In today's Australian, Richard Gluyas writes - 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 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.
Flash Payments was founded a year ago by two former Westpac institutional bankers, Nicolas Steiger and Michael O’Sullivan.
So far the duo have self-funded their project, but are now engaging with investors about a possible capital raising around the middle of next year to support their global expansion plans.
A couple of weeks ago, the company had a soft launch of its new foreign exchange payments solution. Since then it’s processed about 40 transactions worth several hundred thousand dollars.
It’s a small start but Steiger and O’Sullivan have big plans, including a push offshore and expansion from its consumer foundations into the lucrative business-to-business market. Flash Payments uses the Ripple variant of distributed ledger technology to support its business. Since Ripple payments are almost real-time instead of about three days under legacy systems, the platform is able to remove credit and liquidity risk.
In other words, there’s no role for the banks in the payments chain, which 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 Licence from ASIC.
A key selling point for Steiger is integration of payments messaging with funds settlement, allowing for much greater visibility because customers can choose a target conversion rate and track the currency transfer like a package from start to finish.
The potential market is huge, with consumer remittances generating annual worldwide flows of $US405bn, earning providers a healthy $25bn in revenue.
B2B payments bring in a colossal $US240bn in revenue from $US135 trillion in flows.
Incumbent banks are aware of the efficiency gains and recognise the threat from start-ups.
Some have responded by integrating the Ripple system, but Flash Payments proselytises its transparency advantage — the company doesn’t charge transaction fees and discloses to users the intended cost of making a payment.
The pricing model means the cost of a transfer varies with the amount transferred.
However, retail FX rates in Australia are very high.
At the moment banks charge a spread of up to $55 on a $1000 transfer of funds (that’s the 5.5 per cent margin), plus an additional $30 overseas transaction fee.
Steiger reckons they’re addicted to the high-margin business. Technology might enable them to lower their costs but the question is whether they’ll pass the benefit on to the customer.
Only time will tell. And then it might be too late.