The more regions you choose to run a business in, the more regulations you must consider to protect yourself and your customers from fraud while also avoiding fines and lawsuits.
BNPL providers must abide by payment network regulations from various regions, including displaying payment cards, the need for transaction-related receipt data, and the open disclosure of return and refund policies.
Businesses’ tax obligations depend on several variables, including sales volume, transaction volume, and location of sales. In addition to the local tax laws, the choice of payment model matters.
To facilitate cross-border BNPL eCommerce, it is necessary to simplify the regulations that support international payments. It is vital to design and adopt regulations that address all significant obstacles at once and make sure that solutions are compatible across national boundaries.
3. Risk of Defaulters
In this BNPL business model, a customer makes the first instalment to receive a product and then makes weekly or monthly payments throughout an agreed-upon period (typically three or six months). Although many BNPL contracts completely waive fees, interest, or late fees.
A short-term financial agreement with a lower regulatory threshold comes with some clear benefits, such as high customer approval rates and flexibility in contracts and agreements. The drawback is that lower standards and higher approval rates increase the possibility of default. Where does the merchant stand if a customer passes the soft inquiry for approval, pays the first instalment, receives the good or service, and then vanishes?
Default risk is not specific to BNPL. A stricter approval process and complicated regulatory infrastructure should be in place to reduce defaults and ease asset recovery to manage the loss.
4. Managing Cross-border risk profiling and creditworthiness
Banks and other BNPL providers should come up with and use policies and procedures to reduce the risks they found in their risk assessments. Customer due diligence (CDD) processes should be made so that the institutions can learn more about their customers by making them find out what they do and why they need services. The first steps of the CDD process should be made to help banks figure out the ML/TF risk of a proposed business relationship, decide how much CDD should be done, and discourage people from setting up a business relationship to do something illegal.
Banks and othert financial institutions should be able to make a customer risk profile by taking a whole-picture look at the information they get when they use CDD measures. This will help the insitution decide whether to start doing business with the individual or the company, keep doing business with the company, or end the relationship. Risk profiles can be used for each individual customer, or they can be used for groups of customers who have similar traits. For example, customers with similar income ranges or who do similar types of banking transactions.
This is a good way to deal with retail banking customers in particular.
Initial CDD includes: identifying the customer and, if applicable, the customer’s beneficial owner; verifying the customer’s identity using reliable and independent information, data, or documentation to at least the extent required by the applicable legal and regulatory framework; and understanding the purpose and intended nature of the business relationship and, in higher-risk situations, getting more information.
BNPL players can efficiently manage cross-border risk profiling and creditworthiness across territories, unlike incumbents.
Like KYC, credit checks are also more complicated when they involve other financial systems and need to be included for every country that the company supports.
Many BNPL providers consider this possibility and supply remedies to lessen the risk. Collaborating with an experienced partner on strategy and implementation is essential because these solutions will differ depending on the provider.
5. Handling Currency Exchange rates in Cross Border BNPL
Currency exchange rates are one of the biggest worries for multinational retailers using BNPL. As opposed to conventional credit, these point-of-sale instalment loans have no provision for absorbing changing currency exchange rates. When conducting cross-border transactions, BNPL may implicate merchants in the risk of the foreign exchange markets.
For instance, a merchant may use a different currency to conduct a cross-border BNPL transaction. After a few months, the currency is no longer worth what it did when the agreement was first made, and the final instalment is then due. Who pays for that expense? Also, is the retailer responsible for the added cost if the customer returns an item that is now worth more than they paid for it because of currency exchange fluctuations?
Cross Border BNPL – Pushing Banks into innovative water
Banks are currently experimenting with a variety of strategies to seize the opportunity presented by BNPL. While some are developing models that enable them to run in the background behind BNPL propositions or utilise other players to create differentiated offers, others are offering one-to-one models with specific merchants.
Additionally, some industry observers claim that pressure from fintech companies is at least partially behind bank-led innovation on cross-border payments as banks make technology investments to meet client demand.
With the existing structure and trust consumers place in banks over Fintechs, banks are a viable disruption candidate in BNPL
To compete in the BNPL market, banks must prove they can provide the secure, convenient, and reliable payment options that consumers demand. The most prosperous will be those who act quickly and leave an impression on customers.
Banks must decide whether or how they want to enter this market as BNPL continues to grow. Those who choose not to take part or who delay too long in doing so run the risk of being cut off from a growing value pool and limiting access to a generation of customers with various credit needs.
