These intermediaries could be end-to-end platforms that manage customer acquisition and notify the receiving party when funds are available. Alternatively, an increasing number of specialist network operators provide background ‘rails’. These network operators tend to specialise in payment flows between country pairs (aka ‘corridors’) or regions and seek to gain advantage through scale, aggregating demand across their distribution networks of banks, agents and other money transfer organisations.
An important aspect of the more modern intermediary platform businesses has been the customer interfaces that provide ease of access, are transparent on costs and progress of payment fulfilment, and encourage repeat usage.
G20 initiative to improve global cross-border payments
At the lower end of the market, remittances have been a key focus area for the World Bank given that those from expat workers can account for a significant proportion of income in receiving markets.
In 2020, the G20 set out goals and agreed a roadmap to enhance cross-border payments by 2027. The roadmap aims to address four challenges: cost, speed, access (for enabling institutions and their end users) and transparency. It has identified 19 initiatives under three broad themes: payment systems interoperability; legal, regulatory and supervisory frameworks; and cross-border data exchange and messaging standards.
In particular, the roadmap promotes the adoption of ISO 20022 messaging and a model to interlink domestic payments systems, along with increased use of shared liquidity models, such as those operating under the TARGET2 system in Europe.
Investment considerations
Increasing global mobility, growing use of digital banking and greater transparency on costs have led to the rise of innovators seeking to address inefficiencies in international payments, developing new solutions which improve the experiences of the originating customer and the receiving customer and/or the efficiency of the platforms. A plethora of alternative options for making international payments now exists, with start-ups and innovators challenging specific niches, but there remains much work to be done.
As start-ups mature, those in complementary niches will consolidate, but given the complex and disparate nature of the cross-border payments market, we expect that opportunities for new innovators will continue to appear as well.
Despite financial markets’ concerns over the near-term economic outlook, we believe that this large, growing and innovative part of the payments market will remain attractive to investors for a long time to come.
Factors shaping cross-border payments and investors’ opportunities in the space include:
- Domestic and geopolitical concerns. In many markets, domestic politics and geopolitics are impacting growth in global trade and foreign direct investment. However, cross-border payment volumes continue to grow above GDP. Economic centres outside the US are looking to reduce dependence on entities and networks that rely on US dollar clearing, but we believe it will remain the de facto currency and reference for international payments for a long time yet, providing a reliable basis on which commercial opportunity can be assessed. The G20 push to improve cross-border payments is creating regulatory pressure for greater alignment of payments systems, which in turn encourages innovation and competition to better serve the market.
- Defensible moats in the cross-border payments market. The complexity of the use cases for cross-border transactions will ensure that defensible moats for investors will continue (e.g. in the remittance market, access to a cash-out branch in hard-to-reach communities will be critical). Advantaged access to certain communities and corridors can lower fulfilment costs for other providers of remittance solutions, and we expect to see more ‘coopetition’ between platforms that together provide a patchwork coverage model, potentially as a precursor to consolidation.
- Revenue growth from moving along the value chain. Greater transparency in pricing and access to real-time FX rates will continue to put pressure on prices. To defend margins, providers will continue seeking to enhance their offerings by providing value-added services like FX hedging, bridging different countries’ accounting regulations, or offering treasury or cash management solutions.
How L.E.K. can help
L.E.K. has deep expertise and experience working with clients across the payments value chain, and we continuously support our clients with growth strategies and commercial and operational excellence projects. We support investors in identifying credible targets and growing companies with value creation strategies.
Want to discuss this topic in more detail? Please contact us.
L.E.K. Consulting is a registered trademark of L.E.K. Consulting. All other products and brands mentioned in this document are properties of their respective owners. © 2024 L.E.K. Consulting