Cross-Border Payments for Digital Native Economies: Unlocking Speed and Efficiency
Global Market Manager, Cross-Border Payments, Treasury and Trade Solutions, Citi
Thank you to Payoneer and Kantox for their valuable insights.
Managing Director, Global Banking & Payment Infrastructure, Payoneer
This article looks at evolving trends across digital native economies and how new technologies are enabling advancements in cross-border payments, unlocking efficiency and improving customer experiences. Topics and trends explored include:
- Evolving e-commerce landscapes and shifting consumer buying behavior have created an environment for digital native companies where unlocking efficiency in cross-border payments is now critical.
- The need for speed in cross-border payments is more important now than ever before, helping to attract customers and investors.
- Emerging application programming interfaces (APIs) for digital native companies enable access to real-time data, improving services provided.
- Managing foreign exchange (FX) risk efficiently: Finding the right FX solution is critical for managing risk.
- The beneficiary is king: Self-service tools for suppliers and gig economy workers allow them to access real-time payment information, improving supply chain efficiency and reducing operating costs.
- The wallet is dead, long live the wallet: The global rise in the use of digital wallets is changing how individual beneficiaries want to be paid.
- Let the games begin: Some industries have experienced growth during the COVID-19 pandemic. Banks must consider how to respond to the growing need for seamless payments into complex markets.
- Insights from Citi’s leadership team and industry leaders, including Payoneer and Kantox.
Digital native companies include e-commerce businesses, such as online marketplaces and data streaming services, and fintechs, such as nonbank payment service providers. Despite covering a wide range of business models, companies in this segment have clear synergies. Most obviously, goods and services are delivered digitally, online and without a brick and mortar shopfront.
One less obvious synergy is that digital native companies are often at the forefront of leveraging new technologies and alternative payment methods for making cross-border payments. One driver of this trend is that digital native companies regularly expand into new markets, where endto-end digitization and the ability to make fast and efficient cross-border payments is a foundational pillar for launching high-quality services. Additional drivers behind the increased uptake of new technologies include increased pressures to improve efficiency and reduce cost — a theme we expect to see elevated on boardroom agendas given the impact of the COVID-19 pandemic.
Evolving e-commerce landscape
- e-commerce: In recent years consumer spending on luxury goods has become globalized, as consumers have gained easier access to lesser-known global brands. It is common for the suppliers of online sellers to be small in size; many are small businesses selling goods via online marketplaces or individuals offering services through the digitally-enabled freelancing and gig economies; app developers, social media “influencers,” property rentals, ride-hailers. This shift in consumer spending and the profile of suppliers has resulted in higher volume, lower value payments.
- Payment service providers are increasingly attractive to small and medium-sized businesses, underpinned by simplified services, improved end user experience, high service standards and easy to digest pricing. By default, flows processed through fintechs — as payment aggregators — are often higher volume, lower value cross-border payments, and access a wider range of payment currencies.
“Higher volume, lower value cross-border payments across digital native economies place increased importance on providing cross-border payment solutions that unlock speed and efficiency. This is especially true for those companies breaking into new markets, planning their next funding round or launching an IPO. Citi’s unparalleled global network and material investments in cross-border payments has allowed Citi to take huge strides forward with developing alternative payment methods that offer more choice and convenience,” says Amit Agarwal, Citi’s Global Head of Cross-Border Payments, Treasury and Trade Solutions.
The importance placed on the speed of cross-border payments has increased in recent years, according to Jody Perla, Managing Director, Global Banking and Payment Infrastructure at Payoneer. “For years now, we’ve seen a growing trend where speed is becoming more important in international payments. As consumers, we’ve become accustomed to accessing information in real time, and seeing an instant movement of money at little to no cost. These expectations are carried over to cross-border commerce and B2B payments as well.”
The current climate of COVID-19 has heightened these trends, with e-commerce growing as rapidly as at any point in the previous decade. “Every day in April saw the same level of e-commerce activity as Black Friday of the previous year,” says Perla. “As part of that boom, the cross-border component also picked up significantly. At the same time, in the service sector, we’ve seen more people turning to freelancing and the gig economy, especially as remote work became the norm for so many.”
These trends have emphasized the need for fast, efficient and streamlined payments. “Additionally, with so many people now out of full-time work, the shift to freelancing is exploding,” explains Perla. “Immediate access to funds is more important than ever. If in January, you had a cushion and could afford to wait to receive payments, that safety net is no longer available for many. To meet these needs, Payoneer is continuously working on enhancing our platform, including looking for ways to speed up the delivery of payments, and by adding additional financial services that our clients need, like access to working capital or the ability to collect payments globally.”
