Managing Cross-Border Payment Costs,Risks and Efficiencyby Ebru Pakcan, Global Head of Payments, Citi Transaction Services

Globalisation is accelerating the flow of people, goodsand services, capital, energy and information acrosscountry borders. For a multinational corporation, the

impact of globalisation extends further than the opportunityto expand into new markets: it involves new ways of doingbusiness, creating strategic and operational challenges andopportunities. Treasurers have a pivotal role in facilitatingtheir company’s global expansion and supporting changing

business models, creating the backbone for supplier andcustomer engagements by enabling efficient, cost-effectivepayments and collections. Innovations in cross-borderpayments are a prime example of how business trends arechanging. In a growing number of businesses, traditionaltreasury mechanisms for facilitating cross-border trade nolonger support these emerging business models effectively,necessitating new techniques and approaches.

Increased costs, reduced efficiencyCross-border payments are typically considered by treasurers as achallenging but necessary condition for doing business. Thesechallenges include:

Cost. Cross-border payments are more expensive than domesticpayments, and it is often difficult to assess and deduce chargesincurred through multiple correspondent banks, leading to a lossof value and a lack of visibility and auditability.

Information. As payment messages are transferred betweenbanks and across borders, information held on the payment maybe truncated or the detail lost, making payments and collectionsmore difficult to reconcile.

Complexity. As companies work with a growing number ofsuppliers worldwide, the number of accounts that the companyhas to open and maintain frequently proliferates, resulting ingrowing administration and control issues.

Risk. By maintaining multiple foreign currency accounts, thecompany is exposed to FX risks and may need to exchangecurrency to fund supplier payments, which adds cost andadministrative effort.

Changing nature of supply and demandThese challenges directly controvert treasurers’ and financemanagers’ objective to achieve cost-effective, highly automated

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end-to-end payments processing.Traditionally, companies have tried tomitigate some of the challenges ofinternational payments by payingsuppliers in their base currency oranother major currency such as USD,therefore minimising the number ofcurrencies and accounts they need tomaintain. However, as new businessmodels emerge, the nature of supply anddemand is changing dramatically forcertain industries. For example, in thepast, suppliers to a large technologycompany may themselves have beenmedium- or large-sized companies, witha similar degree of financialsophistication. Today, distributeddevelopment of applications for mobileand tablet devices and the growth ofopen source development means thatsuppliers could be micro businesses orindividuals located in any part of theworld. These companies or individuals

may not be in a position to acceptforeign currency payments. Furthermore,it would be prohibitively expensive andadministratively intensive to collect bankaccount details (which may only be usedonce or on an ad-hoc basis), maintainlocal accounts and/ or make cross-borderpayments to these suppliers, often forvery small amounts.A similar challenge relates to

collections. In many industries,companies have historically adopted adistributor model, so collections aretypically large, regular amounts receivedelectronically from distributors or agents.Increasingly, companies are engagingmore directly with the end customer,such as through eCommerce models. Thismeans that companies increasingly needto be able to manage smaller collectionsthrough a wider variety of paymentmethods and currencies. This includesdomestic payment methods, which may

be cash or manual payments butincreasingly new forms of electronicpayments such as mobile payments.Macroeconomic changes are also

shaping new cash flow dynamics. Ascompanies expand their business inemerging regions such as Asia and LatinAmerica, gradual market liberalisationand currency deregulation in countriessuch as China and Brazil mean thattreasurers and finance managers can nolonger rely on making and receivingpayments to/from importers andexporters in USD or EUR. Instead, theyneed to be able to support RMB or BRL inorder to maintain their competitiveposition, without loss of efficiency orcontrol. Regulatory changes are not onlyan issue in emerging markets. Themigration to SEPA (Single Euro PaymentsArea) in all Eurozone countries will meanthat SEPA Credit Transfers and SEPADirect Debits will replace existingdomestic payment methods by 2014.While the aim of SEPA is to reduce costsand fragmentation across the Eurozone,and to facilitate intra-regional trade byeliminating cross-border payments withinthe Eurozone, companies outside of thisarea will need to review how they makepayments to Eurozone countries toleverage the opportunities forstandardisation and reduced costs.

New payment models forchanging timesShifting business paradigms have thepotential to create further risk,complexity and cost to payment andcollection processes unless treasurers andfinance managers adopt a similar degreeof innovation in the way that they dobusiness. There are a variety of ways inwhich they can achieve this. Paymentscentralisation, through a paymentsfactory or shared service centre is oftenan important element of an effectivepayments strategy, but centralisationalone does not solve the challenge ofcross-border and international payments.

Leveraging the network. One importantelement in achieving an efficient globalpayments infrastructure and mitigating

Increasingly,

companies

are engaging

more directly

with the end

customer,

such as

through

eCommerce

models.

