Business-to-business (B2B) cross-border payments are not a revolutionary concept. Corporations have been transferring funds both domestically and internationally for some time. As markets become increasingly global, however, there is a pressing need to fulfill the requirements of corporations participating in cross-border trade and the financial institutions that serve them.
Multiple payment vehicles (e.g., checks, purchasing cards, ACH, wire transfer), networks and standards have risen up to provide a dizzying array of options. Additionally, technological, political, geographic, regulatory and competitive changes are transforming the cross-border payment process and landscape.
Although cross-border payments are a "global" issue, much of the noise in the industry today is focused on Europe. For example, when Single European Payments Area (SEPA) is introduced in 2010, a cross-border payment of up to Euro 12,500 (U.S. $15,238) will have to be treated the same as a domestic payment. The amount will increase to Euro 50,000 (U.S. $60,950) in January 2006.
Initiatives like STEP2 are pushing toward the goal of building a pan-European automated clearing house (PEACH). Each European country has its own automated clearing house, however, and many are not yet ready to give up their territory and move toward collaboration. Additionally, as only 2 percent to 10 percent of payments are cross-border, the high costs of moving toward a pan-European ACH do not provide a great incentive.
Checks, purchasing cards and wire transfers are examples of alternative payment methods. These payment vehicles, while not perfectly suited to all types of transactions, give corporations ways of conducting cross-border business. Regardless of the payment method utilized, corporations and financial institutions have specific goals and challenges relating to cross-border transactions.
Goals and Challenges
Corporations typically have a specific goal in mind with regard to cross-border B2B payments: making payments as simply and inexpensively as possible. Additionally, corporations seek a seamless path from purchase to payment. Other challenges include risk management, the need for remittance information and integration issues with their enterprise resource planning [ERP] systems.
Financial institutions are focused on quickly and efficiently serving the needs of their clients while maximizing their transaction fees. Juggling these two aims is not easy, especially since banks are interested in nurturing and growing relationships with their clients. SEPA presents a particular challenge to European banks: They have to seek out new and innovative methods to recoup fees from transactions that were once considered cross-border.
There's no shortage of groups or organizations aiming to create standards for cross-border payments based on their "unique" visions. These organizations often share common goals, yet unfortunately tend to favor distinct operations. Over the years, some of these groups have been placed on hold, such as WATCH and its concept for a global automated clearing house. Others have taken the high road, embracing collaboration and potential growth.
Kernel of Standardization
For example, in October 2003, IFX, OAGi, SWIFT and TWIST got together to collaborate on building a standardized core XML payment kernel. As part of this agreement, each organization assigned members to the International Standards Team (IST) Harmonization Working Group. Collaborative efforts such as these can take cross-border B2B payments to the next level.
Cross-border payment systems need to provide a net benefit to all parties involved - corporations, banks, central banks, standards organizations and others. For these solutions to evolve and provide tangible benefits, a long-term vision and spirit of collaboration is required. However, it is less obvious that market participants will work in unison, especially in the short term.
Jacob Jegher is a senior analyst in the banking group at Celent Communications, a financial services research and advisory company headquartered in Boston. He can be contacted at email@example.com.
B2B Cross-Border Standards Scorecard
Standards Organization: TWIST
Fundamental Objective: Aims to provide XML-based standards for financial processes, including commercial payments, cash management and wholesale financial markets. Works in "strong alignment" with CRG-Edifact and RosettaNet.
Standards Organization: RosettaNet (Payment Milestone Program)
Fundamental Objective: Strives to create open standards for e-business, allowing companies to exchange data. The Payment Milestone Program has the goal of automating the accounts receivable reconciliation process and improving the flow of payment-related information. Works in "strong alignment" with CRG-Edifact and TWIST.
Standards Organization: IST Harmonization Working Group
Fundamental Objective: Aspires to build a standardized core XML payment kernel. IFX, OAGi, SWIFT and TWIST have assigned members to this effort. Endorsed by RosettaNet.
Source: Celent Communications