The New Payments Landscape

The Luxembourg law of 10 November 2009 transposed the Payment Services Directive (PSD) and set up the legal and operational framework for creating a single market for payments within the European Economic Area (EEA). It has allowed the emergence of a new wave of new payment services providers (PSPs), which have taken the opportunity created by this new legal environment to compete with banks on one of their most traditional activities, that of payments.

The brand new character of these start-ups allows them to be often more efficient than the banks on pricing and services, as they can take full advantage of the latest technologies. By contrast, banks are often handicapped by the size and the complexity of their IT network and systems, consequently focusing on their biggest clients to the detriment of the smaller ones. This has created the kind of opportunity that led to the development of FX4Biz, a new start-up that will begin offering international and foreign exchange (FX) services to corporate clients before the end of 2012.

When talking about international payments, we focus much of the time on FX conversions and the need for corporates to cover their FX risk. A large number of corporates, especially the small and medium-sized enterprises (SMEs), have not yet fully appreciated the importance of covering such a risk, which can still lead to dramatically reduced margins and profits in the event of a non-favourable evolution of FX rates.

For example, a French company buys goods from an Australian supplier. The invoice is issued on and dated 1 June, with payment shown as being due not later than 1 August. The amount payable is A$100,000. Say that the average Australian dollar to euro FX rate on 1 June is A$1.2767 = €1, but has dropped to A$1.1703 = €1 by 1 August. If no coverage has been taken out by the buyer the resulting shortfall incurred is about €7,122, the difference between €85,448 and €78,326. This figure represents about 7.12% of the original purchase price, and as margins can be very thin in certain industries the importance of hedging is evident.

Why is the Risk not Systematically Covered?

The reason for not covering this risk can usually be attributed to three main reasons, as follows:

1. Lack of time and resources
   It’s often not easy to find the time to follow the market and get the right information for taking the right decision. You can get FX information from FX brokers, but they offer trading facilities only and not payment services. You can pay internationally through your bank but access to the trading room is often restricted to their biggest clients, and real- time transparency on FX rates for a small company can therefore impossible to get.
2. The difficulty of getting visibility on FX gains and losses
   Most of the time FX deals are offered in one place, payments are made in one system and invoicing information is stored in yet another system, which collectively leads to an incapacity for most of the traditional international payments providers to generate reports for their clients that link the payment to the FX deal. This is always a major obstacle and prevents corporates from quickly getting visibility on FX gains and losses.
3. Pricing of and access to coverage
   As mentioned banks are not always equipped to manage international payments fully online, especially for small payments, which makes the cost for such transactions higher. The human cost behind such payments is reflected in the total transaction cost; worse still it is often impossible to get access to financial coverage instruments as forwards for smaller transactions.

These restrictions are the ones that we intend to tackle through the launch later this year of the FX4Biz online payment platform. It is based on the belief that international payments and related FX operations must be simple, accessible, transparent and cost-efficient.

Simple means the possibility of making payments online whatever the currency, the country, the beneficiary or the value date of the payment is, and this on a single platform gathering payment, hedging, beneficiaries storing, internal wires and reporting functionalities.

Accessible means an online platform available in two versions: a light version with basic functionalities for the smallest companies and a full version answering the needs of medium to large companies. It also means close attention to the design and language, so that they are close to the pragmatic needs of corporates: so rather than taking a forward and having to keep a close eye on settlement date, instead you block an FX rate now for a payment that will take place on the value date of your choice.

Transparent means that real-time FX rates and one-click confirmation deals are available on the platform, together with full reporting on hedging efficiency, FX gain and losses, and FX market information.

Cost-efficient means aggressive rates, due to the fact that human intervention is minimal even for small transactions thanks to the use of the latest IT technologies and solutions, allowing the resulting savings made on internal processes to impact on transaction costs.

Competition has always been to the benefit of the final customer, and ultimately one of the main beneficiaries of this new payment landscape should definitely be the corporate client, especially SMEs which did not always get the services they deserve before now. However, they are regarded by the new providers as the best way to gain market share from traditional providers and will reap the benefit of all the improvements brought to this industry by the new wave.