Sending money overseas has never been easy. But as the world has become more globalized on the back of advances in technology and trade, the need for cross border payments is only increasing while the underlying banking system has not been able to adapt. More transactions, and in particular more smaller-size transactions are clogging the system, driving up costs and increasing processing times.
In part one I discussed what makes up the fees charged by the banks. Whilst they have a lot to answer for when it comes to the costs and delays associated with sending money, this is only one piece of the puzzle when it comes to paying your suppliers, or getting paid by your customers internationally.
Let’s take a look at two others:
Society for Worldwide Interbank Financial Telecommunication
Otherwise known as SWIFT. This absolutely key network was built in the early seventies (yes you read that right) to facilitate wire payments messaging between banks in different countries. Each country has its own domestic banking system and swift is the communications layer which links them all together. It’s important because messages sent via this network tell banks where and how to route your money, and it was designed in a time when cross border transaction volume was far lower and transaction amounts were far larger. The fees charged were small as a percentage of the overall transaction.
All the information you have to fill in about beneficiary banks, correspondent banks, swift codes, bene name, address and account number is translated from (the already pretty ugly) user interface at your bank into the SWIFT messaging format – without this, the message will fail or get lost. BIG mistake – it can take weeks to get your money back…why? Because to send one payment, the SWIFT network generates two messages, an MT103, and an MT202. The MT103 goes directly to the beneficiary bank to tell them to expect money to arrive and which bank account to put it in. The MT202 winds its way through a network of correspondent banks (more below) until it finally arrives at the bene bank (less a ton of fees). If something goes wrong, payment investigation teams at each bank in the chain must communicate back and forth to resolve it- which can take weeks. Sounds efficient, right?
Banks who don’t have an international presence rely on a network of correspondent banks to facilitate international transactions.
These commercial relationships are formalized under correspondent banking agreements, and these agreements lay out what fees can be deducted, based on things like the size of the transaction, currency, country or whether it is for a company or a private individual. These fees are impossible to predict at the beginning of a transaction, because they vary so greatly depending on the transaction itself. Correspondent banks also earn money by sitting on funds overnight to earn interest on the credit balance, the more banks there are in the chain, the more delays before money gets to the final beneficiary and the more fees get taken out along the way.
In part one we established opaque markets, complex pricing and multiple middlemen, far removed from end customers are to blame for the high costs. Whilst in part two we have identified the antiquated systems and legacy agreements in place between banks that make communication and sending money such a slow and complex affair. At Align we are working to combine new technology, such as the blockchain and new ways of communicating, to provide a fundamentally new experience for our customers. Over the coming weeks and months we are excited to be able to share these with you and work towards making global business a more local experience.