Transaction account balances are higher than ever. Image: Shutterstock
Correspondent banking is transforming, piece by piece. Banks are busy digitizing on the back end to compete with new challengers who have been working to unbundle banking services. So far, this has mainly affected consumer products, with challengers like Transferwise or m-Pesa offering simpler and more cost-effective payments services to individual customers.
However, corporate clients are equally aware of recent innovations in payment platforms, and expect the same level of upgrades to their own cross-border payments. Corporates are often faced with low-cost, real-time domestic payments that contrast with their experience of costly, days-long cross-border transactions.
Bottom line: corporates expect better cross-border payments services, and according to McKinsey, 70 percent are willing to consider alternative providers to get them. Banks must prepare to serve corporate payment needs on a whole new level.
So when it comes to cross-border payments revenue, exactly what is at stake?
McKinsey: corporates need faster #payments, too. Tweet This
Individual (C2C) remittances generate a healthy $405 billion in flows. This makes up less than half a percent of the world’s cross-border payment activity. Providers earn $25 billion in revenue around the world, accounting for 8 percent of total cross-border revenue. In comparison, business-to-business (B2B) payments offer $135 trillion in flows, bringing in $240 billion in revenue. The average transaction value is between $15,000 and $20,000, so that means corporate cross-border payments typically cost $30 to $40 per transaction. That’s a lot to pay for a payment that takes three days to settle and may not provide any certainty when funds are committed.
McKinsey reports that payments volume growth remains strong, and will likely only increase as the global marketplace becomes more digitally connected. However, this growth has an additional drawback for corporates who have a significant need for cross-border payments.
Similar to the dilemma faced by global financial institutions, corporates are increasingly looking for solutions to consolidate the liquidity tied up with the nostro account balances required to fund their overseas payments. Despite continued banking innovation, transactional account balances have never been higher. At the end of 2015, balances in transactional accounts exceeded $27 trillion, which McKinsey declares their highest level ever.
2016 was the year that banks began to accept distributed ledger technology for commercial solutions, particularly in cross-border payments. 2017 could be the year that financial institutions and corporates alike begin to adopt digital assets like XRP, which can allow banks to fund their payments in real-time, and in the process, cut down their dependency on nostro accounts.
McKinsey, as always, ends on an optimistic note citing adaptability as the greatest of all virtues:
“Established payments providers that act decisively can turn a changing landscape to their advantage, and the rewards for successful payments strategy and execution will be considerable.”
Freeing up $27 trillion is definitely a considerable reward.
Read the full McKinsey Global Payments 2016 report here.