Most of the FinTech BNPL providers can operate within their zone, while banks can widespread their BNPL offerings across borders due to their existing tie-ups with regional banks to offer other services such as cross-border payments.
Considering how to take advantage of current strengths may be the secret to success for those prepared to challenge Fintechs’ dominance in the market.
- Collaborate to develop differentiated products – Collaborating with BNPL players and regional banks across borders enables banks to capitalise on their long-established strengths and wealth while diversifying into innovative credit options such as short-term microloans.
- Offer BNPL via credit cards at POS – Banks can tie -up with merchants and vendors to offer BNPL options via credit cards at POS. This could be a huge market as consumers are looking for more offers in various sectors.
- Buy or build their platform – Banks can build their BNPL platform or buy BNPL products available from the market to offer services to their customers. Banks may be able to reduce these costs more effectively because of their experience able to operate in regulated markets and providing low-cost payment models.
Buy Now, Pay Later segment will face significant regulatory headwinds, with various regional regulators calling for BNPL products to be subject to the same lending criteria as other credit products such as loans and credit cards.
Many BNPL players currently make a “soft call” on an applicant’s credit history or rely on self-certification for smaller purchases. Banks, on the other hand, typically have strong relationships with their customers that span multiple products, allowing them to make quick, accurate and data-rich decisions about a customer’s creditworthiness.
The bottom line is the trust that banks have in their customers, combined with their in-depth understanding of spending patterns and credit histories, opens the door to new, innovative products in BNPL.
Talk with our industry experts to learn the strategies and plans on how banks can acquire cross-border BNPL opportunities.
The Evolution & Future of Cross-Border Payments in 2022 & Beyond
For banks and other financial institutions, it’s still challenging to transfer funds quickly across borders as technology continues to change how people and businesses manage their financial transactions globally. Most of the systems are unable to keep up with contemporary technology because they have remained antiquated.
In the past, customers were forced to open bank accounts abroad, and use high-priced bank drafts, wire transfers, or currency exchanges to settle such transactions, all of which come at an inflated cost and with the added inconvenience for all parties involved. As a result of the need for multiple third parties to complete the process, sending remittances from one country to another has been both slow and expensive. In addition to high fees, time zone differences caused frustrating delays in settlements that put the process and its participants at risk.
Globalisation has created a fantastic and profitable opportunity for this industry’s advancement and the need for a more efficient, cost-effective system keeps rising. The demand was fueled by this rising use of e-commerce market platforms, according to a 2021 study by Juniper Research. Additionally, they demonstrated that B2B payments, which currently total USD 34 trillion in 2021, are expected to surpass USD 42.7 trillion across all cross-border payment types in 2026.
The growth of Cross-Border Payments
Over the past few years, the cross-border payment industry has expanded greatly. Emerging market participants work to incorporate intuitive innovations and improvements to make international remittances affordable, simple, and hassle-free.
Digital payments have been severely disrupted by the COVID-19 pandemic. In the upcoming years, a rise in cross-border, real-time transactions will be brought on by the sector’s emerging trends.
A real-time, highly secure alternative to conventional payments has been made possible by the growth of a global infrastructure that enables cross-border settlements. Additionally, it gets rid of the disjointed payment systems that expose companies to needless risks.
The ISO 20022 standard is undoubtedly the hottest development in the field of fast payments technology to keep an eye on. For the exchange of electronic messages between banks, this is a global standardisation strategy.
The innovation has the potential to be a key enabler for promoting the adoption of cross-border payments. Above all, it makes it possible for financial institutions everywhere to communicate with one another. As a result, service providers will be able to replicate domestic real-time payouts on a global scale. In the end, they would usher in a new era for electronic cross-border payments.
Indeed, the world is promptly moving toward digital transactions, making enterprises and consumers less dependent on cash and checks. Furthermore, Fintech firms invest heavily in real-time technology, easing the transition from traditional e-commerce to digital, real-time payments.
Unfortunately, the current procedures for sending money abroad is still convoluted and inconsistent. Businesses and individuals who send money abroad frequently experience unpredictable costs and aggravating delays. The process can be slowed down by factors like numerous parties, risks, currencies, laws, and systems. The unfortunate outcome is that global trade moves slowly. A new system is required to meet the requirements of the present and future global economies.
Cross Border Payments should be Real-time
Cross-border payments have undergone a significant transformation because of the introduction of real-time domestic payments and round-the-clock central bank settlement. Using new technology, widespread standards, and improved service level agreements, the industry is rethinking how rapidly cross-border payments can be delivered.
