Making cross-border payments work

Uberoi: a more efficient global cross-border payments infrastructure could save billions

As the value of global cross-border payments such as workers’ remittances increases, billions of dollars are being lost to inefficient legacy systems – but that could be about to change, according to Hank Uberoi, executive director at cross-border payments services provider Earthport.

In July 2009, development ministers from the G8 countries – France, Germany, Italy, Japan, the UK, the US, Canada and Russia – set a target to reduce the commission charged on remittances from the 2009 average 10% to 5%, within five years. At present, the current average transaction cost worldwide is 7.8%, according to figures provided by Earthport. Uberoi estimates that more efficient cross-border payments could benefit the world’s emerging markets to the tune of $16 billion – money that is currently “going from the pockets of the poor into inefficiency”.

“The problem is that while the number of companies sending cross-border payments has gone from hundreds to many tens of thousands over the last 20-30 years, the cross-border payments technology has not kept pace,” he said. “Payments are still done one at a time in much the same way as decades ago – it’s not fit for purpose.”

Last year, foreign workers sent $401 billion in remittances to friends and relatives in developing countries. Remittance flows increased by 5.3% last year – and they are expected to do so again, rising 8.8% to reach $515 billion in 2015. In total, there are believed to be about 215 million international migrant workers out there, with a further 700 million internal migrants also remitting funds, according to estimates provided by the World Bank.

Earthport has a payments network that connects directly into the automated clearing house systems of 57 different countries. Based in London, the company prides itself on its independent status and claims to have making cross-border payments cheaper, faster and more efficient as its only goal. The firm plans to expand to 80 countries within the next 12 months.

“We connect to the local systems via partner banks, and internalise the difficult part of a cross-border payment: the international leg,” said Uberoi. “Sending funds via banks, a consumer might find their payment rejected three days later and be left in a difficult situation. We work in real time. Likewise, a customer might send the amount and the recipient finds the payment falls short, because the bank has taken a fee. Our system does not take a lending fee.”

Earthport uses automated systems to reconcile payments and to verify and check them against AML lists. The company will also notify a payment sender if there is a problem and why in near real time; the firm’s argument is that its low cost base and automated processes create significant savings, which should ultimately be passed on to end consumers. In addition, by removing manual processes the risk of error is kept to a minimum, at least in theory. Where Earthport doesn’t have local connectivity, the firm uses the Swift network.

While in previous years, financial services executives have debated the possibility of bank disintermediation by newer, quicker firms such as PayPal, mobile operators such as Safaricom and others, more recent developments point to collaboration as the likely driver of future developments.

“We don’t aim to compete, we partner with banks, e-commerce firms, everyone – we allow them to do payments in a more effective way, without interfering with their business,” said Uberoi. “We never go direct to the consumer; we only offer our services to aggregators and payment providers. That said our system can drive down the cost for the end user, since it makes payments more competitive and therefore cheaper. Given the size of global cross-border flows, the potential market is virtually unlimited.”