by John Rampton
Global payment revenues have consistently exceeded expectations over the last couple of years. In fact, McKinsey & Company are predicting that “payment revenue will grow by 8 percent each year through 2018, at which point annual revenue will reach $2.3 trillion and account for 43 percent of all banking-services revenue.”
As McKinsey & Company’s Global Payments 2015: A Healthy Industry Confronts Disruption notes, because of the rise in cross-border payments and advances in technology “many areas of the payments landscape are at risk of disruption.” In particular, these four areas will see great change:
- Nonbank digital entrants are transforming the customer experience. There will be a reduction in the use of cash and checks while tech giants like Apple, Facebook, and Google enter into and continue to alter the payment industry. As the smartphone explosion continues, more people will use these third party apps instead of banking apps to meet their needs.
- Payment infrastructure modernization is already underway. Customers are looking for faster and secure payments, however, “most of the global payments infrastructure (e.g., clearing houses) leveraged by incumbent players (mostly banks) still operates on systems designed to accommodate the demands of the pre-digital era.” So far, only 25 countries, that happen to represent 45 percent of global credit transfers, have already begun to modernize their infrastructures.
- Cross-border payments inefficiencies are an open door for new players. Cross-border transactions “generate approximately 40 percent of the payment industry’s transaction-related revenues, yet they comprise nearly 20 percent of its total volume.” And, unlike domestic payment infrastructures, cross-border payments remain outdated and expensive. The front end needs solutions like “support for integrated accounting software (e.g., Intuit with Paypal), supply chain finance or dynamic discounting (e.g., Taulia).” On the back end, infrastructures need to be interconnected to provide low-cost processing and using blockchain technology.
- The transition to digital in retail banking has important implications for transaction banking. If banks want to compete in either the domestic market or the global market, they will have to make digital technologies a priority. However, nonbanking technology players “can quickly disrupt and redefine the customer experience” since they “are not subject to the legacy infrastructures and complex regulations that are typical for most banks.”
On top of the disruptions listed above, perhaps the most impactful global payment component is the different standards and regulations in different parts of the world and what can be done to solve this problem. Tristan Hugo-Webb, Associate Director of the International Advisory Service says, “To date, very few countries around the world have opted to create the initial regulatory frameworks required to oversee the emergence of mobile blockchain payments. This is in part because of different regulatory attitudes among countries, but a more significant factor is the fact that the mobile payments and the technology powering it are still evolving.”
Global payment regulations
According to Accuity, “The payments landscape is also undergoing rapid change in response to a range of regulatory and governmental initiatives designed to address inherent problems in the payments marketplace.” In fact, there are several governments that “are outright preparing for the eventual phasing out of cash altogether.” For example, the Dutch have been “preparing for the possibility of a cashless society by the year 2015,” while in the U.K., “the Payments Council Board has agreed to set a target date of 31st October 2018 to close the central check clearing system.”
For international money transfer to work though, there has to be a payment network in place that moves money from one account to another. Here in the States that would be accomplished via the Automated Clearing House (ACH) and Fedwire. Global payment transfers are facilitated by Society for Worldwide Interbank Financial Telecommunication (SWIFT).
Here’s what exactly SWIFT is and how it works according to Mae Saslaw on Simple;
“SWIFT does not actually move money; their network transmits messages between banks that allow the banks to make transfers. Rather than giving someone your bank account number, you use a SWIFT account number and SWIFT does the rest. They’re also not a corporation, but a cooperative owned by the banks who use the network.”
For larger transactions, both domestically and internationally, there’s CHIPS—a fundstransfer system that contains some of the world’s largest banks. According to its website, CHIPS is responsible for over 95 percent of USD cross-border and nearly half of all domestic wire transactions totaling $1.5 trillion daily.”
However, having a payment system in place is only part of the equation. As mentioned earlier, global payments are often regulated by various countries and their banking institutions in order to offer their customers privacy and security. Saslaw adds;
“Regulatory bodies around the world have systems in place to monitor transactions for suspicious activity. Governments, banks, payment processors, and companies around the world have a common interest in making sure that you can send and receive money easily and quickly. They also have a common interest in making things difficult for countries, organizations, companies, and people they don’t like.”
For example, in 2012 the Senate Banking Committee approved sanctions on Iran that would expel Iranian banks from SWIFT.
With that in mind, here’s a closer look at global regulations in different regions around the world.