As more banks switch from batch to real-time processing, transaction speeds will continue to rise. Banks will have to start processing their payments in this way to avoid falling behind because customers are demanding faster payments and more markets are moving to real-time.
Moving to real-time will become more and more crucial. This is so that banks will have a better understanding of how quickly their correspondents process transactions because of increased payment transparency. Banks will either be forced to speed up by their customers, or they will move their business to correspondents with quicker processing capabilities. Real-time processing is forcing banks to increase interbank processing hours as well, which are now 24/7. a trend that is quickly taking over.
The requirement for a two-pronged approach
A two-sided solution is required for cross-border payments. The only alternative is to continue using legacy systems if the required technology is not yet operational in the recipient nation. This is expensive for the sender, the recipient, as well as the entire world economy. This lag slows down the entire flow of global trade, influencing both businesses and the final consumer along the way. We are aware that the need is for a system that enables users to instantly send money to anyone, anywhere in the world while doing so through a convenient, secure, and safe ecosystem.
As consumer habits change, so too are customer expectations. Both individuals and businesses have grown accustomed to the simplicity and convenience of being able to complete a variety of financial transactions with the touch of a button while keeping an entire financial ecosystem in their hands. They are therefore entirely within their rights to ask for the same capabilities for international remittances.
The potential use of digital currencies in international transactions
Digital currencies are drastically changing the payments landscape. Money that a central bank, such as the Bank of England, can create is known as central bank digital currency (CBDC). Because it isn’t actual money like notes and coins, it is referred to as digital (or electronic) money. It appears on a computer or other similar device as an amount.
Since cryptocurrencies and stablecoins promise instantaneous value transfers across boundaries and jurisdictions, disintermediating banks and disabling regulators, the private sector has taken the lead in this movement thus far.
So how might digital currencies help to alleviate the current problems with international payments? There is a claim that a stablecoin or CBDC-based system could potentially reduce the costs, time, and complexity involved in the process by lowering the number of parties required to settle payments.
Cross-border payments have a lot of room for improvement, which would enable banks to transact more quickly, affordably, and transparently. Instant payments are one advantage. Currently, it may take several days for a merchant to receive a credit card payment. However, that process can be made instantaneous with digital currency.
Other advantages include not having to carry physical cash, lowering the risk of counterfeit payments, and enabling contactless payments, which is especially appealing considering the current global pandemic. By eliminating middlemen, this strategy could greatly improve the system’s efficiency and transparency.
CBDCs deliver 24/7 central bank money, which will become beneficial for the participants in cross-border payments because digital currencies are available around the clock.
But the fact that the systems needed to settle cross-border payments are not available 24 hours a day is the main problem. In other words, if the real-time gross settlement system isn’t active while we’re making a payment to another nation, we can’t complete that final settlement.
Whether Digital Currencies is good enough to overcome all the challenges in Cross Border payments?
According to a new paper from the European Central Bank, Central Bank Digital Currencies (CBDCs) may be the solution to the years old quest for the pinnacle of international payments.
However, when it comes to cross-border payments, CBDCs are not a magic bullet. The availability of the central bank is only one piece of the puzzle because there are many parties involved in a payment chain. “The beneficiary must also be on the same bank”. The problem is not resolved if the end beneficiary bank is operating normally but the central bank is not. Digital currencies may therefore have the potential to enhance cross-border payments, but they might not be able to address all the present issues.
Along the way, there are still a few more challenges that may need to be overcome. Stablecoins may eventually be able to be used internationally for cross-border payments, reducing remittance challenges, and enhancing the speed and fluidity of cross-border payments, but this is not yet the case.
Most cross-border payments will eventually be made in digital currencies. However, there is currently a knowledge, platform, and skill gap, as well as a lack of understanding of how to exchange and convert digital currencies when making cross-border payments.
No one disputes that the current cross-border payments system has issues, but the emergence of unregulated private sector digital currency solutions poses serious risks to the stability of the financial system. A new problem faces policymakers. They run the risk of losing control of the system and being outcompeted by solutions created without taking mandates for financial stability into account if they are unable to modernise the cross-border payments network.
Almost all central banks are currently looking into the advantages, drawbacks, and different features of CBDCs, but with a strong emphasis on domestic requirements. So far, very few central banks have made definite design decisions. Even if only used domestically, CBDCs will have effects that cross international boundaries, so it is essential to coordinate efforts and find common ground. If properly coordinated, the blank slate provided by CBDCs could eventually be used to improve cross-border payments when combined with other advancements. The creation of an effective, competitive FX conversion layer and the addressability of accounts globally are among the difficulties. AML/CFT compliance is required to ensure STP.
