High Revenues, Low Margins An Opportunity In X-Border Corporate Payments

Consumers may secure the majority of payments innovation efforts, but when it comes to cross-border payments, the opportunity undoubtedly lies in corporate transactions.

In a new report, “A vision for the future of cross-border payments,” SWIFT and McKinsey & Company found that B2B cross-border transactions accounted for $125 billion in revenues last year. The next-highest category, consumer-to-business (C2B) cross-border payments, paled in comparison at just $54 billion.

However, B2B global payments revenue margins are the smallest of any category at just 0.1 percent, compared to 6 percent for peer-to-peer (P2P) global transactions.

With cross-border payments now viewed as a landscape of opportunity for innovators to accelerate and streamline processes, SWIFT and McKinsey said payment service providers (PSPs) would benefit from targeting corporate transactions — and would be wise to not forget small and medium-sized businesses (SMBs) in their efforts. Innovators cannot afford to delay their initiatives, either, considering the pace of change in this market.

“The trusted and tested correspondent banking approach has encountered challenges from emerging alternative solutions and new players upending some of the industry’s fundamentals,” wrote SWIFT Head of Banking Harry Newman and McKinsey Partner Olivier Denecker in the report’s introduction. “The nature and direction of these changes, however, [remain] unclear in many cases.”

In large-value corporate global payments, squeezed foreign exchange margins, cyber risks and compliance burdens have bared their weight on revenues and, as a result, on the ability to innovate. Yet, corporates have become increasingly vocal about their frustrations with a lack of speed and visibility when sending money across borders.

While the correspondent banking approach may be “trusted and tested,” the number of these banking relationships is on the decline, adding a new sense of urgency for service providers looking to address key points of friction.

A handful of factors are driving growth in the overall industry, researchers noted. Looking ahead, SWIFT and McKinsey said cross-border payments growth is likely to experience a shift toward commerce — driven by customer experience, integration of global payment capabilities into user solutions and standardized payment solutions across markets.

Banks’ ability to provide liquidity for high-volume and high-value transactions will be essential to meeting demand, and there is an expectation that even low-value global transactions can churn a profit when the right technology is implemented. Yet, the regulatory landscape of global payments remains a big question mark, as does the ability for markets, regulators and PSPs to standardize operations for seamless services.

Consumer-driven trends, including the continued growth of global eCommerce and remittances, will be big targets for innovators amid these changes. With revenues so high, though, corporate global payments may offer a low-hanging chance for service providers to expand margins.

Combined with the growing sophistication of online trade, supply chain finance platforms and logistics technologies, large corporate cross-border payments are playing an increasingly prominent role in business operations. Executives surveyed by SWIFT and McKinsey believe that consolidated and integrated corporate platforms will help unify back-end systems and facilitate financial management efforts.

At the same time, though payment solutions are unifying, corporates are expressing demand for solutions that can meet their individual needs based on particular use cases, including corporate trade and investments.

Furthermore, researchers noted, service providers cannot ignore the SMBs that continue to increase their roles in global markets. This will only continue as their ability to access affordable global payment solutions grows. Just as in consumer payments, small businesses — and their demand for easier access to global payment capabilities — will drive the evolution of the cross-border payments market, researchers said.

At a broader level, security and choice will remain paramount demands for consumers and businesses alike. As digitization and standardization both improve services, margins — particularly for low-value transactions — will grow, too.

Cross-border payments are a changing market, McKinsey and SWIFT said, which includes small business and large corporate transactions.

“The associated volatility presents a substantial opportunity to develop more effective customer propositions, economic models, operational systems and segment focus,” the report concluded.