Are you doing business anywhere else other than your home country? If so, or if you have the growth strategy and drive to get to that international scope, this article is for you.
That’s because, like it or not, if you’re accepting cross-border payments, you’re going to have to deal with the baggage that comes with that. Fees, compliance, delays, and other “hidden” drawbacks inherent to the traditional global payments process all add up.
That last part, the “traditional process,” is important to note, as in this article we’re going to take a look at what that really means, and why a newer alternative, one that involves digital wallets in place of the traditional banking infrastructure, could make your payments process a whole lot simpler.
Global payments, clarified
“Global payments” sounds large. It sounds official. But take that term to Google and most of what you’ll find are results about a large payment processor bearing a very similar name. Not much help, right? Because obviously this isn’t what people using the term always mean. So, for the sake of clarity, let’s clear that up.
In the general context of payables, “global payments” simply codifies the idea that a payment can come from anywhere. So, this embodies a process that needs to have all its players working together in a system that lets processing of payments that can come from both domestic and international locations execute with the least amount of hassle possible.
This happens to be a point of contention for some, as the level of “hassle” is something that can be debated. But I’m here to tell you that there are clear, objective shortcomings in the traditional process.
What’s wrong with tradition?
The traditional global payments process for B2B consists of a few variants, each having a different set of steps. But whether it’s a paper-based payment or Electronic Funds Transfer, there are third party mediators (e.g. banks) involved in the transaction. This adds steps to the process. These steps inevitably add more fees and delays to the mix.
As I stated in a previous article about embedding payments capabilities in AP solutions, there can easily be a 1 to 3% aggregate fee when dealing with cross-border payments. This is due to processing costs. But think about this at scale. How much cost leakage is just falling away in the form of fees?
The are also the delays. And while this can vary based on the number of intermediary banks the transaction has to go through, a good rule of thumb as of now is 2 to 5 business days. People generally know this. So, it has been built into the expectations of most involved. And it has gotten a pass, in the past, because the system had exclusive access to global transaction banking. But, as the ecosystem changes, so will these expectations. Progress won’t sit and wait.
Beyond these aspects relating to the efficiency of processing itself, there are also protocols to respect. Enter Anti-Money Laundering (AML) and Know Your Customer (or Client, KYC for short). There aren’t many who will dispute their necessity, a necessity that hinges on the part they play in stopping illicit—and often dangerous—activity. But what those whose responsibility it is to make sure that reporting and due diligence is up to standard will know all too well is the administrative burden that compliance requires.
A quick look at the FINRA rule 3310 gives you a small taste of what is in store for some who are tasked with tackling compliance for their organization. There is a lot on their plate. And it is a living process.
Between developing a written AML program, implementing it, providing training to appropriate staff on this and any developments in the policy triggered by a change in regulations… conforming to proper KYC practices by “understanding the nature and purpose of customer relationships for the purpose of developing a customer risk profile,” the due diligence that comes with that, etc. There is a lot there. And it is serious.
It’s no wonder that there are an increasing number of organizations hoping to outsource stewarding of compliance.
It seems, then, that the traditional system has got (at least) a triple pack of strikes against it, as plain as day:
- It isn’t cheap, with fees at scale siphoning a sizable amount of cash.
- It’s not that fast, for today’s world.
- It requires a heavy time investment in administration when it comes to compliance.
Do digital wallets have what it takes?
Digital wallets aren’t new. They’ve been around for quite some time in the B2C ecosystem. B2B is just starting to catch up. One would be forgiven for thinking that a large reason why their adoption in a B2B landscape is simply due to it using relatively new technology.
As we all know, new technologies are often looked at with some hesitance when there are high stakes, and with good reason. When it comes to B2B and the movement of money, there is a lot at stake.
There are security concerns, and to a degree compliance can roll up into that. But there are also specific concerns about access, both providing proper access and limiting of it to the proper scope.
There are concerns if something as straightforward as a digital wallet—often just seen to be a digital bucket that funds are placed into—has enough infrastructure around it to provide the reporting and diligence to comply with protocols that programs like AML and KYC require. As I mentioned above, those aspects are “normally” handled through a work-intensive process of vetting and monitoring. But as the technology advances, new platforms and service offerings are beginning to give respite from these types of processes, and at the same time, overcoming a large stumbling block that digital wallets have had to their widespread adoption in B2B.
Can digital wallets really simplify B2B payments?
In short, whether a payments platform built on digital wallets can actually foot the bill, isn’t entirely about the funds-holding mechanism. A digital wallet holds funds, a bank account holds funds. Aside from possible fees incurred, and systemic delays and problems, as long as the payee receives their money, most is good. What really matters is the mechanics around this exchange. And that’s where an intelligent digital wallet infrastructure can shine.
When you have an intelligent digital wallet system that offers automatic currency exchange functionality coupled with a system that will take care of the data gathering needed for reporting and diligence to AML and KYC, there really isn’t any need to continue leaning on the traditional banking systems. And in that comes the simplicity and freedom that comes from the cutting the cord to such a monolithic infrastructure.
- Money transfers are near-instant.
- Currency exchange rates can be carried out wholly within the platform.
- No processing fees are incurred for any cross-border payment.
Even if it ended there, that, to me, is simplicity. How about you?
If better and simpler digital payments sounds good to you, drop us a line to see how XTRM can help you put that in place.