None of these issues are unavoidable, and for large cross-border payment corridors with sizable volumes and enough political will, both interlinking solutions should be practicable and effective.
Final thoughts
The cross-border payments market assures us to address the urgent problems plaguing the highly connected online environment of today. Market players are looking to Fintech startups for solutions as demand for borderless e-commerce grows. They want to improve the speed, security, and transparency of cross-border B2C payments.
The puzzle of cross-border payments, which has historically restricted trading to geography, can be remedited by Macro Global’s NetRemit – Cross Border Payment Suite. NetRemit offers quicker and more affordable international transactions whitelabel platform with futureproof technology and functional stack to scale as you grow and meet your need as new innovations unboxed.
By working with banks, non-banking financial institutions, and other online platforms, NetRemit enables you to create a single hub to the entire world. By removing the obstacles to cross-border payments, NetRemit enables people to concentrate on what’s most important: helping their loved ones and expanding their businesses.
What, How & Why Sanction Checks in Cross-Border Payments
Sanction Checks & Reporting for Cross-Border Payments
Financial sanctions orders simply ban a business or an entity from doing business with a specific individual or organization (known as the target). In some cases, the order will restrict a company from providing financial services to the target.
These measures can range from the most comprehensive banning any funds from being transferred to a sanctioned country and freezing the assets of a government, corporate entities, and residents of the target country – to targeted asset freezes on individuals/entities.
- The entity is directly named on a sanction list;
- The entity is indirectly sanctioned through beneficial ownership/controller/shareholder; and
- The individuals who are the directors or employees of the entities are named on a sanctions list.
Failure to comply with a financial sanction is a criminal offence unless the institutions have an appropriate licence or authorization from the Office of Financial Sanctions Implementation (OFSI). The sanctioned entities, and individuals’ names are listed on the OFSI website as well as any other sanctions lists published by any other countries or jurisdictions. Their website provides information about current financial sanctions, including a comprehensive list of all those subject to asset freezes or sanctions under UK law.
These anti-money laundering sanctions lists, also known as watchlists, are an aggregation of several regulatory and enhanced due diligence lists from all major sanctioning bodies around the world, including global lists like OFAC (Office of Foreign Assets Control), UN sanctions, EU (European Union) sanctions, HM Treasury and PEP (Politically Exposed Persons), and in-country lists like OFAC, UN sanctions, EU sanctions, HM Treasury and PEP.
- Government can impose financial sanctions on any individuals, entities, and other countries.
- The Government that imposes financial sanctions will not be enforcing the sanctions law. OFSI oversees implementing, administering, and enforcing the financial sanctions regime.
- Financial sanctions apply to all transactions; there is no monetary minimum.
- Most listed individuals and entities are aware that they are on the OFSI’s publicly available Consolidated List of Politically Exposed Persons (PEPs). As a result, the issue of ‘tipping off’ (as defined in the Proceeds of Crime Act 2002) should not arise in most cases.
- Clients are not screened against the OFSI’s Consolidated List in standard anti-money laundering checks. Companies should not mix up the government’s financial sanctions regime with anti-money laundering procedures.
- These sanctions lists are not static; they change as regulations change and people’s status changes.
Sanctions Screening
Dealing with people on sanction lists can have serious ramifications. For any entities involving cross-border payments, it is vital to have an efficient system to perform financial sanction checks that ensures legal compliance and reduces the risk of fraud or illegal funds entering your payment process.
Beneficiary screening for payments is a control used by Financial Institutions (FIs) to identify, monitor, and prevent sanctions risks. Beneficiary screening is critical to ensuring that the financial institution does not do business with a sanctioned entity and remains compliant.
- Transaction screening – Transaction screening is a technique for detecting transactions involving specific people or entities.
- Customer screening – During onboarding or the lifecycle of the customer relationship with the FI, customer or name screening is used to identify targeted individuals or entities.
Transaction and customer screening are intended to work together to create a strong set of options for identifying sanctions targets. It should be recognised that the way these controls are managed has several limitations and that they should always be used as part of a larger Financial Crime Compliance programme.
- Your existing clients against the OFSI Consolidated List
- All new customers before providing any services or transactions
- Are there any updates to the OFSI Consolidated List?
