Our Samee Zafar (Director, London) caught up with Hank Uberoi CEO of Earthport, the leading provider of international payments to talk about innovation, cross-border payments and Distributed Ledger Technology.
What are the pain points in international payments and what is driving change?
The cross-border payments space is undergoing a rapid transformation, as it adapts to accommodate greater regulatory complexity, diminishing margins, increasing competition, expanding business and trade flows, and the ever-changing geopolitical landscape.
The increased movement of people across boundaries, and the acceleration of e-commerce and the sharing economy are key drivers of change in the payments industry. In a truly interconnected world, there is great potential for the many different types of online businesses, consumer services and digital marketplaces to grow across borders. To succeed – and maintain their impressive pace of growth – these new platforms need specialist services, such as efficient, low-value payment solutions and one-stop connectivity to the global marketplace.
Regulation, for example PSD2, Basel III and Dodd-Frank, is also having a significant impact on the financial markets, and quite acutely, the banking sector – including cross-border payments. In fact, the tightening regulation around capital adequacy brought about by Basel III will focus banks on the problems in the traditional correspondent banking system, namely capacity around liquidity positions, uncertainties around settlement time and a lack of predictability with regards to fees and charges. PSD2 has already created considerable angst among the banking sector but it represents an opportunity as well as a challenge. While it will trigger a new theatre of competition, one of its consequences, the increased use of APIs, will enable an entirely new ecosystem of innovation with the customer’s interest at its core.
While this is in process, banks continue to de-risk across their businesses, resulting in retractions from some markets and geographies, severely reduced client bases and hard-hitting – and perhaps damaging – cost-efficiency programmes. Many banks are reducing their global footprint while they aggressively strive to reduce costs. While this may cause some pain, it may also create openings for other institutions and perhaps drive some consolidation. At the same time, there is a school of thought that suggests de-risking is actually creating other risks by pushing people towards a ‘grey economy’ that operates beneath the regulatory radar.
Is the international payments landscape that is today controlled by large banks through their correspondent banking relationships ready for disruption?
The system that has been in place for decades is creaking at the seams. In a world that demands instant action, speed and transparency, this ageing structure is no longer as fit for purpose for low value cross-border payments as it once was.
The current reality is forcing the so-called ‘incumbents’ – the traditional, long-established providers – to scrutinise and adapt their business models in order to satisfy new regulatory requirements and client demands. The industry has developed a growing awareness of the need for a new model that can facilitate the flow of global payments more effectively, efficiently and at lower cost than the decades-old, traditional correspondent banking model.
The fintech sector is often said to be disrupting some of the business areas which, for many years, banks considered their territory. But if fintechs are disruptors, they should be disrupting outdated processes, not the banks themselves – they should be collaborating with the banks and enabling them.
Collaboration is a mutually beneficial, two-way street. Banks have the transactions but when it comes to innovation, the agile service providers have a clear edge. Fintechs can react quickly to market demands, without being hindered by regulation, bureaucracy or slow, monolithic manoeuvring, and are able to deliver at much lower cost than the banks can. Ultimately, this is a win-win situation for clients.
What does Earthport offer in international payments that is truly innovative/unique?
Earthport is uniquely positioned, as nobody else really offers the same type of service as us. We’re not going head-to-head with the market but are bringing to the table a set of capabilities for the industry as a whole, an efficient infrastructure for people to plug into and incorporate within their own business model. In effect, we’re building a cross-border payment utility for clients such as banks, money transfer companies, e-commerce companies and large corporates, depending on the regulatory framework in any given country. We are partnering with these clients and enabling them to benefit from greater efficiencies across many levels.
Fundamentally, the Earthport model gives clients complete transparency and predictability around their cross-border payments. Any organisation that uses our payment network knows from the outset exactly how much will reach the beneficiary in local currency and when the funds will be received. This is achieved by leveraging the local clearing system in the countries in which we operate, while eliminating the unwieldy correspondent network, which has constrained innovation and offered a sub-optimal user experience for years. Our extensive network includes global payment capabilities in more than 190 countries, with local ACH options in excess of 60 markets. And it’s a network that is broadening all the time.
Do you think distributed ledger technology (DLT) will find relevance in international payments?
It is estimated that in 2016 banks spent approximately USD 75m on DLT and this is expected to grow to USD 300m by 2018. At the moment, most are not sure how they can optimally use the technology but you can be certain that once the first movers are in place, adoption will be contagious.
DLT will no doubt be part of the future landscape that we are heading for and, in fact, we are already seeing steps towards embedding this new technology into everyday business. Although DLT is still in its infancy, it is gaining momentum and is being used in real-world situations, including cross-border payments – and the first distributed ledger-enabled P2P wallet, which Earthport recently collaborated on with the UK division of leading global bank and a fellow fintech partner.
However, we must resist the temptation to bill DLT as a panacea, since payments involve a degree of complexity that requires more than this technology alone. But it will be a useful addition to our toolkit and will complement more established technologies, as we move towards utility-type solutions that deliver more speed, efficiency and transparency, allowing us to capitalise on the exponential growth of cross-border payments.
Other than work, what excites you?
I have a great appreciation for wine! I have quite an extensive collection and am also on the Board of Directors for Sula Vineyards, which produces award-winning wines in the Nashik region of western India.