The need for speed
Globally there are more than 40 domestic instant payment schemes (for example, Faster Payments in the United Kingdom, or Fast and Secure Transfers in Singapore). The emergence of these domestic instant payment schemes highlights increasing consumer demand for immediate and full value payments. This demand is now overflowing into the cross-border payment space.
“To help our globally expanding digital native clients tap into the phenomena of instant payments, Citi is investing in cross-border instant payments. This investment is enabling our digital native clients to unlock efficiencies that in turn help attract new suppliers, customers and investors. To complement Citi’s existing payment currency footprint of over 140 currencies and extensive cross-border ACH footprint covering over 70 corridors, we are excited to launch cross-border instant payments to the United Kingdom and Singapore, with many more countries planned for this year and next,” says Agarwal.
“As our digital clients break into new markets, frictionless, fast and full value payments are critical to ensuring successful market penetration and organic growth,” says Amir Karimi, Citi’s Fintech Sales Head, Treasury and Trade Solutions. “The world of cross-border payments is still evolving but we know that across digital economies there is growing excitement to see the emergence of Citi’s cross-border instant payment capabilities. The future is truly here.”
- e-commerce: Certain e-commerce industries such as ride-hailing services, providers of property rentals, or data streaming “influencer” services can often have thousands of cross-border payments a month, potentially resulting in millions of dollars of payment costs a year. Furthermore, across many e-commerce industries, the supplier, freelancer or influencer can often choose when they draw down their available balances. Being able to make cross-border payments, 24/7 instantly, with full value, strengthens the digital ecosystem and improves the end users’ experience.
- Payment service providers: Through cross-border instant payments, payment service providers can enable their underlying small and medium-sized business clients to extract working capital efficiency by offering just-in-time payments. By making payments in real time, clients can increase availability of funds to use for natural hedges, short-term (overnight) investments or self-funding.
Emerging API solutions
Application programming interfaces (APIs) have become increasingly important to the financial services industry in recent years. APIs can help digital native companies unlock efficiency in their cross-border payments in multiple ways. For example, Citi’s API Payment Rules enable digital native companies to request payment formatting information for making cross-border payments. This up-todate, regulatory aligned payment formatting information is delivered in real time to clients through APIs.
- e-commerce: Integrating API Payment Rules will help ensure the right information is being collected from suppliers, landlords or even app developers, ahead of payments being made.
- Payment service providers: API Payment Rules can be integrated into payment service providers’ front-end payment applications, prompting their underlying clients to provide the correct payment details when making cross-border payments. This removes the need for payment service providers to maintain static data, which can become quickly outdated as regulations change, and is costly to maintain.
When combining API solutions such as Payment Rules with API-enabled FX and access to cross-border payment solutions, digital native companies can unlock unprecedented improvements to the consumer experience.
Managing FX risk efficiently
“The borderless and global nature of digital economies presents a need for efficient tools to manage currency exposures. API-enabled FX solutions allows digital native companies to access real-time FX rates that are fully integrated into their own platforms, unlocking both maximum efficiency and an optimal consumer experience,” said Sam Hewson, Citi’s Global Head of e-FX solutions.
- e-commerce: When selling overseas, enabling consumers to purchase goods or services in their preferred local currency is important, but this can present balance sheet or FX risks. Having the tools to seamlessly manage FX conversions and remove any volatility risk is important to mitigate currency exposure. From online travel agencies selling holiday packages overseas, to online sellers of luxury goods, to cross-border payments to freelancers, managing FX risk efficiently is an important key performance indicator (KPI).
- Payment service providers: Strategic partnerships between banks and payment service providers are important for servicing small to medium-sized businesses and e-commerce industries. Citi continues to establish strategic partnerships with industry-leading payment service providers, enabling access to Citi’s FX and cross-border payment capabilities, which in turn, are made available to payment service providers’ underlying clients. For instance, some payment service providers may need to purchase foreign currency using live FX rates (instantly accessible via API) and hold foreign currency balances (with their bank partner) until they need to make same-currency, cross-border payments. Other providers may need to lock in guaranteed rates to eliminate FX volatility risk and currency exposure. Similarly, there may be a need to lock in live FX rates for just a few hours until payments are executed, but without the need to hold foreign currency accounts.
