How Platforms Are Reshaping the Landscape of Foreign Exchange
Consider this scenario: you’re a small online retailer based in Australia selling handmade jewelry through a major digital marketplace. Someone from Germany buys one of your top-selling necklaces. Great! You check and see that their payment has come through but are dismayed to find that you’ve lost somewhere from three to five percent of the purchase price to foreign exchange.
Here’s another one: you’re that same seller on that same marketplace, and another person from Australia buys a pair of earrings—this time in AUD. Perfect, you think: it’s the same currency, no need to worry about foreign exchange fees. Trouble is that the marketplace you’re selling your jewelry through is headquartered in New York and doesn’t have a local AUD currency bank account. When you go to collect your payment, you again find that you’ve lost a portion of your proceeds—now between four and eight percent—to foreign exchange.
These aren’t abstract situations—they’re real problems that online sellers run into all of the time, and they’re a big reason that marketplaces are moving away from traditional foreign exchange-based payment processes and pushing for localized payouts.
Foreign Exchange in the New Economy
Foreign exchange trading was facilitated almost exclusively by banks up until maybe 20 years ago, when foreign exchange brokers, distinct from banks, emerged and began to offer more competitive rates through their SWIFT-based international wires. Next came payment service providers and connected domestic ACH networks, which facilitated cross-border payments with currency conversion integrated right into the payment flow. It wasn’t until recently—the past six years, really—that we started to see the rise of peer-to-peer money transfer services. All the while, these new technologies have introduced more competitive rates and applied downward pressure on foreign exchange revenue streams.
Fast-forward to present day and the emergence of digital marketplaces like Amazon, HomeAway, and Airbnb. Together, these platforms have successfully globalized cross-border ecommerce, threatening to displace established payout models. The result? An increased demand for razor-thin foreign exchange rates and local currency transfers.
Putting Global Mass Payments to Work
Online sellers have become pretty savvy when it comes to exchange rates, and it’s not surprising that they’re demanding more competitive options from their chosen marketplace listing platforms. To add even more pressure, smaller foreign exchange players are emerging in key geographies. Combined, these two variables have eroded the upside for many large foreign exchange players to continue servicing the marketplace arena.
Amidst this shift we’ve seen a push for end-to-end local payments—that is, a payout structure that doesn’t require foreign exchange in order to ensure local currency delivery. We saw this shift first from POS providers, which disrupted foreign exchange on cross-border credit card purchases by interjecting dynamic currency conversion into the transaction. This means that an American traveling abroad in Europe will be presented the purchase price in the currency of their credit card (USD) rather than the local currency (EUR). Currently, an ecommerce consumer is able to see the price of goods in their local currency, but settlement to the marketplace is typically still in a single major currency. It’s a small difference, but one that ultimately shifts the foreign exchange revenue opportunity from the issuing bank to the acquiring bank.
Foreign exchange can still factor into transactions where marketplace buyers and sellers are in the same country and transacting in the same currency, but the marketplace platform itself is headquartered in another country. In these scenarios, sellers expect to receive full settlement (less marketplace fees)—after all, the product or service was sold in the seller’s home currency. Instead, this often leads to an FX double dip: there’s a conversion when the transaction hits the marketplace’s bank account and then again when it is disbursed out to the seller, leading to huge exchange fees. To resolve this issue, the marketplace needs to replicate the POS implementation of hyper-local currency management on the payout side with a true end-to-end local payment experience—otherwise their sellers simply won’t be happy.
The Difficulties of Building Local End-to-End Payments
If offering local currency payouts (minus foreign exchange expenses) is a major focus for marketplaces, why haven’t more of these platforms opened their own global bank accounts to ensure local disbursements?
It’s the same reason that these marketplaces don’t set up acquiring relationships in every country where they sell their product: it would take a tremendous amount of resources to establish and manage. Redundancy and resiliency are critical in the world of payouts. As transaction volume grows, big marketplaces need to ensure there are no disruptions. To maintain this in-house would mean opening and maintaining multiple banking relationships in every country they operate, maintaining their own treasury teams, and building infrastructure which connects with all these disparate data types—operations that ultimately lead to complex and resource-intensive payment operations. For marketplaces and global platforms, finding a partner that has already achieved this sort of network scale is paramount.
Which brings us to Hyperwallet.
For years, we’ve been proactively managing this push for local payments through our virtual account-based platform and multi-currency ledger. Our technology and global financial network is currently being leveraged by marketplaces to send global payments locally in 90+ countries. For us, this is the natural evolution of the payment service provider from a foreign exchange-based business model. Through the creation of virtual accounts sponsored by banks, our technology allows payments to be routed over local clearing networks. Compliance monitoring, data exchange, and funds movement are all handled by the Hyperwallet platform, with banks fulfilling the last mile delivery.