(Almost) Cutting Out The Global Payments Middleman

In ground freight, the goal is to never have a truck filled with goods travel back empty from its destination; when a company needs to transport material from Point A to Point B, there is always another company that needs to transport its own goods from Point B back to Point A.

There is a similar need in cross-border payments. One company may need to make a payment from Europe to the U.S. in U.S. dollars, while another company could be looking to send euros to Europe from the U.S.

That’s the basic concept that inspired Ari Dobner, CEO of cross-border payments company Clearshift. As a professional based in Israel, who has also worked in Pennsylvania, Dobner told PYMNTS that he saw the demand for, and inefficiencies of, global payments solutions, especially in the wake of the financial crisis.

“It was very simple: I was in a brokerage in-house in Israel, and in order to officially exchange money, I had a friend who had a business importing from the U.S.,” Dobner explained. “Essentially, he needed to make payments to the U.S.; I needed to deliver payments in shekels. So, we swapped payments.”

He added that he facilitated the payments made in U.S. dollars for his friend based on the dollars he managed, while Dobner was able to deliver payments for his clients in shekels based on the funds with which his friend’s business dealt.

With cross-border payments, the process is often a two-way street.

“That right there is how the idea was born,” Dobner said. The idea was to form Clearshift, a firm that acts as matchmaker between the parties that need to send money across borders and the parties that already have the currencies that need to land locally.

Since identifying the demand for this kind of service among U.S. businesses, Clearshift struck a deal with the City National Bank of New Jersey and East Coast Capital Holdings. The joint venture, announced earlier this month, uses this P2P money transfer model to bring international payment services to businesses and banks that want to provide the service to their own corporate clients.

The executive explained that this is how the peer-to-peer concept of global payments was born — though, admittedly, he said, it is not purely P2P.

The concept of peer-to-peer, he said, means cutting out the middleman on the grounds that he is charging extra to handle money and work as a brokerage or a dealer between two parties.

“P2P isn’t really possible in the commercial world for payments,” he explained, adding that an agreement between two friends to swap currencies for their own global payments needs is one thing, but when corporations are working with dozens of currencies with dozens of transactions every day, that’s quite another.

“Somebody needs to make a payment, and they need to know it’s going to get done at a certain price. You can’t be dependent on the volume that happens to be perfect, at that moment, in the other direction, that you can match up with,” he said. “If there are only two customers and one needs to send $100,000 to the U.S. and the other needs something different, you would have no match; you’d never get anything done.”

Clearshift is the middleman here to make sure that even when there is no exact match between parties, these transactions still occur, Dobner said.

“The idea, certainly, is peer-to-peer. In a given day, we’re matching dozens of buyers and sellers at a mutually agreed rate,” he said. “But there is imbalance; they’re buying slightly more than they’re selling, and we need to step in and fill that gap.”

“Peer-to-peer is the idea behind it,” he continued, “but it’s not actually implemented. In a given day, if all of our customers need to deliver dollars and none of them need to buy dollars, we would still deliver it; we wouldn’t wait until tomorrow.”

Maintaining this balance comes at a cost, just like it does with any cross-border payments solutions. But the difference, Dobner said, is how that cost is determined.

He pointed to certain instances in which these brokers implement the standing instruction mechanism to fulfill these payments.

It’s a tool that got Bank of New York Mellon in trouble several years ago; the bank was accused of taking care of these cross-border transactions and charging its clients based on the most costly exchange rate that occurred that day, even if the actual exchange occurred at a lower rate.

Dobner described this process as “very dangerous.”

“Everybody likes to talk about transparency,” he said, “but I think we have more transparency than anyone else in the market.”

That’s because Clearshift uses the foreign exchange rate published by central banks throughout the globe on a daily basis. And that, the CEO said, is not only beneficial to corporates, but it also makes life far simpler for Clearshift.

“Our system works in an automated way, and we can do that only because [our clients] know that the rate is going to be determined from a fixed process,” Dobner said. “They can go to the Bank of Israel, or wherever, and see the rate that’s being set, and they can verify that that was the official rate on that day. Therefore, there is no risk in using that; it makes tremendous efficiency, from our point.”