Box 1: Case Study: Eliminating risk, maximising efficiency incross-border payments

Business challenge An independent provider of port cost management services to the shippingindustry has developed a highly competitive, and rapidly growing service forenabling prompt, convenient payments from shipping companies to port agentsat the point of ship docking for voyage-related costs. Missed or delayedpayments could result in ship detention or arrest and high daily charges.Although shipping services are typically denominated in USD, port charges arecharged in local currencies, leading to considerable FX risks and costs.

Citi’s solution Citi provided the company with an electronic file upload solution that enablesthe immediate processing of multiple payments with different formats,currencies and beneficiaries. As the solution uses SWIFT MT 103 messages,payment beneficiaries receive a payment confirmation, enabling vessels to clearports without any delay.

The result Following an implementation of only two months, the solution enables cross-border payments to be made to port authorities in the appropriate format andcurrency, minimising the associated administrative burden, operational or FXrisks. As a result, the company has achieved close to 100% straight throughprocessing rates. Furthermore, the company’s shipping company clients are alsocushioned against the risk and cost of FX conversion. The strength of the solutionenables the company to offer a highly competitive, attractive service to itsclients and therefore expand its offering further.

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the challenges associated with cross-border payments is to work with a bankwith an extensive global network. Forexample, at Citi, we enable our clients toreduce the cost and data attritionassociated with correspondent banking aswe are typically able to transmit themajority of payment instructions acrossour branch network, reducingcorrespondence fees and ensuring thecompleteness and accuracy of data.

Simplifying cross-border payments.Leveraging a global network has otheradvantages too; for example, as theillustration in box 1 demonstrates,treasurers and finance managers have theopportunity to instruct a wide variety ofcross-border payments through a singlechannel and a single file, irrespective ofthe ultimate format, currency andbeneficiary. The bank then makespayments locally, using electronic,manual payments or cash as appropriate.

Multi-currency payments. Not only cantreasurers and finance managersfacilitate global payments more cost-effectively, but they can also do sowithout the need to open accounts ineach currency, therefore minimisingcurrency risk and simplifying accountstructures and administration. Forexample, Citi’s WorldLink® PaymentServices enables companies to makepayments and receive collections in 130countries from a single account, across awide variety of payment methods,whether manual or electronic. This is apowerful proposition for corporates,public sector bodies, non-governmentorganisations and financial institutionsalike, as it provides a framework tofacilitate international growth reducingany additional cost or complexity.

Bespoke solutions. Increasingly,treasurers and finance managers needpayment and collection solutions thatare specific to changing businessmodels, without compromising theirobjectives of centralisation,standardisation and efficiency. As theexamples in boxes 1 and 2 illustrate,

combining proven yet innovativesolutions in a way that is unique to eachcompany, and therefore addressing eachcompany’s specific requirements, israpidly becoming essential to enable thecompany to respond to changing marketdynamics.Globalisation in its many forms

continues to transform the way thatcorporations do business. From marketand currency deregulation, theemergence of new supplier andconsumer markets to digitisation andtechnology innovation, new businesschallenges and opportunities are beingcreated for corporations globally.Treasurers and finance managers need tobe in a position to support thecompany’s commercial activities byproviding efficient payments andcollections. This increasingly involvesinnovative solutions that supportcompetitive, flexible and global business

models whilst maximising efficiency,control and risk mitigation. Workingwith a bank with a global network, asignificant level of payment expertise,and bespoke solutions that combineboth proven capabilities and continuous,commercially relevant innovation tocorporations is critical to achieving thisobjective successfully. �

Ebru PakcanGlobal Head of Payments,Citi Transaction Services

Based in New York, Ebru Pakcan is the Global Head ofPayments in Citi Transaction Services’ Treasury & TradeSolutions team (TTS). Prior to this, Ebru had several roles inCiti Transaction Services in Europe, most recently as theEMEA Head of Payments for TTS. Ebru started her career atCiti in Turkey in 1997.

Box 2: Case Study: Streamlining global payments

Business challenge A leading, diversified global IT company headquartered in India sought toestablish a shared service centre (SSC) to increase efficiency and control overglobal payments processing, and increase the use of electronic payments overcheques wherever possible.

Citi’s solution The company has worked with Citi to enhance its SSC operations and now makespayments on behalf of the company in over 30 countries across a full range ofpayment methods, including supporting the group’s activities in North America,Latin America and Central & Eastern Europe.

The company uses Citi’s WorldLink® Payment Services solution in the UK tomake foreign currency payments from a single account; and in the US forautomating the production of cheques to suppliers, without additionaladministration or FX risk.

The result The company has been able to expand the geographic reach and scale of itsactivities whilst further streamlining its processes, reducing costs, increasingstandardisation and enhancing controls. One hundred per cent of payments inIndia and the UK, which are the company’s largest markets, are now madeelectronically through the direct file format connection, which is rapidly beingextended to payments in other currencies and markets. Foreign currencypayments have now been automated and require far less administration,enabling resources to be reallocated to more value-added tasks.

Globalisation

in its many

forms

continues to

transform

the way that

corporations

do business.

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