The IPFA framework overlays existing relationships and connections between businesses and their financial institutions. As a result, domestic payment rules and formats are not affected by IPFA’s procedures, according to the IPFA’s website.
For smaller transactions, however, the need for a simple, efficient process often is greater than the need for the guidance. Here, treasurers are gaining a few options. For starters, several nonbank firms now offer simple, relatively inexpensive, cross-currency payment platforms. Among them are Travelex and Western Union’s Custom House division. They’ll execute the payment, changing the funds into the local currency once it reaches its destination.
Any treasurer who works for a company conducting business across borders – and today, that’s just about every venture – knows that actually completing a transaction can be a headache, given the different currencies, regulations, and payment systems that can come into play. However, things are slowly changing. While it would be a stretch to say that cross-currency payments today actually are easy, it’s safe to say that they’re getting easier. “It’s not that the regulations are getting simpler or the number of currencies smaller or that managing currency risks is easier,” says Zilvinas Bareisis, a London-based senior analyst with Celent, a consultancy focused on the application of IT in the financial services industry. However, “there are more alternatives and options to conduct payments.”
Also worth noting is the International Payments Framework Association (IPFA), a group of financial institutions and clearing and settlement firms. Among its members are Dovetail Systems, the Federal Reserve Bank of Atlanta, and Royal Bank of Canada. Its mission is to simplify international credit transfers throughglobal standards. To accomplish that, the IPFA is leveraging existing payment networks and international standards, such as ISO 20022, to enable interoperability between domestic and regional non-urgent payments systems and banks. In other words, the IPFA is trying to do for payment systems the same thing that the euro did for European currencies, Bareisis notes. “It simplifies cross-currency payments.”
In October 2010, transactions began between the Federal Reserve in the U.S. and Equens, the largest payment processor in Europe. Transactions from Europe to the U.S. have access to accounts at all U.S. banks, while transactions headed the other way can access accounts at all banks in 22 European countries Big Fat Finance, IPFA says. What’s more, because the transaction is electronic, the company maintains visibility throughout the process. In addition, the cost should be less than working with a correspondent bank – a key benefit for smaller transactions. “If you’re a small- or medium-size business that needs to make payments, suddenly large banks aren’t your only option,” Bareisis says. ###
Historically, cross-currency payments have required access to local clearing systems. Banks in one country gained that access by opening accounts with banks on the other side of the border, in the other country’s currency. That’s given rise to today’s correspondent banking system. The system works great for larger transactions. Not only can the banks involved offer the technical infrastructure needed to complete a transaction, but most have acquired a solid understanding of the applicable regulations. “The value of the banks isn’t just their (technical) platform, but their deep understanding of the rules, regulations, and laws,” Bareisis notes.
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