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When the Knights Templar set-up what is often regarded as the first international banking system, the church didn’t allow them to charge interest. When a pilgrim lodged money in a Templar bank in London, and collected it in Jerusalem, they received every penny of their original lodgment.
Of course, the Templars got around this through a variety of loopholes, but it wasn’t for another couple of centuries that modern banking methods had interest and fees as standard practice.
This system built was built upon and expanded, middleman upon middleman, as the world became more globalized and interconnected. By the time we got to the latter part of the 20th century, the global payments system was a tangled spiderweb where money would be routed from the payer to the payee through several banks and third-party handlers – all taking a cut as it passed through their hands.
Foreign exchange rates added a layer of complication, causing headaches for finance departments trying to predict if the amount they sent across an international border would arrive at the destination as expected.
This has all changed.
With modern fintech infrastructure, businesses can cut out layers of those middlemen, using new payment rails to reduce FX fees and banking costs when making international payments.
How to reduce banking fees and costs when making international payments
It’s important when looking at this area not just to look at the ‘what’ but also the ‘how’. Once you understand how it all works, the solutions (and their benefits) become obvious.
1. Accessing new payment rails
Traditional correspondent banking is built on that network created over centuries. It’s complex and uses multiple handlers along a payment chain. If you send a payment from the US into Australia, for example, that payment may go through several banks, each taking their fee for moving the money through the chain.
A survey focused on international payments showed that 48% of respondents were unhappy with the fees charged, while 80% of businesses would consider changing providers to reduce costs.
Saxo Payments
And it’s not just those fees that cost businesses; it’s the time delays, lack of transparency, and reconciliation issues that goes along with this type of payment process.
With today’s fintech payment solutions, businesses can access payment rails with much less steps along the path. Instead of going through multiple banks and third parties, they go directly from one country to another.
How is this possible?
Basically, a new international payments infrastructure has been created over the last decade or so. These fintech's have gone out to each individual country and secured regulatory licenses to operate there, allowing their clients to access these payment rails themselves and generate all kinds of benefits.
Because they have put in the groundwork in creating this simpler and more straightforward infrastructure, they can charge those clients much lower fees than traditional banking methods.
Additionally, because they control this network their clients can have complete transparency over their payments, seeing it move (often instantaneously) through the chain at every step. It also helps reduce administration time because there are never any follow-up payments to make up shortfalls due to unexpected bank charges, and it reduces support questions from suppliers enquiring where their payment is.
2. Using automation for mass payments and reconciliation
Accounts payable and receivables is a complex business at the best of times. Every step in the chain is a potential for more complexity, making it difficult to reconcile payments and resolve errors when they happen.
This leads to significant resources being put into administrative work, requiring the need for more staff and, maybe more importantly, staff not working on more productive activities.
"Our platform allows the user to upload one file and request up to 10,000 payments at once in multiple currencies"
David Hughes, Chief Commercial officer, Transfermate
Beyond potential errors, even large enterprises will often be using multiple platforms to record invoices and reconcile payments, leading to more administration time connecting the dots, and leaving financial leaders in the dark on a daily basis. This also makes mass, batch payments much harder to manage and execute.
Modern fintech platforms solves many of these issues.
By using API integration and other embedded technologies, fintech’s offer businesses platforms that can significantly reduce administration time, eliminate errors, allows for same-day payments in many cases (with receipt confirmations), gives the user the ability to make mass payments in multiple currencies, and give them visibility over the process in real time.
This hasn’t been the result of a single breakthrough. It’s been achieved through innovative technical engineering combined with that payment’s infrastructure built up over years of diligent work.
How to reduce FX fees and costs when making international payments
Many of the same reasons that modern payment rails reduce banking fees also apply to the reduction of FX fees, with a few nuances and additional benefits.
1. Leveraging the modern payments infrastructure to reduce FX fees
Those same steps along the chain that generate banking fees are also vulnerable to detrimental exchange rates and handler commissions. The outcome is also the same – additional costs to the bottom-line and the payment sent may not be the payment received.
SMEs are often charged up to 4% (and higher) using the more traditional payment providers
Money mover
By using the modern payments infrastructure, and its shorter payment rails, businesses can take advantage of lower fees. But how do these platforms offer lower fees? Put simply, because the money goes through less steps on the chain due to the infrastructure they’ve built, the fintech providers are not paying the normal correspondent banking rates and therefore can pass on those lower fees to their clients. When that relationship gets to a certain scale, it can even mean that clients are offered a percentage of the FX commission back to them, generating a revenue stream from their international payment activities.
2. Improve international currency management through fintech software
Visibility over how much cash a company has, where it sits, and what currencies it is divided into, can be a more difficult task than it would seem at the surface level. This is particularly true in large, multi-national enterprises.
The result of this can be the inefficient allocation of resources and being in danger of getting caught by currency fluctuations.
With modern solutions, company’s can gain much more visibility over their international currency holdings. They can manage payments in one account, view all their holdings on one platform, lock in currency rates for future payments, and allow customers to pay in their local currency.
This leap forward allows treasury, procurement and finance departments work together more efficiently and transparently, allowing an agile allocation of resources depending on the business needs.
The more things change, the more they stay the same
When we look back at those first international payment networks, controlled by knights and popes, it’s difficult to reconcile them with the systems we have today.
It’s hard to imagine a time without high handling fees and commissions on currency exchanges, but in a lot of ways we’re moving closer to that original system than ever before. The pilgrim that took their promissory note thousands of miles over border after border, only to be given the same amount they put in at the start of their journey when they reach their destination, is analogous to the journey our international payments go through today.
Through building a new banking and payments infrastructure, and combining it with innovative technologies, modern fintech's offer businesses a new way of payments very similar to the old one – albeit a lot quicker than carrying it all the way yourself.
To learn how TransferMate can reduce your banking and FX fees when making international payments, get in touch with the team.
