If ever there were a banking niche ripe for disruption, it would be cross-border payments.
It almost defies comprehension that Amazon can deliver physical goods faster than a bank can make a credit entry.
The reason, of course, is that remittances still meander through the 600 year-old correspondent banking system, which requires six players to link up to achieve the final outcome — the payer, the payer’s bank, the payer’s bank’s correspondent, the beneficiary’s bank’s correspondent, the beneficiary’s bank and the beneficiary.
The system is clunky, opaque and extremely costly for users.
Fintech was always going to find a better solution, and the machinery is now in place for far-reaching change.
The only uncertainty is whether incumbent players, such as the major banks, can modernise their systems and keep the marauding start-ups like Sydney-based Flash Payments at bay.
That means sacrificing part of an unsustainable margin, estimated to be as high as 5.5 per cent on the $50 billion of cross-border payments processed in Australia every year.
A couple of weeks ago, Flash Payments had a soft launch of its new foreign exchange payments solution.
The company has since processed about 40 transactions worth several hundred thousand dollars.
It’s a small start but co-founder Nicolas Steiger, who left Westpac about 12 months ago, has big plans, including a push into offshore markets and expanding from its consumer foundation into the lucrative business-to-business (B2B) market.
Flash Payments uses the Ripple variant of blockchain technology to facilitate payments anywhere in the world.
Since Ripple payments are almost real-time, compared to about three days through the old, time-honoured banking system, the platform removes credit and liquidity risk from the process.
In other words, there’s no role for the banks in the payments chain, which significantly reduces cost.
The lubricant for the system is a digital currency, With Flash Payments the first Australian digital currency business to receive an Australian Financial Services License from ASIC.
A key selling point for the technology is that it integrates payments messaging with funds settlement, allowing for much greater visibility and transparency.
Just like the systems now in place for the transfer of physical goods, customers can track the currency transfer like a package from start to finish.
They can also choose a target conversion rate.
The growth potential is huge, with consumer remittances generating $US405bn in annual flows worldwide, earning providers a healthy $25bn in revenue.
B2B payments offer $US135 trillion in flows, bringing in a colossal $US240bn in revenue.
While some banks are also integrating the Ripple system, one of Flash Payments’s key propositions is transparency — it doesn’t charge transaction fees and discloses the intended cost to users.
Pricing varies with the amount of money to be transferred.
Retail FX rates in Australia are among the highest in the world.
Banks often charge a $55 spread on a $1000 transfer of funds (that’s the 5.5 per cent margin), plus an additional $30 overseas transaction fee.
Steiger reckons the banks are addicted to high-margin foreign exchange payments.
Technology modernisation might allow them to lower their costs, but the question is whether they will pass the benefit on to the customer.
Only time will tell. And then it might be too late.