According to the Global Payments 2015: Listening to the Customer’s Voice report,
“North America remains the largest payments and transaction-banking market globally, generating $238 billion in total retail payment revenues in 2014.” Interestingly, it wasn’t until the Dodd-Frank Wall Street Reform and Consumer Protection Act was instituted that federal consumer protection rules regarding “remittance transfers” (electronic transfer of money from a consumer in the United States to a person or business in a foreign country) was put in place.
These new rules were put into effect on October 28, 2013 and include the following regulations;
- Disclosures that contain the exchange rate; fees and taxes collected by the company; fees charged by the company's agents; the amount of money expected to be delivered; disclaimers regarding any additional fees and foreign taxes.
- A receipt must be issued that includes information like when the money will arrive; the consumer’s right to cancel the transaction; what to do if there are any errors; and how to submit any complaints.
- You must give at least 30 minutes for the other party to cancel the transfer and refund the money if cancelled.
- You must also provide coverage if transfers are more than $15; made by a consumer in the U.S.; or sent to someone overseas.
Additionally, according to the Financial Action Task Force (FATF) on Money Laundering, you must also provide the originator information in the following order.
- Line 1: /Account Number (the slash [/] is the SWIFT standard indicator for account number)
- Line 2: Full Name
- Line 3: Street Address (Not a P.O. Box)
- Line 4: City, Country (and state and postal code if applicable)
In Canada, regulations have been put into place by the "Proceeds of Crime (Money Laundering) and Terrorist Financing Act." The act is similar to FATF in that both the party and beneficiary information needs to include: full account name, full account number, full beneficiary bank name, the SWIFT BIC code, and full physical address information.
Meanwhile, in Mexico, the country has been praised for its risk-based KYC requirements, which gave underprivileged individuals the opportunity to obtain banking accounts without having to complete the traditional identification process.
Across Latin America countries have “have taken the initiative over the past several years to promote payment electronification and cash substitution, hoping to outcompete new entrants.” In fact, a number of countries “have been actively promoting e-payments by providing tax incentives, changing regulatory frameworks, and adopting social-transfer e-payments.” For example, Brazil passed Law 12865 in 2013 that allowed non-banks to issue e-money as payments institutions. However, only 30 percent of credit cards can make international payments in Brazil since cards must be connected to a local acquirer.
In Argentina, the country recently adopted new measures that would help stabilize the country’s economy. These measures include no approval from the tax authority to make cross-border transfers of funds, one exchange for all cross-border transfers, and a reduction in liabilities and investments on cross-border transfers.
Peru, according to the Brookings Institute, is an interesting case thanks to Law 2998 of January 2013, which allows “both banks and non-banks to issue e-money.” There is also “regulations issued by the SBS enabled e-money issuers to follow a simplified account opening process.”
As the McKinsey & Company has found, Asia “particularly China—is the primary engine propelling the global numbers.” the Global Payments 2015: Listening to the Customer’s Voice report states that the ”payments market in China is still booming, with growth in non cash payment values expected to range between 10 percent and 15 percent annually over the next decade.”
Because of this, the “Chinese market is not only growing but opening up as well.” Previously, only the “state-controlled China UnionPay was the only player permitted to provide clearing services for renminbi-denominated bank-card payments.” However, since “June 1, 2015, other companies—both domestic and foreign—have been able to submit applications for a clearing-services license.”
At the same time, the People’s Bank of China (PBOC), the central bank, and national financial regulator issued new rules regarding cash alternatives and online payments for non-banks in December 2015 over “concerns about risks due to fraud and money laundering.” These new guidelines are stricter KYC requirements like real-name registration and daily limits, such as $800 for any transactions that “are verified using two-step verification without browser plugins.”
In India, J.P. Morgan states that;
“All electronic payments (in any payment currency) sent to India from other countries require a purpose of payment/purpose code as defined by the Reserve Bank of India. A valid purpose of payment/purpose code must be included in the payment details of the funds transfer instructions or the transaction will not be processed.
For bank-to-bank transfers, the purpose of payment/purpose code must also be included with the bank information. Failure to comply with this mandate may result in payments being rejected.”
