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Transparency in Payments

The ability to track parcels through every step of their journey has been with us for decades. Shouldn’t we be able to do the same for international payments?

Why is transparency in international payments so elusive?

Moving money internationally is a murky business. That isn’t to imply any wrongdoing, more that the processes are something of a black box even to those in the industry. Senders rarely know what the total transaction costs are, or when funds will arrive. Beneficiaries may not know what the received funds are for, leaving them with significant administrative and financial costs in reconciling receivables with deliverables. This is particularly problematic for firms that receive multiple payments from a single counterparty, which may be a consolidated payment for multiple invoices. The amounts can differ from those on the original invoice perhaps due to part-payment, early payment discounts and exchange rate fluctuations. It is not the case that banks are not sharing this detail, more that it is not often apparent to them. Banks depend on other banks in a chain; one weak or non-standard link can disrupt the flow of information.

Even where banks do have control, the practices don’t help their corporate clients. It is common practice for banks to charge fees to both sender and beneficiary, frequently without either party realising it. The sender may pay a substantial fee.  The sending bank may also request that the beneficiary’s bank charge the beneficiary a fee, which is then shared with the sending bank. Are corporates happy with the level of transparency in payments?  One corporate speaking out during a discussion about mining the value of data at EBADay 2012 asked when banks would be able to do even just the basics – who had sent the payment, what it was for and when it was delivered?

    But there isn’t a solution…is there?

Despite payments and transfers being entirely electronic, there has been little improvement in decades, even with mass market adoption of the internet. Changing a longstanding business process, especially one involving multiple counterparties, is not easy. Is there anything we can learn from other industries?

The logistics industry merits close investigation. Firms which specialise in the delivery of parcels and packages have, over the same period, made massive advances. In parcel delivery, transparency has been achieved on delivery date and accurate tracking on its journey. The containerisation of shipping has transformed that business; reducing time and effort of loading ships by a factor of 100. The exact location of containers can be established to within inches, and through standardised monitoring devices the temperature, humidity, angle of tip and other variables can be tracked throughout the journey and reported at any time.

If other parts of the value chain can achieve transparency, then why can’t payments? Shipping is even more commoditised a business than payments, so that cannot be an excuse. Perhaps it is what transparency is required that is the issue.

What is transparency?

According to the dictionary:

Transparency is operating in such a way that it is easy for others to see what actions are performed.

In the payments world, who are those others, and do they all want to see the same thing?

Transparency in governance is different from transparency in transactions. In governance, the stakeholders in an organisation – such as a national payments council - want clarity as to the goals of the organisation, coupled with methods of measuring progress and success.

Transparency in transactions generally refers to the sender knowing what the outcome will be – total fees, how much money will the beneficiary receive, how long will it take, and what redress is available in the event of any of those promises failing to be kept.

This lack of transparency has not gone unnoticed. It is seen by regulators as an inhibitor to competition and to financial inclusion. In many remittance corridors the cost of sending remittances is high relative to the often low incomes of migrant workers and their families. In light of this, the G8 Global Remittance Working Group and the World Bank have promoted the 5x5 objective: the reduction of the average cost of sending remittances globally by 5 percentage points over 5 years. Such a reduction would generate a net increase in income for migrants and their families in the developing world, estimated at 15 billion USD. This is particularly important for small states where costs are relatively high.

Driving innovation in transparency

Though much of the publicity around remittances focuses on relatively poor countries, they are also high on the agenda in developed economies. In the USA, regulators are enforcing transparency through Section 1073 of the Dodd-Frank Act. The main provisions, which banks, MTO’s, FX businesses and other institutions providing international consumer payments services to US consumers, will need to satisfy by January 2013, are:

  • Full fee disclosure at the point of, and time of, origination
  • Guarantee of amount of final funds delivered, to be delivered at time of origination
  • Guarantee on when funds will be received
  • Right to cancel a transaction up to 30 minutes after its submission

Further background is available here, and in the links within it.

Section 1073 describes closed and open loop providers. The former are firms which have a relationship with both sender and beneficiary, such as an e-wallet, and are well placed to be able to deliver transparency. The best known firms providing these services are USA based. Open loop is akin to the traditional correspondent banking system, in which the sender’s bank depends on one or more other banks in a chain to deliver the funds. With each bank adding delay and in some cases taking a fee, transparency in this model is very hard to achieve. Indeed, some banks are seriously considering exiting the business, rather than hoping for investment in innovation to enhance the business, because of the challenges they face.

  Towards a more balanced future?

The ideal system is agnostic to all parties – that is, it benefits all equally. In a networked industry, this is most likely to be achieved by greater transparency where the network is merely a conduit for information rather than a filter, creator or barrier. Making the network as transparent as possible will ultimately benefit all. 

In the short term, it may well be seen as a threat to the revenue of banks. But in the long term, perhaps Metcalfe’s law is a better analogy. This states that the value of a (telecom) network is proportional to the square of the number of users connected to it. By improving the network, new users are more likely to use the service, in turn creating more traffic. Even if fees are reduced the volumes will rise.

One of the challenges in improving transparency is the first mover disadvantage. Because traditional payments models involve multiple banks collaborating, there is a ‘hysteresis’ – the first bank to invest in a new model cannot reap a return until sufficient others have also adopted the model so as to reach critical mass.  

With some, such as the Federal Reserve, referring to this as market failure, the market can surely only expect further interventions such as Dodd-Frank’s Section 1073.

Beyond transparency

Customers not only want better and more timely information; they want it more frequently too, even if it is unchanged since the last viewing. Recent research shows that UK mobile bank users check balances 216 times per year, compared with 72 times online and just 8 offline. If customers want to check the status of a transaction frequently, then someone will meet that need. Will it be banks, telecoms companies, or other e-commerce new entrants? Will it, like domestic banking, be mainly free; or will it, like most telco services, be chargeable? Is there a ‘social media’ dividend from better and more timely information; and who will reap that dividend?

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Comments: (1)

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 02 June, 2012, 17:54Be the first to give this comment the thumbs up 0 likes

Comparing an electronic payment with a courier consignment and seeking transparency at all steps along the way somewhat obscures the fundamental difference between the two: Both in theory and in actual practice in some corridors (viz. TARGET2 nations), an electronic payment can happen in realtime, obviating the need for any transparency except for immediate notification of credit to the beneficiary's account. A parcel sent via courier cannot, even in theory, reach the destination in real time, thus needing tracking facility to provide a sense of comfort to the sender and the receiver. Given a choice between a payment that reaches the destination in 1 hour but offers zero transparency (e.g. Western Union) and another that takes 7 days - only because several parties earn float along the way - but provides full transparency, I'll any day prefer the former and even be prepared to pay a premium for it.

BTW, nonbank MTOs like Xoom do provide step-by-step tracking for international payments. But, when things go wrong, they take shelter behind the same alleged complexities of cross-border remittances as banks. I remember a USA-to-India transaction that I'd initiated over Xoom. The tracker showed healthy progress for the first 4 days (USA > UK > Germany > ...). Then, on the fifth day, all hell seemed to have broken loose since the tracker turned to something like "#*!@!argh!..., payment failed, returned to USA"!