Breaking Borders for Marketplace Payments

One of the biggest challenges with international payments and sending money overseas is how slow it is. The extremely ironically named SWIFT system of international bank transfers can take up to and over a week to send any amount of money from one country to another.

Breaking Borders for Marketplace Payments

One of the biggest challenges with international payments and sending money overseas is how slow it is. The extremely ironically named SWIFT system of international bank transfers can take up to and over a week to send any amount of money from one country to another. If you are a marketplace merchant, you clearly cannot work in transactions that take a week to finalise. That gives you the choice of either finding a faster and more affordable solution or only trading domestically.

For many startups and SMEs, only trading domestically is fine. Plenty of small businesses only deal with local customers and investing valuable time on searching for a good international payment service provider is, at best, a low priority - at worst, completely futile. However, as the business matures, the decision to only trade domestically will inevitably become an obstacle to continued growth, particularly in the global business environment we find ourselves in.

At this point, traditional banks will swiftly go from being a convenient solution to the biggest hindrance. Their charges become prohibitive, their services inadequate and their network of internationally correspondent banks too limited. SMEs often find such legacy payment systems result in a fundamental inability to move their own operations forward. It’s not a case of “we do it like this because we’ve always done it this way” so much as “we do it this way because we have no alternative”.

But there is an alternative

Fortunately, while the banking world has been somewhat slow to develop, the payments sector has not sat idle. Seeing this shortfall in the services provided by banks and the opportunities presented by fintech solutions, payment service providers have filled the gap with cheap, quick and convenient alternatives.

As many of these solutions have sprung from the world of fintech, they are naturally mostly digital. Online marketplaces provide small businesses and startups with an easy avenue of international expansion, massively increasing their customer base without an equally massive increase in cost or personnel requirements. While the borders between the buyer and seller would ordinarily have created an insurmountable obstacle to a small business’s cashflow, payments companies offered a way to overcome them without costing every penny of the profits.

Now there are regulations

The world of finance attracts government regulations like cow dung attracts flies and the international payments sector was no exception. The Revised Payment Services Directive (PSD2) was specifically intended to regulate payment services (the clue is in the name) and, as you might expect, introduced a certain amount of complexity where there had previously been only risk. To be fair to them, governments rarely introduce regulations just to be awkward. However, these new complexities have necessitated a certain amount of creativity to maintain the same important service without the cost or speed suffering.

That creativity has taken various forms. In some cases, payment services providers have transformed into banking entities in their own right while others have partnered with existing banks. In either case, the objective remains the same: to bypass the obstacle of the cumbersome legacy systems banks have traditionally used to facilitate international payments with full compliance with PSD2.

How it works

The international payments service providers operate in a very similar way to remittance companies. Both technically offer the same service - they give customers immediate access to funds in another country by issuing it from the service’s own accounts and then balance their own books with the old SWIFT system later. The differences in the process between remittance and payments are subtle but significant.

Payment service providers issue a virtual IBAN (international bank account number) account to marketplace buyers in the seller’s native country. They then transfer funds from this virtual account into the seller’s account, immediately settling the transaction. At the same time, the buyer sends money to a similar virtual account in their own native currency. All the payments company has to do then is send the money from one virtual account to the other in order to settle both accounts, which they can do at their own convenience later using the slower SWIFT system.

This process gives sellers immediate access to global markets, enabling them to instantly receive payments from around the world. It is especially helpful for SMEs as it does not necessarily require them to have accounts in every country and currency they want to accept payments in, which adds a significant amount of complexity to their operations and auditing.

The benefits

The major advantage of this system over the legacy systems provided by banks is one of scale. With the amount of fees applied, sending money by SWIFT is only practical when the amount being sent is very significant and, unless the product a marketplace seller is selling is in the range of luxury cars, it is unlikely their typical transactions will be at an appropriate scale.

The alternative - having accounts in every country you wish to operate in - requires such a significant upfront investment that it becomes out of reach for small businesses hoping to expand their customer base. It creates a catch-22 where the business cannot grow without cashflow from international buyers, but cannot afford the accounts required to accept international payments without growing their cashflow.

The process of using virtual IBANs effective removes the international border by reducing settlement and reconciliation times to a minimum without significantly increasing costs for either the seller or the buyer. As far as both the buyer and seller is concerned, it is equivalent to handling the payment in their own home country - a very quick and simple process. The only difference they will notice is a very slight discrepancy between the cost shown on the marketplace and the amount Google says that it should be in their own home currency, which is the small fee added by the payment service provider.

The benefit to the payment service provider comes in the form of these much smaller fees, which are applied over a significant volume of payments. A few pennies added to an individual payment is not a huge profit, but when applied to thousands of payments per day, the profits quickly add up. Once enough payments have been processed, the company can reconcile their own accounts by sending one large transfer by SWIFT, losing a relatively small percentage of the total to the banking fees in the process.