One final example is The Australian Anti-Money Laundering (AML)/Counter Terrorist Funding (CTF). This is “regulatory requirement mandates that all incoming wire transfer of funds sent to banks in Australia or routed through an intermediary bank in Australia must include full remitter information (also known as the Originator or By Order party – SWIFT field 50) in designated By Order (also known as originator fields) for non-SWIFT payments and full beneficiary information in beneficiary field (SWIFT field 59).”
In Europe SEPA (Single Euro Payments Area) and PSD (Payment Services Directive) have been created to facilitate payments across the Eurozone. Accuity states;
“SEPA began as a self-regulatory inter-bank standardization initiative to break down cross-border barriers to efficient payments by eliminating different pricing structures between cross border and domestic payments. SEPA was specifically created so that the concerns of corporations could be heard and addressed accordingly.
The Payment Services Directive is a regulatory initiative from the European Commission designed to protect the rights of the consumer by regulating payment services and payment service providers throughout the European Union (EU) and European Economic Area (EEA). The goal for both is to increase pan-European competition and participation in the payments industry from both banks and non-banks, as well as to provide for a level playing field by harmonizing consumer protection along with the rights and obligations for payment providers and users.”
The difference between both entities is that “SEPA is a self-regulatory initiative by the banking sector of Europe (represented in the European Payments Council—EPC) that defines the harmonization of payment products, infrastructures and technical standards.” The PSD, however, is driven by regulators and provides for the necessary legal framework within which all payment service providers will operate.
The PSD announced in November 2014 that “The third party providers will not be able to get as ready access to ‘consumer bank credentials to facilitate transfers’ under the new regime.”
Additional Western Europe is pushing for interchange regulations, while we’re seeing banks working together in Central Europe in creating a stronger digital infrastructure.
Meanwhile, Russia has a set of unique regulations considering global payments. For starters, according to J.P. Morgan, “Ruble payments to Russia require a mandatory currency transaction code (also known as payment purpose or VO code). This code describes the purpose of a cash payment by non-residents and residents.” Furthermore, B2B transactions are “are legally binding due to the large financial value of these purchases.” As PYMNTS.com explains, “Procurement procedures, especially for state-run entities, face strict legal requirements,” prevents “spontaneity” within the B2B e-commerce industry.
How to solve problems involving global payment regulations
According to Todd Latham, vice president of marketing and John Hammond, chief commercial officer at Currency Cloud, via PYMNTS.com, regulators need to support FinTech.
“For the economy to realize the benefits of FinTech, the regulatory environment needs to evolve. While there are standards out there, they are not universal. Every bank takes its own interpretation of the regulation—that makes it very difficult for any FinTech firm to adhere to. The key things that need to happen in the environment are:
- KYC / AML principles become universal
- Risk owners established within the transaction. Who’s held accountable for each transaction?
- Banks encouraged to take a risk-based approaches to FinTech firms. Banks have to think about their approach accordingly – they can’t just refuse to work with Money Service Businesses.
- Regulation coordinated for crypto-currencies
- US Federal licensing for Money Service Businesses”
PayPal echoes this same sentiment by advocating for a SMART Governance. This “respects the role of regulators and supplements it with cutting edge thinking by” basing decisions on iterative data analysis, encouraging collaboration between appropriate parties, focusing on performance instead of design, and “Understanding the opportunities to better delivery policy goals while enabling new business and operating models.”
Another option would be for all the banks to play nice with each other. That’s what SWIFT is currently working on through its global payments innovation initiative. So far, 45 banks from Europe, Asia Pacific, Africa, and the Americas have agreed to collaborate with each other so that there will be access to funds on the same day, transparency and predictability of fees, end-to-end payments tracking, and transfer of rich payment information.
The most promising option, however, is cryptocurrencies. The problem with this approach is that there are a number of different digital currencies out there that range from bitcoin to litecoin to Ethereum. If these currencies were united then it could become one global standard payment. This is actually what is occurring at the company who oversees Ripple with the so-called “interledger protocol” project.
Wired explains that this would be “technology that would let all these online ledgers talk to one another, that would let you send money between these systems.” Ripple chief technology officer Stefan Thomas says “This will be something that sits on top of all the ledgers and abstracts the differences,” and he adds, “We’re trying to create a global standard for payments.”
This technology would make it possible for you to pay someone in U.S. dollars, but have it arrive in e-cash, dogecoin, or litecoin and vice versa.
John Rampton is an entrepreneur, investor, online marketing guru, and startup enthusiast. He is founder of the payments company Due.