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Transforming Funds Transfers Innovative fintech startups are remedying the pain points that have traditionally affected FX customers and helping those most unfairly disadvantaged by the legacy system

By James Shanahan

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The world is more interconnected than ever before. The pandemic may have halted most travel for the time being, but we continue to trade goods and services, communicate and collaborate internationally at an unprecedented rate and volume. The standard avenues for sending money from country to country, however, remain mired in the past. Problematically, traditional systems for electronic funds transfers and exchanging currencies are not only slow and inefficient, but also needlessly expensive.

This isn't merely a pain point for large international businesses, professional traders and affluent leisure travellers. The ugly truth is, the highest costs of sending money from one country to another are borne by those who can least afford it. Although the average cost of transferring funds internationally is around 6.5 per cent, migrant construction and domestic workers from low- and middle-income countries frequently incur fees of up to 20 per cent on the sums that they send back home.

How big is the problem for these vulnerable individuals? According to the World Bank, "If the cost of sending remittances could be reduced by 5 percentage points relative to the value sent, remittance recipients in developing countries would receive over $16 billion more each year than they do now." The scale of the rip-off is profoundly disheartening, when you consider the larger impact. These funds could be used to provide education and medicine, and alleviate poverty and hunger in some of the world's poorest countries. Making remittances more cost-effective has the very real potential to change lives, and to save lives.

"Remittances are a vital source of income for developing countries. The ongoing economic recession caused by COVID-19 is taking a severe toll on the ability to send money home," the World Bank's Group President David Malpass said last year. "Remittances help families afford food, healthcare, and basic needs. As the World Bank Group implements fast, broad action to support countries, we are working to keep remittance channels open and safeguard the poorest communities' access to these most basic needs."

An unfair exchange

While the situation is most egregious for low-income migrant workers, we've all suffered to one degree or another under the legacy system, where the costs involved in cross-border foreign exchange (FX) transactions have frequently lacked transparency. Perhaps the exchange rate you're offered is unfair, or hidden costs have been extracted along the transfer chain: an incoming fee, an outgoing fee, a local bank fee, a receiving bank fee, FX markups throughout, and so on. The final result is a terrible exchange rate, often substantially below what is considered the market rate, with no real explanation as to why various charges and commissions have been levied, and an unfair imposition on those who can least afford it.

Margins on official exchange rates are often more impactful than fees. In one salient example, during 2017, leaked documents obtained by The Guardian showed that Santander Bank generated €585 million from money transfers the previous year, almost a tenth of its annual global profit. The majority of this half-billion euro sum, The Guardian reported, was reaped by the bank not from fees, but as a result of a large FX margin.

In its defence, Santander told the newspaper that its charges were clearly explained and in line with those of other banks. There's truth in that statement. Virtually every bank in the world has been gouging customers on FX transactions for as long as you can remember. Until now, it's simply standard practice.

Fortunately, in recent years, technology-driven financial services companies have made overcoming the issues facing FX customers a key mission. Fintechs of this sort tend to offer customers the interbank rate: the best rate you can get in the market, essentially, the official live conversion rate between currencies that banks trade between themselves. However, when transferring customers' money overseas, banks habitually charge a significant margin on top of the interbank rate. The new breed of fintechs, meanwhile, offer value to customers by charging little to no markups, fees, commissions or other costs on FX transactions that are conducted within trading hours. By aggregating thousands of small transfers, these new fintechs can access the interbank rate and pass the savings along to their customers, while bringing transparency and fairness as added benefits.

New values, new value

Startups can offer these rates and remain in business because they are coming into the market fresh, building from the ground up new, globally scaled, low-cost networks that have not existed in the past. These networks offer clarity, full transparency, and enable fair fees and charges that are genuinely related to the actual cost of the underlying service.

Legacy banks, on the other hand, continue to charge fees based on the way they did business years or even decades ago. That actually makes sense. Theoretically, the costs behind the scenes at banks should have gone down. But the reality is, in many cases, banks have failed to automate, they're using outmoded technology with compatibility issues, they suffer from silos of technology and operations, and they simply can't reduce their costs. Thus, with vast overheads, they're unable to offer the improved value that their new fintech competitors can.

The startups vying for the banks' business are far more agile: they don't have the problems related to legacy, backward compatibility, or heavy pre-existing burdens in terms of costs. New technology gives an organisation, in some cases, an order of magnitude reduction in its underlying cost base, particularly via automation. The cost to banks of migrating to a tech solution and utterly changing the way they operate is very different from the cost to a fintech firm of starting up and operating in a lean, technology-enhanced manner from scratch.

Similarly, banks often operate different platforms from country to country, whereas a fintech startup will roll out a globally enabled platform from the get-go. This gives customers immediate visibility of when funds have been transferred from one country to another. And it allows the startup to amortize costs of the platform across a global customer base.

Instead of attempting to implement a new operating model within their rigid legacy architecture, today, we are seeing many traditional banks standing up a completely separate organisation and trying to build that from scratch. For example, Standard Chartered's Mox in Hong Kong, or UOB's TMRW in Indonesia and Thailand. Perhaps banks such as these have acknowledged the problems they face, taking the view that it wasn't possible to renovate their existing tech and their existing operating models, and that they needed a fresh start.

That is exactly what customers deserve. For far too long, banks have overcharged for services that have long since been radically simplified by technology. It's time for legacy players to rethink their approach to FX and a host of other offerings; and for new startups to lead the way.

James Shanahan

CEO at Revolut Singapore

James Shanahan joined Revolut in March 2020 and was previously Chief of Staff for Railsbank Technologies in South East Asia and Chief Operating Officer for Singlife. He has more than 25 years experience with large banks, insurers and third parties, predominantly in Asia, including ANZ Bank, Avaloq, Standard Chartered Bank, AXA Insurance and Accenture. He has led new business launches, M&A, strategy, technology and operations in Hong Kong, Singapore, South Korea, Taiwan, Thailand and Australia.


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