22 November 2021
The cross-border payments view from EY: where are we now and how is the market shifting
At Worldline, we know how fast the payments sector moves. For this blog we spoke with payments experts from EY, who offer their macro view of the sector based on their broad international footprint.
Challengers in C2C and B2B
Andreas Habersetzer, EMEIA Payments Leader for EY, laid the groundwork for the conversation by emphasising the scale of the market. “International payments form a massive market that has been dominated by banks over the years. Challengers have been attracted by the large market opportunity.” He noted that challengers tend to start in C2C payments with anti-banking marketing, though some have evolved to partner with banks. They’ve primarily taken market share from banks, but the market also has a good growth margin. Despite their successes, however, challengers still place third in market share, behind banks and payments specialists.
The B2B market is even more difficult for challengers. Banks have a stronger value proposition for corporations and they’re defending their position more effectively than in the C2C market. Traditional specialists are also much more focused on B2B, with established firms like moneycorp, where 80% of their business relates to B2B payments. However, Martijn Gerritsen, of EY’s Netherlands Payments Department, saw the market shifting. “Looking at banks, their market revenue shares in 2019 were 93%, but by late 2020 they’d decreased to 87%. I expect that banks will go below a 75% market share by 2025.”
Transparency, cost and speed
There are three problems that challengers and traditional players alike are looking to solve: transparency, cost and speed. The more complex the corridor, the more difficult those challenges are to solve. “If you’re moving from euro to dollar, it’s less of an issue because banks have infrastructure in all of those places”, Habersetzer explained. “If you send money from Europe to Colombia, however, it gets complex because you’re relying on a partner bank. It takes time. You don’t know where exactly your money is. And it’s costly because everyone is taking a cut.”
Challengers trying to address this have the advantage of a leaner setup and lower costs. They can offer a different approach to service. As they scale, however, it gets difficult to maintain. SWIFT is trying to help banks move fast by rolling out SWIFT gpi and other initiatives
Where is the payments sector going?
Payments are continuing to move towards cheaper, faster, and more transparent, with competition working to bring down prices. A key shift foreseen by both EY experts was the closer connection between payments and other services, such as the integration of payments in a treasury software solution. Banks and challengers alike are aware that international and domestic payments as a standalone proposition are commodities and are enhancing services around them.
“Becoming part of software is a becoming a key value proposition”, Habersetzer opined. “To be honest, for banks this is an old proposition. Liquidity managers combine payments with supply chain finance and other elements. Challengers are copying the idea with a visual-first emphasis. A lot of platforms start with payments, then expand into trade finance.” In the corporate space, he sees more holistic service offerings developing, especially regarding trade finance and payments, to manage international money flows. The tools can also be integrated with risk management.
In C2C, there are sufficient offerings in the more developed economies. The challenge is remittances, sending money from developed into developing countries. There is often a lack of cash-out infrastructure, making it quite expensive. Some challengers are partnering with mobile wallets. Additionally, increasing smartphone penetration in developing countries will diminish the need for cash as use cases decrease. As even the feature phones (which European users might think of as old mobiles or even dumb phones) can now use mobile wallets, developing economies will also move towards mobile payments.
“Cash in hand is always expensive”, Habersetzer explained. “In an ideal system, there would be free money in, free money out, instant transfers and total visibility. The challenge is the underlying infrastructure. Distributed ledger technology (DLT) is probably the right direction.”
Crypto and CBDC
Crypto and central bank digital currencies (CBDC) are a heavy topic of conversation, though they currently have many unanswered questions. Crypto is a popular topic in international payments because it could solve many problems. The coin doesn’t need to leave the system, but payments can be made and received.
For wide adoption in B2B, it would need to be more stable and backed by a government stamp. CBDC could be the answer, but there are several major questions. Foremost is, will central banks issue them? Would that solve issues of transparency, speed and cost? Will that simplify or complicate the open question of how central banks and regulators will react to private currencies?
Martijn Gerritsen summed up the opportunities for this fast-changing area: “With the challenges of transparency and cost, digital currencies are most relevant and active challengers under current market circumstances. It comes closest to transforming cross-border flow. With distributed ledger technologies, one party in the middle acts as sender, reducing the necessary network.”
The payments industry has already seen tremendous change in the past decade. The future looks bright as technology and systems evolve to tackle the main challenges in cross-border payments.
Interested to learn more about CBDC and digital currencies? Read our previous blogs: CBDCs through the bankers’ lens and The digital euro provides a risk-free and reliable currency for all Europeans.