The push for local payouts and the disruption to foreign exchange

Big digital platforms like Etsy, Airbnb, and Amazon are putting increased pressure on established payout models, demanding razor-thin foreign exchange rates and local currency end-to-end transfers. And while it’s becoming increasingly obvious that the market requires a truly localized global payment solution, how can one exist in a world where payment service providers have long-relied on FX revenue as a key component of their profitability? 

During this interview, Hyperwallet’s Head of Global Innovation and European Managing Director, Bill Crowley, will explore the evolution of foreign exchange. During the interview, Bill will discuss how fintech disruption has created downward pressure on traditional payments companies that rely primarily on foreign exchange to generate revenue streams. Hell further consider the unique needs of new marketplace platforms, many of which are demanding truly local payment solutions across all regions of operation.    

Bill, foreign exchange has long played an important role in cross-border money movements, especially when it comes to sending payments to sellers or suppliers. But that’s not to say that disruption hasn’t impacted the space. Can you give us a quick rundown on how foreign exchange has evolved since you helped found Hyperwallet back in early 2000?

Twenty years ago, foreign exchange trading was facilitated almost exclusively by banks. Then we saw non-bank foreign exchange brokers emerge and start competing head-to-head with banks on rates. During this period, the underlying payment was moved as an international wire via the SWIFT network. Payment companies like Hyperwallet started to come onto the scene and connected domestic ACH networks to facilitate cross-border payments with currency conversion integrated into the payment flow. Over the last six years, peer-to-peer money transfer services entered the market with highly competitive rates, putting more downward pressure on foreign exchange revenue streams. 

How are big digital platforms like HomeAway and Amazon changing the foreign exchange game? What are these marketplaces looking for when it comes to their cross-border treasury management?

Marketplaces actually created a new foreign exchange opportunity, and many payment companies and currency brokers focused on servicing this new, untapped market. There are different profiles of marketplace buyers and sellers. 

In some cases, there is a real requirement to convert from the buyer’s currency to the sellers currency—say, from an Australian buyer in AUD to Chinese seller in CNY. For a while, this was a major profit engine for some payment and currency brokers, but sellers on these marketplaces are becoming very savvy on rates. In a two-sided marketplace, there are thousands of sellers that will need to be onboarded, and they are demanding competitive foreign exchange. Smaller players are emerging in key geographies that are putting incredible pressure on larger companies to compete, impacting the profitability of servicing marketplace sellers.

We are also seeing a strong push for end-to-end local payments where there is no need for any currency conversion. Retail purchases disrupted foreign exchange on cross-border credit card purchases by interjecting dynamic currency conversion at the POS, where buyers are presented the purchase price in the currency of their credit card, ultimately shifting the foreign exchange revenue opportunity from the issuing bank to the acquiring bank. The consumer is able to see the price of their goods in their local currency, but settlement to the ecommerce site is typically still in a single major currency. 

Often, marketplace buyers and sellers are in the same country, but the marketplace is headquartered in another country and doesn’t have a bank account in the transaction currency. The sellers on the marketplace expect to receive full settlement, less marketplace fees—after all, the product or service was sold in the seller’s home currency. But if settlement is not in the seller’s currency, there will be an unnecessary currency conversion. To resolve this issue, the marketplace needs a full, end-to-end local payment experience, or their sellers simply won’t be happy.

If local payments are so important to these marketplaces, why don’t they just set up their own banking relationships around the world?

The same reason that marketplaces don’t set up acquiring relationships in each country they want to sell their product: it would take a tremendous amount of resources to establish and manage. The same issues apply to setting up bank relationships for settlement and payout, and the complexity increases with each country. As payment volume grows, big marketplaces want redundancy and resiliency to ensure there are no payment disruptions. This means they may need to have multiple banking relationships, leading to very complex and resource-intensive payment operations if they choose to do it themselves.

What are the implications to traditional payment companies as foreign exchange becomes further commoditized? 

There will be a continued downward pressure on foreign exchange spreads as more fintech companies enter the market and compete, but the complexity to deliver the last mile is increasing with additional global regulations. It is estimated that a payments company will spend approximately 30 to 40 percent of its engineering budget just on compliance and regulatory initiatives. As foreign exchange revenue erodes and compliance costs rise, payment companies need to offer additional account-based services to remain profitable.

With the rise in demand for local payments, where do you see opportunities for increased cooperation among the various payment providers – e.g. banks, payout providers, merchant acquirers, e-wallets, etc.? What do you think this means for fintechs and banks working together? 

Virtual bank accounts sponsored by banks allow payments to be routed over local clearing networks, with fintechs delivering the infrastructure to orchestrate compliance monitoring, data exchange, and funds movement, and banks fulfilling the last mile delivery. More direct integration between merchant acquirers and payout providers will allow the settlement and payout to seamlessly flow in the currency of the authorized transaction. 

How is Hyperwallet adapting to the push for local payments?

Hyperwallet’s virtual account-based platform and multi-currency ledger is being leveraged by marketplaces to manage the orchestration of their global—yet local—payment requirements. We essentially become the ERP for their payments infrastructure, all while sitting underneath their own branded applications and providing a seamless local payment experience to the users in their ecosystem.

About Bill Crowley

Bill Crowley is Hyperwallet’s Managing Director in Europe, where he leads the company’s UK-based team in bringing innovative, simple, and efficient global payment solutions to the European market. Bill headed Hyperwallet’s Product division for more than 15 years and has played an essential role in developing the Hyperwallet platform into what it is today.

About Hyperwallet

Hyperwallet’s payout technology provides two-sided marketplaces and digital platforms with a frictionless, transparent, and reliable way to manage global payouts and enhance their sellers’ experience. With Hyperwallet, platforms can offer payout optionality across multiple currencies, enable financial management tools for their sellers, and streamline identity verification and compliance screenings – all through a single integration. Hyperwallet has offices in San Francisco, Austin, Sydney, London, and Vancouver.