„Quo vadis foreign payment transactions?“
New providers are pushing into a market dominated previously by banks
So far, banks in particular have assumed that foreign payment transactions are a monopoly of the banks. Until now, it has been complicated and time-consuming to provide this service. For cross-border money transfers, correspondent banks are required for the various target markets and sometimes already on their way to these markets. In addition, a large number of experts for foreign payment transactions work in the banks in order to provide the whole range of different services. This “quasi-monopoly” of banks in foreign payment transactions (cash (money) transfers from Western Union and Co. excluded) is slowly dissolving and new providers are successfully establishing themselves in the market for foreign payment transactions.
What makes these new providers so successful?
Some of these providers have already successfully positioned themselves on the market. For example, TransferWise, founded in London in 2010, claims to transfer USD 2 billion per month and already has 4 million customers. Other providers in the market include WorldRemit, Remitly and Azimo.
Why are TransferWise and Co so successful? The new offers are thought of consistently from a customer perspective, not least because they were developed by frustrated bank customers. TransferWise was founded because the founders working as employees abroad, repeatedly had to pay high fees for remittances back to the home country. The aim was to make the transfer of money from one account to another as easy and affordable as possible. In addition to an easy-to-use app, this objective was also achieved via a cash pooling, in which the various payment flows are aggregated and offset accordingly. This means that only a fraction of the original sums (peak settlement) must actually be transferred across borders; the majority of payments can be made via a national clearing system, which is much more favourable.
In addition to the new providers, the more established market players such as Western Union and MoneyGram also offer an alternative for customers who want to send money internationally.
The new digital offering is a typical disruptive innovation
A normal standard foreign payment bank transfer costs about 15 euros at a bank. With TransferWise the fees start with approx. 2 euros, with Azimo, a further digital service provider, a bank credit transfer costs as a rule 2.99 euros. At Western Union, the cost of (non-cash) transactions starts at 5.00 euros.
As a rule, the classic banks’ offerings are geared towards the high demands and extensive needs of large business customers. However, there are also much simpler customer needs, especially for private customers or smaller companies (SMEs). Sample evaluations show that these customer groups in particular are using the new service providers. Not only private customers, but especially business customers who appreciate the low fees, easy handling and fast execution, although the scope of services is significantly smaller. Thus, this is a potential disruptive innovation.
What can banks do?
As a first step, banks should analyze how many of their own customers are already using the new service providers. An analysis carried out by OSTHAVEN for a bank showed that the bank could already have lost potential fees of around 250,000 euros p.a. by using TransferWise and Co. today. Even though few transactions in relation to the total volume were affected here, we believe that in the future customers will increasingly use non-banks for money transfers across national borders (which in turn make use of the banks’ foreign payments infrastructure) and thus erode further bank earnings.
In addition to observing developments in the usage behaviour of their own customers, banks should also examine other activities. Our (not complete) list of ideas:
- If not already done, integration of the foreign payment transaction into online banking and own banking apps
- Adjustment of fee models, in particular for simple payment offers such as relatively standardised bank transfers to Great Britain or other European or Western countries.
- Consideration of whether cooperation with the new providers could be useful in order to offer customers favourable and easy-to-use foreign payment services. This also against the background that banks will certainly not be able to stop the development. But with a suitable profit-sharing model, banks could continue to (partially) participate in the earnings from this business. In addition, savings could be achieved by shifting some of the standard services.
The first banks, such as N26, are already offering services from TransferWise on their platform. This offers two opportunities for these banks: they offer their customers a modern and up-to-date service and, secondly, they do not have to implement the complex requirements for foreign payment transactions on their own but can fall back on third-party service providers.