Cost vs. Alternatives
Overview
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Did You Know...
- In Canada, there is only 1 payment network (EFT), but in the UK there are 3 (BACS + CHAPS + FPS).
- In Canada, the accountholder name submitted in the batch file for processing is NOT verified by the receiving financial institution, but in Japan both must match or the transaction will be rejected.
- In Japan, the accountholder name in payment processing files must be submitted in Half-width Katakana.
- Transaction value date requirements vary from country to country. In some countries, you have the obligation of adjusting value dates for weekends and holidays, while in others you don't.
- In the USA, payments are processed using Routing Numbers, but in the UK the payment network utilized Sort Codes.
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Challenges of cross-border payments
Any company with a considerable volume of cross-border micro-payments is suffering today, due to the limited options available that adversely impact business.
This section explores the costs and complexities associated with existing providers and offers a clear new approach to improving this area of your business.
Background to the problem
Put simply -- banks are poor at payments. Similarly, Foreign Exchange companies do not do payments well either.
| Banks |
- In-country payments are generally not an issue because a local bank will ‘clear and settle’ with other banks through the local network.
- International payments are a totally different problem. Banks need correspondents (partners) in different countries to complete the last leg of an international send.
Its like a children’s game of "Telephone" where the message changes with each pass.
- In payments, the amount changes, the recipient details can change or get dropped, and the investigation process is a nightmare.
Example Bank Payment Flow >
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| Foreign Exchange Companies |
- Their service is a concierge for their bank partners
- Compete on price to win the business, and then increase spreads
- Majority of payments are sent by wire, which is costly
- Don't have their own payment network
- Make their money from FX spread and risk management products
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The Root Cause
The root cause of payments cost and complexity is the fact that:
- When sending money through banks or FX companies, the sender must take responsibility for the beneficiary bank details.
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When we look at the alternatives, as a general rule paper based methods avoid this problem. Again however, any electronic payment places the burden of responsibility on the sender.
The Alternatives
Checks
Checks are expensive. While the main redeeming feature of checks is that bank account details of the beneficiary are not required, they are not a suitable payment instrument due to:
- Cost: As a physical product, checks are costly to produce, administer and distribute on a widescale basis, especially globally.
- Local Checks: For the business, the costs range in the $2-5 range. This is considerably higher than an ACH payment; however, the advantages of payment documentation and float still make checks an attractive payment choice – locally.
- Foreign Checks: Foreign checks are a disaster. Although they cost the business the same in processing, the beneficiary side of the cost equation is much higher.
- Fees, Delays, FX: Bank processing fees, time delays (2-6 weeks, depending on country) and FX margin make this an unsuitable payment method. Any company currently paying sales agents with foreign checks is likely to have a storm brewing.
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Wires
Wires are the most expensive way to send money.
These costs appear to be increasing as banks dream up new ways of charging their customers, while many FX companies state they do not do payments under $3000 for reasons noted below. Clearly, wires are not an option for micropayments.
Example:
- Wire Fees: A $450 AUD payment to Australia from New Zealand incurred a $25 outgoing fee, a $30 incoming fee plus 7% FX margin.
- Bank Fees: The bank charged 18% of the payment in fees.
- Payment Instructions: The burden is on the sender to provide the beneficiary bank instructions.
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Bank Deposit via ACH
If you have a significant presence globally, this is the option you are most likely using today.
However, there are many associated costs which can arise from use of ACH payment services:
- Maintenance Fees: By having a number of bank accounts around the world, you pay the administration fees for these accounts ($500+ per month), and for the friction cash tied up in these accounts.
- Funding Costs: If you have a natural position in another country (revenues and expenses), then your funding costs will be manageable. If not, you will likely use your bank or an FX company to fund these foreign currency accounts.
- Administrative Costs: The real cost is in administering payroll and accounts payable costs in each of these countries, and in managing the beneficiary bank details.
- Bank Charges: Payment administration is very expensive if you are not submitting payment files to the local clearing network and pushing the burden onto the beneficiary for managing their bank details. Your costs here are mainly headcount and bank charges.