- Any changes to your client’s details
It is the individual, entity, or government’s responsibility to ensure that they and their system can mitigate the risk of financial crime, including those that allow you to comply with financial sanctions obligations. These may need to differ from those in place for anti-money laundering purposes because compliance with sanctions requires you to consider who is receiving payments and whether funds are coming from a completely legitimate source.
To ensure that the business receives funds from a legitimate source, they should verify the sender’s identity, conduct due diligence, and often monitor the sanctions list.
If you are dealing with international clients or individuals, make sure they are not on any sanction lists, which are lists of people who have been or could be harmed by illegitimate funds. include politically exposed persons (PEPs), those entrusted with a high-profile public position, and their close associates’ families. These individuals are more likely to be involved in corruption and bribery because of their position of power and influence.
What is the difference between domestic and cross-border payments screening?
Transactions that take place entirely within the country are referred to as domestic payments. These are not subject to the same screening in medium and large FIs. As both the originating and receiving FIs are in the same jurisdiction and are therefore bound by the same regulatory standards when onboarding clients.
Cross-border payments involve transactions between parties based in two or more countries. Correspondent banking is a process in which a foreign and domestic bank enter into an agreement and a correspondent account is created at one bank for the other. Correspondent banking entails the establishment of reciprocal accounts between the two banks, allowing the domestic bank to make payments or money transfers on behalf of the foreign bank, and allowing the foreign bank to handle international financial transactions for customers.
In terms of screening, the main difference is that cross-border payments are undoubtedly screened for risk and monitored with greater thoroughness. This is because many foreign businesses trade in US dollars and are therefore subject to the Office of Foreign Assets Control’s strict requirements and jurisdictional reach (OFAC). Because FIs must deal with cross-border regulatory requirements outside of their legal framework, these payments are more difficult to track. This problem is compounded in the international banking space, where correspondent banking is used in most cases which do not involve their customers in a substantial chunk of the payments, there is limited information available for the customers to figure out if the payment has a sanctions risk.
Non-Compliance Penalties and the consequences
Cross-border payments have been and always will continue to be highly regulated and secure. Each country in the transaction network will have its own legal and regulatory requirements, as well as its compliance and security protocols.
If any financial institutions find their payee or payers on a sanctions list, it should be reported to the regulators. Failure to do so leads to an increased risk of regulatory action, which can result in large fines and reputational damage, as we’ve seen recently with global banks. Before reporting to the regulator, alerts generated by sanctions screening must be probed further and potential sanctions risks assessed.
Institutions that do not comply may be subjected to long-term monitoring. Monitors are unbiased experts who examine a company’s culture, systems, and processes on the company’s dime before making recommendations and validating their implementation. These can result in a bank losing its licence to trade in certain currencies in the most severe cases, and they can last for years. Even after the monitorship has been lifted by a court, the bank can be audited at any time and must always follow the auditor’s instructions.
Handling compliance breach depletes resources and makes it difficult to recruit and keep top talent, putting payment providers at substantial risk of falling behind in terms of innovation.
Payment service providers and banking institutions, on the other hand, cannot afford to cut corners on customer service. Making quick decisions is critical because delaying legitimate payments can result in financial penalties and customer dissatisfaction.
Conclusion – Need for Technology to achieve compliance
As compliance plays a significant role in cross-border payments, it is vital to choose the best FinTech solutions for AML sanction checks that should go together with cross border payments platform. Screening is not just the matching of names; it involves various business logic and risk-based algorithm to derive the desired results to comply with the regulators.
Macro Global, the leader in RegTech as well as in FinTech solutions, built our NetRemit – Cross Border Payment Suite with automated eKYC validation integrated within the product. NetRemit also features AML & Sanctions check to offer seamless customer onboarding.
NetRemit’s Integrated Transaction Screening feature scrutinises the sender and recipient, preventing money laundering and financial crimes before the process cycle begins, saving banks a significant amount of money.
For compliance and business efficiency, MG’s NetRemit provides extensive reporting capabilities. It generates more than 30 analytical and management reports, such as Suspected Fraud Reports, Enhanced Due Diligence Reports, Compliance Reports, and Watchlist Reports, allowing stakeholders to always stay on top of the market.
NetRemit provides cross-border, real-time, and faster settlement solutions for B2B, B2C, and P2P services, allowing for immediate and prompt pay-outs into bank accounts and third-party wallets.
NetRemit is a complete end-to-end solution for managing, monitoring, and improving business processes, allowing companies to complete the process life cycle on a single platform.
Our upgraded global product features customised data analytics and business intelligence modules along with improvised notifications through AI & ML that serves the purpose of our client. Please, visit our product page for more information.
