Q&A with Kent Henderson
Hey Payment Fanatic!
Today, I’m excited to share my latest Q&A with Kent Henderson, VP, Product Management at Mangopay.
Before diving in, I recommend:
Let’s get to it!
- What are some of the biggest challenges businesses face when it comes to cross-border payments?
The biggest challenge for businesses is costs. These costs impact their ability to grow, compete and profit from international business. These costs are typically hidden and, for businesses, they can be particularly difficult to identify and control because the rules around cross-border payments have typically been left up to private networks to solve in contrast to domestic payments.
Intermediary banks charge an average fee of 3.39% for cross-border payments. In Europe, the average fee for converting currencies (euros to dollars) is 2.06%. And for sending USD to USD within Europe? The fee jumps to 4.18%. This means that even when transactions are conducted entirely in one currency, banks often apply substantial administrative fees to each transaction.
Where do these costs occur? Banks charge substantial fees for cross-border payments but they can be difficult to identify. Banks may not charge these fees until the end of the month when you receive a bank statement so by the time you notice the costs, they have already been paid. Even today this data is hard to access and analyze with banks relying on legacy systems that mask fees and charges or rely on paper statements.
For platforms that handle thousands to hundreds of millions of transactions per year, these fees can seriously affect their profits and their ability to compete. Intermediary banks may also increase charges through FX rates by adding extra fees above the normal market rate for exchanging currencies. There’s also processing fees as well as adding a margin on the interbank rate, which can be up to 5%. Exchange rate fluctuations present another unpredictable element that makes it difficult for platforms and their sellers to anticipate the exact amount they'll receive or disburse.
As a consequence, platforms are left with a dilemma - they either create policies that can be unfavorable to their buyers and sellers to offset any extra risks and costs from cross-border payments or they decide to bear these costs themselves, impacting their operating budget. Another option might be that they just decide it’s too much of a challenge and decide not to offer those services to those customers so both the business and the customer lose out.
Another issue with cross-border payments is the issue of speed of transaction. Legacy payment systems are slow and can leave everyone in the supply chain in the lurch. Swift has become the global standard but it carries a high cost and in comparison to local payment networks, it is slow as it relies on a network of banks that are in some cases still utilizing manual processes. Platforms are waiting for their dues, sellers are waiting on their funds, and buyers, unlikely to pay before receiving their products, are awaiting their purchases to arrive.
Lastly, global platforms collect, store, payout, and manage different currencies at all times. Each of these will have to be reconciled correctly while the platform also has to manage its treasury and liquidity needs from incoming funds, requiring an advanced treasury system to manage all these currency movements and reconciliation of invoices - it’s a costly and time-consuming problem to solve. The absence of a flexible and well-structured payment system often makes platforms depend on multiple partners, which can lead to reconciliation challenges and a lack of control over cross-border flows.
- How can using a modern payment provider with FX services help platforms tackle these cross-border payment challenges?
FX solutions provide transparency - by ensuring that sellers know the exact amount they will receive after conversion, customers understand precisely what they are paying, and platforms are aware of the fees and risks involved - as well as control over when, where and how the FX conversion occurs.
Increasingly modern payment providers with FX services are enabling platforms to operate locally in international markets. This means that buyers and sellers are able to do business on more familiar local networks that typically don’t carry the high costs and longer processing times to send and receive payments. These providers are a game-changer for any platform looking to expand internationally as they allow platforms to offer multi-currency pricing and localized payment options. This is an underappreciated factor in successfully entering new international markets.
What’s more, modern payment providers with FX services help platforms make smarter decisions, like when to convert funds based on market conditions to take advantage of favorable exchange rates. A good modern payments provider will allow platforms to secure fixed FX rates in the future through a forward or guarantee type mechanism which allows the platform to control their FX risk, similar to Mangopay’s guaranteed FX rate feature. For instance, if the current exchange rate is 1 USD to 0.93 EUR, a business can use Guaranteed FX to lock in that rate for a planned transaction. This means the buyer is guaranteed to exchange their dollars for 0.93 euros each, regardless of future rate fluctuations, during the agreed period.
Also, by carefully designing payment processes, platforms can avoid reconciliation errors, payments delays, and get more control on their cross-border flow. At Mangopay, our FX suite, paired with our e-wallet ecosystem, enables platforms to use e-wallets to collect, hold, convert, and manage different currencies. With multi-currency e-wallets, FX is not confined to a specific point of pay-in or payout, offering platforms the flexibility to use FX at any stage in the payment flow, and convert between platform wallets and user funds all in a single infrastructure.
- Can you illustrate how FX solutions can be used to increase revenue and cut down on costs with specific examples?
As I mentioned before, platforms can avoid daily fluctuating rates and save money by using options like Guaranteed FX.
Payment providers that offer FX solutions can also help platforms generate new revenue streams through flexible schemes like FX margins and markups. A markup, in this context, refers to an additional charge applied to the base currency conversion rate. The strategic deployment of markups involves balancing the need to generate extra revenue with the importance of providing high-quality payment experiences so users continue to engage with the service without feeling excessively charged.
As regards the local currency approach, there are a few aspects to emphasize here on the payouts and pay-ins side.
Traditional payout methods are often slowed down by long settlement times and come with hidden conversion fees. By incorporating an FX solution directly into your transaction flows to settle payments through local rails, funds are transferred quickly, in the correct currency, and in the precise amount expected by the seller.
On the pay-in side, implementing local pricing based on the customer's location and currency preference promotes more transparency. By allowing buyers to transact in their preferred currency, you improve the user experience.
Moreover, platforms operating in different currencies may face double conversions. By enabling transactions in local currencies, platforms can offer users the option to choose when and how they want to convert funds. This flexibility reduces double conversions and gives users more control.
So if I am to sum everything up, by adding markups and margins, you may monetize your FX flows and increase your revenue. With the flexibility of plugging FX at any point in your payment workflow, you can control the losses on conversions. By offering transparency and localized payment experiences, you can retain and attract sellers and buyers on your platform. While the impact here might seem indirect, loyalty and conversion ultimately lead to higher revenue.
- What truly stands out in a good FX solution when it comes to platforms evaluating different options?
It's important to note that we are focusing here on scaling platforms with high transaction volumes. While such business models are profitable, FX costs can consume a large portion of profits. This is especially true for B2B platforms, where transactions not only involve converting home currencies to pay suppliers or vendors but also tend to involve larger sums of money. As a result, these platforms are presented with opportunities to control and reduce these costs.
An effective FX solution should ensure transparency and localization for buyers and sellers regarding the payments they make and receive. It should also offer clear insights into the fees that platforms are required to pay. If it can also open up new ways to make money and let platforms pick the FX management approach that suits them best, offering control and flexibility in the process, then that's even better.
At the bottom line, global platforms with high transaction volumes should search for FX solutions that enable them to:
- Provide swift and cost-effective payouts in local currencies.
- Safeguard profit margins from the volatility of FX rates.
- Offer localized payment experiences that encourage repeat business and sales.
- Collect, hold, convert, and manage different currencies all in a single infrastructure
- Increase revenue by adding markups.
Learn more about boosting revenue and optimizing cross-border payments with Mangopay’s FX solution.
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