Going All-In on Crypto Cross-Border Payments—a Cautionary Tale
The 1960s were revolutionary. Beyond bell-bottoms and social upheaval, it was during this time that a new payment method was introduced to streamline the arcane processes for remittance. The automated clearing house (ACH) was introduced in 1968 as an idea for an electronic payment method, and by 1974, the National Automated Clearing House Association (NACHA) was formed. By 1978, the national network was operational and managed by the Federal Reserve. ACH going mainstream was going to eliminate the manual, error-prone, risky method of paying with paper checks.
Jump cut to the present day—nearly half a century in—and paper checks are still around. While electronic payment methods such as wire transfers, SEPA, eCheck, and other EFTs have made a big dent, checks are still common (even for business to business transfers) and still a nuisance. So, before you put all your eggs into cryptocurrency, here’s a sobering fact: our fragmented and heterogeneous world is highly likely to never be satisfied with a single payment method.
Paying someone takes effort. It’s a manual effort that’s focused on handing out money. In the case of cross-border payments, it’s even more work. Cutting a check is mindless. Even today, some businesses believe that wire or ACH processes and controls are akin to learning the Tango. Well, transacting through a blockchain is learning the Tango in zero gravity while blindfolded.
Multiple Payment Methods Are Here to Stay
Global commerce is becoming more reliant on the digital economy. Suppliers and service providers are increasingly operating within international online marketplaces. As such, their participation—and how they’re rewarded for it—is critical to the next wave of products and services we consume. It only makes sense to pay them in a manner that they want.
Offering payment choice can be challenging, especially from a process and reconciliation standpoint. The key lies in getting the right data from the payee into the system. Once the data is captured (assuming banking rails are established within the organization to execute on those payments) businesses need to properly remit across multiple payment methods. An intelligence onboarding process—one that guides a payee through the vast array of potential inputs—is the first step.
Developing a Monetary Conscience
If you wanted to send $5,000 to India, what would be the most optimal method? How about $100? How do those answers change for a different country? The amount sent actually matters because of increasing transaction fees and the complex way in which banking works in India. Paying that vendor in a way where you want to continue working with them means understanding their needs. The same is true for under-banked nations. Part of developing a monetary conscience and being aware of your vendors is to accept that the world is a complicated place.
At Tipalti, we send billions of dollars to 190 countries each year on behalf of our customers who are paying their suppliers (currently a population of over 3 million). One of the capabilities of our platform is to allow for the payee to select his or her payment method, ranging from paper checks, US ACH, wire transfers, PayPal, eCheck (or local bank transfer, SEPA, Global ACH, etc.), and prepaid debit card. When we examine our data (summarized in our report on Demystifying Cross-Border Payments), an interesting result occurs.
Smaller value payments tend to favor convenience. PayPal, for example, as well as US ACH are relatively inexpensive from a fee perspective. Globally, of course, US ACH isn’t available. If the payee has a bank, they may opt for wire transfers or eCheck (Global ACH).
But regardless of all this, how much of the current population has access to a crypto account? And if you were to pay in crypto, that person still needs a way to convert it to mainstream funds to buy things like groceries or pay rent. And which cryptocurrency are you using? Every day, a new one shows up. Hopefully, you have not selected the one whose value is plummeting. This is also a DIY process, with no support of a regulated entity if something goes horribly wrong. There has been plenty of reporting about nefarious use cases for cryptos, and your business likely does not want to be tied up in that noise.
The world at large can’t even agree on a single currency. A single payment method is just as, if not more, problematic.
The Foreign Currency Conundrum
Speaking of centralized currency management, much has been made about how cryptocurrencies like Bitcoin can challenge the forex space. This sounds good in theory. But conversion from one currency to bitcoin then to a regional currency is not only a very manual process, but it also comes with associated fees that damage the value of the transaction. In a sense, the transaction could be charged conversion fees twice.
Nevertheless, allowing payees in the global economy to choose their currency helps maintain a strong working relationship. Payees in some countries have a much higher propensity for wanting to be paid in their local currency according to our data. This is in lieu of having to convert their funds through their own bank where conversion fees can eat into their profitability.
From our experience, payees in more established EU countries (Germany, France, etc.) prefer to have their funds land in their accounts in their local currency. At the same time, there seems to be a pronounced preference for USD in countries with less stable economies, such as Nigeria, Honduras, and Lebanon. Even in Israel, they prefer to be paid in USD with only 16.2 percent choosing to convert their funds to shekels.
Organizations with an in-house treasury function often look to establish local bank accounts to pay locally to vendors. Of course, for smaller businesses, this isn’t always feasible. The future trend will likely be that basic currency management efforts become more centralized and more around increased efficiencies.
If Cryptos Go Mainstream, There Will Still Be Paper Checks
At some point, cryptocurrencies will take their place as a viable payment method option, but it will just remain an option among other proven payment methods. ACH didn’t do away with the need for paper checks. As a point of reference, the U.S. Treasury couldn’t even do away with the penny. Once any payment method gains traction, it seems inevitable that it remains in place.
After all, a payment between two disparate parties is an act of faith in a greater system whether it’s represented as a network of banks or a blockchain. You can’t just undo it.
About Chen Amit
Chen is CEO and Co-Founder of Tipalti and divides his time between Israel and Silicon Valley. He is a veteran high tech executive and repeat entrepreneur.