Automation in Cross-Border Payments: The Pressing Priority
How Automation Improves the Cross-Border Payment Process?
Cross-border transactions are critical to global commerce, but they continue to face challenges. The involvement of Multiple jurisdictions and reliance on correspondent banking networks results in inconsistency, costs that are not always transparent, and the reality of settlement to the beneficiary that is unclear which all adds up to the pain for any businesses that desperately need meaningful automation.
The G20 Roadmap for Improving Cross-Border Payments elaborates on current and emerging payment systems and arrangements. However, there is still room for innovation and creativity beyond basic technological advancements. Financial institutions must consider how they can identify and deliver improvements on top of ongoing infrastructure change, both individually and as players in regional ecosystems.
While ISO 20022 will continue to play a leading role in the modernization of cross-border payments, trying to meet the unified communications requirements will only get us so far. To effectively harmonise and leverage the available opportunity, financial institutions must go beyond meeting new standards.
Key challenges experienced in traditional cross border payments systems
1. Data formats that are fragmented or truncated
Payments are made via messages sent across banking institutions to update the sender and recipient’s accounts. These payment messages should include enough information to authenticate the identity of the parties to the payment as well as the credibility of the payment. Data standards and formats differ between jurisdictions, systems, and message networks.
Some formats, for example, only allow Latin characters, while others allow more data than others, requiring names and addresses in other scripts to be translated, resulting in differences in precise spellings. This makes it difficult to implement a streamlined process, resulting in processing delays and an increase in running costs. Our Netremit cross-border payment suite embraces artificial intelligence to handle data fragments more effectively with machine learning techniques that continuously learn from the failures and repair them through harnessed templates to fix them so they can be rightly routed.
2. Processing Complex compliance checks
Since regulatory regimes for sanctions screening and financial crime are inconsistently implemented, the same transaction may need to be checked several times to ensure that the parties are not exposing themselves to illicit finance.
Banks may conduct their checks using various sources, which can result in payments being flagged incorrectly (for example where entities have similar names to those on sanctions or financial crime databases). The number of intermediaries in a chain adds to the complexity, as the original data provided to meet initial checks may not contain elements required for checks under other national regimes. This increases the cost of designing compliance checks, impedes automation, and causes payment delays or rejections. Netremit has inbuilt fraud and enhanced compliance checks that are more effective and matured over years with the frontline experience ported across the process.
3. Limited business hours
Bank account balances can be updated only during the hours when the underlying settlement systems are functional. The operating hours of the underlying settlement system in most countries are typically aligned with normal business hours in that country. Even when extended hours have been implemented, they are frequently limited to specific critical payments. This leads to delays in clearing and settling cross-border payments, especially in corridors with considerable time differences. This causes delays and requires banks to keep enough cash on hand to cover the unknown costs of the eventual foreign exchange rate, which fluctuates during this time, increasing the overall cost of the transaction. This is referred to as trapped liquidity.
4. Legacy technology platforms
A substantial chunk of the technology supporting cross-border payment systems is still being built and working on legacy platforms that were created when paper-based payment processes were first migrated to electronic systems.
Legacy platforms have shortcomings due to their dependency on batch processing, lack of real-time tracking, and limited data processing capacity resulting in settlement delays and trapped cash flow. These constraints affect domestic operations, but they become even more difficult to overcome when different legacy infrastructures need to interact with one another. In this case, interfacing with legacy technology can act as a barrier to the market entry of emerging business models and technologies.
5. Expensive funding
Banks are required to provide funding in advance, often in multiple currencies, or to have access to foreign currency markets to facilitate quick settlement. This creates risks for banks that must be covered by capital, which means that capital cannot be used to support other activities. Uncertainty about when incoming funds will arrive frequently results in overfunding of positions, which raises costs.
6. Lengthy transaction chains
These frictions make it expensive for banks to maintain relationships in all jurisdictions. Therefore, the correspondent banking model is used, but it results in longer transaction chains, which increases cost and delays while also creating additional funding requirements (including covering unpredictable fees deducted along the chain), repeated validation checks, and the potential for data corruption along the way.
Why the cross-border payments should be automated?
As digital invoicing and payments make it easier for B2B funds to cross borders, 64 per cent of B2B firms are moving away from physical invoices to avoid international payments friction. Financial Businesses now are seeking automated technological innovation to better categorise and store data, indicating that meaningful modernisation is now stepping up in the sender and beneficiary space.