Kantox’s Gelis says that integrating both FX and cross-border payments together through API solutions means that cross-border payments are becoming “instantaneous, automated, transparent and competitive. In other words, thanks to APIs, cross-border payments are becoming as easy to carry out as local ones.” Gelis adds that, “In the corporate space, we’re experiencing a new trend which consists of not considering FX as an isolated component that should be managed by the treasury team as a silo, but as a company-wide component that impacts top line and profitability. We are seeing a growing number of companies maximizing the opportunities to sell and buy in local currencies in each market they are present in, allowing them to increase sale conversions and get better deals from their suppliers. All of this is possible thanks to FX automation, which allows treasurers to manage FX exposure, in an unlimited number of currency pairs, in a very smooth way.”
In summary, it is important for banks to offer a wide range of API-enabled FX and cross-border payment solutions, underpinned by an extensive payment currency footprint, to meet the evolving needs of increasingly global digital native companies.
The beneficiary is king
With higher payment volumes, both e-commerce and payment service providers are often exposed to a higher volume of inquiries from beneficiaries asking about expected payment delivery times and payment amounts. These inquiries are often higher in volume when paying individual beneficiaries or small businesses as dayto-day cash flow can be extremely fragile, so knowing when funds will be arriving is important. Feedback from our digital native clients is that managing such inquiries to a good standard is critical for maintaining a high level of service and keeping suppliers satisfied, but this is often very time consuming and costly. For this reason, Citi has developed a beneficiary payment tracking tool for their digital native clients, who in turn can enable their beneficiaries (or their customers’ beneficiaries) with access to a real-time self-service experience.
“Citi’s investment in alternative payment methods, from Cross-Border Instant Payments to paying into digital wallets or enabling seamless payments to China, is about providing our clients and their suppliers with more choice and convenience. But this is only one half of improving the beneficiaries’ experience. The other half is achieved by providing the beneficiary with the ability to have easy and real-time access to the payment status, where they can see when the payment is arriving and how much funds will arrive. Not only does this enhance the beneficiary experience, but this enables our clients to reduce their operating costs,” says Agarwal.
The wallet is dead, long live the wallet
The rise of digital wallets is one of the most material shifts in the payments landscape over the last five years. China continues to lead the Asia-Pacific region in digital payment methods. Led by Alipay and WeChat Pay, digital wallets account for over 70% of e-commerce sales in China. The rest of the Asia-Pacific region is rapidly catching up, with e-commerce purchases already surpassing 50%. Across Europe, the UK remains a leader in e-commerce, with digital wallets (and debit cards) the most-preferred method for online shopping by consumers. While in the United States, the use of digital wallets is on the rise and is expected to be the preferred payment method in the coming years.
Across both e-commerce and payment service providers, having access to pay into digital wallets is important, offering more choice and unlocking access to near instant and full value payment options, with 24/7 availability. The recent COVID-19 pandemic has also highlighted the importance of such a solution, where it is possible to get urgent funds to beneficiaries, without having their full bank account information.
“There is a growing preference from digital economy suppliers to be paid directly into digital wallets rather than via traditional bank accounts,” says Agarwal. “This is especially relevant when paying to freelancers, app developers and influencers. The trend is largely driven by the fact that many people in these roles are millennials, which are more enthusiastic adopters of digital wallets. Our recent launch of cross-border payments to digital wallets in Kenya, Pakistan and our ability to pay directly into PayPal wallets is an important development to meet the needs of our digital native clients.”
Let the games begin
While lockdown has been economically devastating for many businesses, some e-commerce industries such as online gaming have experienced exponential growth. The growth in app downloads will increase the volume of payments made to app developers. Many app developers are paid not just for the development of apps, but also receive royalties based on download volumes.
As e-commerce industries including online gaming evolve and grow and as small businesses have easier access to global sellers, there is an increasing demand from digital native clients to make fast and efficient payments to complex markets. As an example, many app developers are based in countries such as China, Korea, India and increasingly across Eastern Europe. Making cross-border RMB payments to individuals in China can be complex, given its tight regulatory controls, the requirement for supporting documentation from the beneficiary, and high beneficiary bank charges. To enable digital native companies to make fast, reliable and full value payments to individuals in China (and other important but complex markets), it is important for banks to establish strategic fintech or local provider partnerships.
The future is now... and we want to keep building it with you
Citi has embarked on a multiyear digital transformation journey to develop industryleading cross-border payment solutions to meet the needs of our digital native clients, both e-commerce and payment service providers. We are keen to hear from you, to understand more about your business, your needs, your customers experience, and how we can work together to continue building the future of crossborder payments.
Payoneer’s digital platform streamlines global commerce for millions of businesses from 200 countries and territories, delivering a suite of services including cross-border payments, working capital, tax solutions, merchant services and risk management.
Kantox builds fully-automated FX management solutions that simplify multicurrency trading, in particular FX hedging, and that increases clients’ profitability.