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Factors that Facilitate and Impede Cross Border
Payments
Carol ClarkPayments in the Americas
Federal Reserve Bank of AtlantaOctober 7, 2004
Scope of Study
• I. Cross border payments marketplace excluding securities transactions
• II. Detailed information on 16 countries that have considerable ACH volume
• III. Policy issues related to international payments
• IV. Future considerations
Key Points
• Projected growth in cross border payments
• Payment barriers
• Players in global electronic marketplace
• Two cross border payment models
Key Points
• Payment networks are two-sided markets
• Challenges for new payments providers
– Establishing critical mass– Aligning incentives for each of the
payment participants
Projected Growth in Marketplace
• U.S. largest sender of remittance payments in world
• Last half of 1990’s remittance flows to Latin American countries doubled
• Remittances to Mexico, El Salvador, Guatemala, Honduras, Nicaragua will increase from $10.2 billion in 2000 to $18 billion in 2005 (Pew Hispanic Center)
Projected Growth in Marketplace
• Global retail payments projected to grow – 10.2% by 2010 – 7.8% in the Americas (Boston Consulting
Group)• Cross border payments may double 2003-2005
(Unisys, Global Concepts, Talson)• Media attention on providing inexpensive,
reliable remittance services
Cross Border Payment Barriers
• Banks and end users view cross border payments as costly and cumbersome
• Incentives to develop faster and lower cost systems do not exist
• Small payment volumes present challenges to developing critical mass
Global Payments Marketplace
• Marketplace concentrated among a few players
– Financial Institutions
– Non-Bank Providers
– Central Bank or Privately Owned Payment Systems
• Infrastructure costs may drive further consolidation
Two Payment Models
• Correspondent/Network Relationship Model
• Tiered Relationship Model
Correspondent/Network Model
InstitutionA
InstitutionB
Sender Receiver
Bilateral Accounts
Tiered Relationship Model
InstitutionA
Supra-RegionalEntity
InstitutionB
Sender Receiver
Institution Institution
Sender Receiver
Two Sided Markets
Factors that Influence Senders
• Consumer/Business
• Cost
– Proximity
– FX Conversion
Factors that Influence Senders
• Cost
– Timing
– Standards
• Reliability
Factors that Influence Senders
• Financial Literacy
– 58% immigrants do not have bank accounts
– For those with accounts, less than one quarter use them to send remittances
– Documentation concerns
Institution Concerns
• Regulation
• Payment Revenue
Institution Concerns
• Costs
– Technology platform
– IT investment
– Liquidity
Institution Concerns
• Standards
– Interfaces
– Formats
– New Procedures
– STP
Factors that Influence Receivers
• Timing
• Reliability
• Cost
– Proximity
– FX
– Institution
Conclusions
• Concentrated and two-sided market
• High unit costs relative to domestic markets
• Standards vary more than in domestic markets
• Challenges in developing critical mass and aligning incentives
Conclusions
• Regulation may unintentionally and inadvertently impact sender
• Business Case
• Education
Questions?