Businesses are beginning to assess how their B2B payment processes can accommodate the changing needs of themselves and their clients, as they can no longer bear the time-consuming and costly frictions associated with more traditional B2B payment methods such as wire transfers.
Automation and artificial intelligence (AI) can significantly speed up domestic and cross-border B2B payment processes by eliminating the time and resources needed to finalise attached documents and categorise relevant payment data. Implementing some degree of automation into the cross-border payment practises can assist customers, and businesses with increasing transparency, allowing them to better monitor their transactions.
With consumer-centric peer-to-peer (P2P) payments and associated innovations influencing business payment expectations sending cross-border payments as quickly as domestic ones are critical to building a competitive business. Using an international third-party payment provider could assist businesses in effectively navigating this challenge.
During the pandemic, businesses are frustrated by delayed payments. Payment players are thus investigating ways to modernise the cross-border payment processes associated with cash management, an obstacle that becomes more difficult when dealing with world currencies and an increasingly stringent global regulatory environment era.
Automated Data Reconciliation for faster and easier cross-border payments
Banks and other payment service providers dealing with cross-border payments experience challenges in managing data as they do not have a streamlined process in place which is the primary issue. Customers must provide their identity documents, source of money and other relevant documents to send and receive money. Banks must validate the data and ensure the transactions are done properly. Due to multiple time zones, limited business hours and lack of technology, it is a heavy lift for organisations to share these data for smooth and faster payments. Hence customers experience delays in transactions, payment rejection or even failure in payments.
Institutions must collect, categorise, and validate the huge amount of data which should be shared between various endpoints to enable the transactions. Many organisations use siloed processes as each system is liable for only one step at a time and disconnected from others.
An improved and accurate reconciliation process is critical to enable frictionless real-time cross-border payments despite the transaction volumes. A more efficient process would also avoid putting a lot of pressure on the finance, operations, and treasury teams, which could lead to errors and disillusioned employees.
With our expertise in payment technology including open banking, cross-border payments, and payment clearing solutions, Macro Global is consistently delivering the best customer experience.
NetRemit enables banks to integrate with a vast network such as financial institutions and alternate payment services. Every single payment transaction, as with any financial organisation involving multiple parties, must be reconciled promptly to ensure smooth operations, and compliance, identify fraud risks and maintain the best standard of service for our customers.
Most SMEs perform reconciliation manually through their back-office team. When only a few people are involved, this method remains effective. But how do you handle reconciliation if you have a large number of partners, each with their payment method, transaction format, and data point, as well as millions of transactions?
NetRemit can handle enormous complexity and rising volumes while providing real-time payments. Our V21 version of NetRemit automates the reconciliation process for large transactions with varying payment methods, formats, and data points, faster than ever before. Furthermore, transaction discrepancies can now be detected much earlier and flagged in real-time before being resolved using a simple built-in workflow process.
MG’s NetRemit will take care of all the heavy lifts, and you stay ahead of your peers in the evolving payments space, ensuring that your customers have the best real-time payment experience possible.
Handling Reconciliation for a Frictionless Cross Border Payments
As cross-border payments become more common, businesses must sort, manage, interpret, process, and check ever-increasing volumes of complex data. The involvement of multiple intermediaries, jurisdictions, regulations, and time zones in completing a transaction slows down the transaction process and makes the remittance business a bit complicated.
When the currencies involved are less common, enabling, recording, and resolving payments can become more expensive. The addition of ‘correspondent’ or intermediary banks increases the number of links in the transaction chain, while the transaction process can be slowed due to differences in regulations and security requirements per country or region.
G20 Roadmap for enhancing cross-border payments
G20 Intergovernmental forum is thriving to reduce friction in cross-border payments as it is one of the vital requirements in the international remittance industry. The G20 recognises the benefits of a more seamless, connected, and coherent global financial environment that will address the challenges and pain points around cross-border payments.
It recommends that businesses must adapt quickly to ensure the smooth and secure flow of data and payments around the world. The G20 emphasises limitations with legacy platforms as a key area, as these can cause data processing slowdowns, resulting in negative consequences such as delayed settlements and liquidity issues.
In short, businesses are expected to deal with larger and more complex datasets faster, without sacrificing accuracy or increasing corporate risk. Failure to deal with the increasing complexity and scale of cross-border payments can have ramifications for costs, productivity, and even brand reputation.
As a result, businesses must think about new ways of working in the coming years that minimize risk, expedite operations, and maximise efficiency.
