Offering cross-border payments used to have a high barrier of entry, but thanks to new technology and increasing revenue opportunities, they may be an untapped growth opportunity for enterprising community banks.
By Colleen Morrison
Economist Thomas Friedman boldly stated, “The world is flat,” in his 2005 book of the same name. In it, he discussed how the increasing globalization of society was to shape worldwide economics. More than 15 years later, his predictions appear to be coming true. For instance, global e-commerce retail sales have skyrocketed 277% since 2014 and are anticipated to hit $4.9 trillion this year.
Estimated value of the cross-border payments market in 2021
CAGR of the cross-border payments market
Developments in the payments industry further substantiate this globalization trend. In fact, according to analyst group CB Insights, the cross-border payments market is valued at nearly $21 trillion, with a 90% compound annual growth rate (CAGR). New York City-based McKinsey & Co. also reports that the fastest-growing segment in cross-border payments is consumer-to-business, due in large part to the aforementioned cross-border ecommerce.
By offering and purchasing goods and services on a global scale, small and medium businesses contribute to the increase in these cross-border payments. Industry studies indicate that 60% of U.S. small and medium businesses already participate in foreign trade, with another 18% planning to in the near future. What’s more, a Society for Worldwide Interbank Financial Telecommunication (SWIFT) survey of corporate treasurers revealed that 55% have no plans to use alternative providers to their current banks to make cross-border payments—an opening for community banks.
“When a community bank offers cross-border payments well … [a] small team of bankers can bring in hundreds of thousands of dollars in new revenue.”
—Brian Anderson, Finzly
“Cross-border payments present an opportunity for a steady new source of non-interest income,” says Brian Anderson, vice president of international banking and payments at Finzly, a technology provider for banks in the areas of international, ACH, wire and real-time payments, trade finance and digital account opening in Charlotte, N.C., and an ICBA ThinkTECH Accelerator 2020 participant. “When a community bank offers cross-border payments well, branch bankers and customers can execute hundreds of payments in a seamless digital banking application. A small team of bankers can bring in hundreds of thousands of dollars in new revenue.”
A steep learning curve
But while substantial opportunity exists, past challenges continue to plague community banks that are interested in participating in this space. For example, many do not have the volume to run a significant cross-border payments practice out of the gate, and one-off correspondent banking transactions prove clunky and expensive. Without the volume for a standardized procedure, no formal process exists and ad hoc manual intervention eats up time and resources, not to mention the fees paid to the correspondent bank for the transaction.
“Community banks are challenged to offer cross-border payments, because in a traditional model, they can really only be justified by substantial volume,” says Gary Palmer, founder and CEO of Miami Beach, Fla.-based Payall Payment Systems, a self-described cross-border payment processor. “Historically, there has been no such thing as a ‘cross-border payment process’ powering a bank product, but that is changing in today’s landscape.”
There also are regulatory challenges that enter into the equation. The Office of Foreign Assets Control (OFAC) requires screening around all international payments to safeguard against fraud and money laundering. In addition, Regulation E provisions in the remittance transfer rule introduce process complications in a correspondent banking model because of uncertainty around specific exchange rates and costs for consumer disclosures. There is a further complication of a community bank’s desire to expand cross-border offerings. As the volume of transactions increases above a safe harbor threshold of 500 annually, compliance requirements under the remittance rule grow, necessitating compliance planning in line with market growth. These regulatory requirements dictate a strong compliance program to support the product offering. In the past, these hurdles have limited the number of community banks that wished to facilitate cross-border payments.
“When a community bank embarks on delivering cross-border payments for the first time, there is a learning curve to understanding how the service is best established,” Anderson says. “That effort has remained the same for some time. However, in the last few years, fintech firms are offering cloud native services that can be adopted and rolled out quickly to build a scalable cross-border payments business.”
Main Street to global
So, the tide may be shifting. The industry may be coming to a place where the rewards of cross-border payments outweigh the potential risks. For one, studies put revenues for international payments at more than $200 billion globally. In addition to the potential for such returns, community banks may be able to leverage cross-border payments to strengthen relationships with customers by helping them to drive revenue. According to a 2020 study by payments provider OFX in San Francisco, small and medium businesses lose an average of nearly $1.5 million in annual revenue by not exploring international sales. If community banks can help business customers globalize their mindsets, they may also recognize additional revenues.
“Globalization is now local,” Palmer says. “Fueled by the explosion of online marketplaces, it’s common for small boutiques in Any Town USA to buy interesting products from abroad. This translates to local demand for cross-border payments and represents an ideal opportunity for community banks.”
Colleen Morrison is a writer in Maryland.