- Error Fees: The ACH fee might seem acceptable, but peruse your bank statement to understand how much you are paying for stops, tracers, errors and exceptions.
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Cash
Cash is a very real option when dealing with un-banked beneficiaries, or in countries where you have a few small payments. You can pay online using a credit card, or drive to a "Sending Agent" location to send money.
However, sending cash is a very expensive payment method for businesses due to:
- Cost: While the global Money Transfer Operators (Western Union etc) have very large agent networks covering all countries in the world, they are not a logical choice for businesses to send funds as they are very expensive.
- Fees: Fees to send money are normally in the order of $10-30 dollars, plus the FX margin of 3-5%.
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Prepaid Card with International Settlement
The market for prepaid cards is is developing strongly. Unfortunately, if the card settles internationally (ie, your organization sends a USD card overseas to a beneficiary in Singapore), then this payment method is unlikely to be well-received from the beneficiary's perspective, as noted below.
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- ATM & FX Fees: A USD card used internationally will incur fees from the ATM and FX margin on cash out. This is costly for the beneficiary, can lead to decreased card usage and likely affect longterm brand loyalty.
- POS Fees: A USD card used at an international POS will incur FX margin and fees with each transaction. Again, dissatisfaction/costly for the beneficiary, leading to decreased card usage and likely negative brand loyalty towards your organization.
- Regulatory Compliance: US issuing banks are becoming much more cautious and stringent about issuing cards, now that US financial regulators are requiring a Social Security Number for each card that is issued. Ensuring adoption of a prepaid card program that is fully compliant with US law is thus fast becoming a critical issue for many organizations.
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Other Networks
PayPal
PayPal has built its business on electronic commerce, and more recently moving into mobile payments.
However, PayPal is not a viable solution for B2C payments for the following reasons:
- Fees: PayPal charges a volume based fee of 2.9%
- FX: PayPal's FX margin is high
- Requirements:
- All beneficiaries have to have a PayPal account, in order to receive funds.
- The beneficiary's PayPal account needs to be linked to their bank account, if they want to actually spend the money outside of participating online merchants.
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Mobile Airtime
Mobile Airtime credits are a new form of currency.
- You can buy points, and transfer these points to any pre-paid mobile phone in the world.
- This is a nice complimentary network for un-banked markets.
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Mobile Money
The Mobile Money operators that are commonly referred to as having built a business on mobile payments are MPESA in Kenya and Smart Money in the Philippines.
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- Again, this is a very nice complimentary network for un-banked markets.
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How does hyperWALLET stack up?
Global payment solutions that cut costs
hyperWALLET’s payment platform and network enable organizations to dramatically reduce administration costs and bank fees associated with making payments worldwide.
- Global Payments Company: hyperWALLET is first and foremost a global payments company. That means we have the technology, the operational infrastructure and the connections to the local clearing and settlement network in 50+ countries to handle your business' payment needs on a worldwide basis.
- Domestic Payments: Leverage our payment platform to pay your employees in local currency across numerous international markets. Avoid the headaches of manually inputting banking details for your payees.
- Other Networks: Reach unbanked employees via additional settlement networks, such as Western Union for cash pickup worldwide.
- Low-Cost: hyperWALLET can provide global payment distribution at a far more competitive cost vs checks or wires, thanks to our global payment network and 100% electronic payment processing services.
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- Multi-Currency: Businesses can make payments in multiple currencies, helping to avoid unnecessary foreign exchange fees.
- Customer Support: Our dedicated multi-lingual call center handles support queries from your employees, and provides you with all the reporting and reconciliation you need.
- Brandable Payment Services: To enhance employee brand loyalty and retention, your company can offer branded payment services via online, mobile and prepaid card channels.
- Localized Payment Services: Offer your employees localized payment services and applications in 18+ languages, to enhance their payments experience.
- Multi-Channel Funds Access: Provide employees with convenient and flexible payments access. Enable them to receive and manage their funds via online, mobile, prepaid card, and phone/IVR.
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