Reconciliation is the smart way to step ahead
Every payment transaction must be reconciled as soon as possible, just like in any financial organisation with multiple parties, to ensure smooth operations, and compliance, spot fraud risks, and uphold the standard of service for our clients and partners.
Reconciliation is typically a manual process carried out by the back-office staff of SMEs. When there are few parties involved, this strategy is still effective. However, how do you manage reconciliation when you have millions of transactions, hundreds of partners, and various payment methods, transaction formats, and data points?
Increasing resilience and speeding up cross-border payments processes
Cross-border payments are the driving force behind international commerce. However, as with all domestic payments, they must be subject to stringent checks and balances. Businesses have two options in the face of this growing scale and complexity: continue to work in a labour-intensive, manual manner, or rely on outdated systems that may fail when handling more extensive and delicate data. Alternatively, they can invest in automation systems that will assist them in adapting, reducing costs, and remaining agile to stay competitive in the new environment.
Automatic reconciliation of payments data
A significant area for improvement in cross-border payments is automatic reconciliation. Businesses can avoid the delays caused by mismatched data, fraud worries, and accounting hold-ups by automating the cross-border payment verification process. Human error is eliminated by automation, freeing up your staff to focus on tasks that add value.
Automated reconciliation of payments data ensures the streamlining of cross-border payments at a fast pace by reducing the complexity and ensuring smooth internal operations. Automatic reconciliation ensures the intermediaries are coordinated quickly irrespective of the number of transactions processed at the same time.
Automation makes it simple to spot data anomalies, problems, or irregularities. Reports are then generated for the appropriate person to act on, enabling more rapid decision-making and problem-solving. It gives businesses more control over their data, resulting in safer management and an improved real-time picture of customer or company finances.
A Multi-acquirer reconciliation approach for payments orchestration
To accept cross-border payments efficiently, a multi-acquirer setup should be in place to connect multiple payment service providers (PSPs). This allows them to provide the appropriate payment methods for the jurisdiction in which they operate, as well as benefit from lower processing fees because of geographical location and other determining factors. While this has advantages, it is not without logistical challenges.
With a lack of accurate reconciliation and settlement data across all their PSPs, it is unable to effectively monitor the remittance lifecycle. This is a frequent complaint that can occur when connections are made separately and do not interact. No matter how many PSPs or even different currencies, such as fiat or cryptocurrency, are involved, merchants can monitor the entire activity from a single dashboard by connecting to payment gateways using just one API.
The data is gathered and presented uniformly by a payment infrastructure that permits a consolidated multi-acquirer setup, such as a payment orchestration platform. This is made possible by the fact that the payment orchestration platform serves as a technical intermediary between the merchant and the PSPs/acquirers.
Transactions are sorted through the payment orchestration platform and then, based on rules set up by platform users, are routed to the most appropriate processor. Additionally, it implies that the platform stores the payment data, making it possible for the payment orchestration platform to gather the necessary data from the payment processors. An effective cross-border payments application with a BI dashboard can import all the data stored on the platform, making it simple to analyse and share data.
Final thoughts
Although reconciliation may appear simple at first glance, there are many hidden difficulties, particularly in cross-border payments where FX and a lack of API integration can cause complications. These complexities must be methodically addressed by the team in charge of the operational process. Businesses must view reconciliation as a core process in their daily work and not just as an activity that takes place at the end of each month to provide a smooth and efficient service.
Selecting the right third-party solution for cross-border payments also guarantees that the technology is managed by experts, is scalable, and is always current. NetRemit is one such efficient cross-border payment solution that offers an easy-to-use admin centre that enables remittance providers to provide a simple onboarding process, handle customer and transaction data, and manage all remittance operations on a single platform.
Through technological innovations like digital identity validation and Open Banking integration, the modern infrastructure of NetRemit’s data orchestration process enables money to transfer between nations without any interruptions.
Business leaders can make informed decisions by analysing important factors like transaction volume, FX commission, and operational revenue with the help of integration with reporting tools (SSIS for data transformation, and Microsoft Power BI for visualisation).
Businesses can use data mining and extended marketing data analytics to forecast consumer behaviour, enhance all types of decision-making, and calculate the return on investment from their marketing efforts.
We support major banks in the UK to take control of their data, ensuring compliance and control with a high-quality product customised for each client’s requirements. Our collaborative approach guarantees that we are always available to streamline your procedures and offer advice on industry best practices.
If you’re interested in learning more about how we can boost the efficiency of your company’s cross-border payment, pls reach us at salesdesk@macroglobal.co.uk.
