Understanding Global FX Payments: Navigating an Increasingly Complex Landscape

Background

For decades, international payments have served as the facilitator for cross-border trade and commerce, paving the way for the emergence of new industries and market providers. Post pandemic, as the world's economies rebounded, process management for global commerce has experienced renewed importance.

For corporates in particular, international payments to vendors, manufacturers, suppliers, and service providers have never been more critical. In parallel, there has been an increasing focus on liquidity management for global corporates who need to expatriate payroll, support intercompany flows, or make international tax payments. Those are only some of the use cases that Goldman Sachs Transaction Banking has been supporting.

Of course, many corporations know that payments, especially cross-border transactions in different currencies, can be complex. They can involve numerous time zones, jurisdictions, and payment regulations. Global payments can be hard to track and slow to settle.

Traditional transactional FX payment solutions have been constrained by a lack of flexibility, visibility, and complex implementations between currencies. Furthermore, the back-end systems that help power many industry incumbents are often powered by legacy mainframe computers, which require regular functionality and maintenance updates while facing difficulty processing high-volumes at scale. This creates inefficiencies and a workflow that has little room for error, requiring mitigants such as early cut-off times to manage the throughput.

Another frequent challenge faced by corporates is the lack of cost transparency to execute FX payments. Many multinational corporations still face issues when trying to determine their complete end-to-end cost of foreign currency payments.

TxB believes we can help clients navigate, and solve for, common issues impacting the modern treasurer, including leveraging technology to help solve for payment complexities and providing cost clarity.

COST

Navigating the Costs of FX Payments

There are multiple factors that comprise the cost of an FX payment. These factors include base exchange rate (including internal profit), spread, cost of funds, correspondent banking transaction fees, and fees charged by the bank originating the transaction.

When clients consider the cost of FX payments, they should be cognizant of the overall cost to execute their FX payments. This will help ensure optimal pricing output is received across different transaction components.

In parallel, there are other factors to consider. Some financial institutions charge commissions for handling and executing the FX conversion, either as a fixed fee (irrespective of value), or a relative fee (the higher the value, the higher the commission). Additionally, banks commonly charge for reporting, posting payments to accounts, and running analytics on accounts.

Frequently, the complex cost-base described above is justified by incumbents due to complex and legacy technology. Therefore, when TxB launched in 2020, it found a strong advantage in building a cloud-based and horizontally scalable business from scratch.

APPROACH

A Simplified and Transparent Approach to FX Payments

From inception, TxB prioritized robust cross-currency payment solutions that could scale with client needs and enable clients to know what they pay at each step of the process.

While there are fees, such as correspondent banking fees, which TxB cannot predict upfront, TxB provides GPI tracking (the ability to see reported fees by each bank in the chain) at no additional cost to clients. Additionally, TxB’s optimization engine allows enriched intermediary details for payments to optimize the ultimate cost.

In parallel, there are other factors to consider regarding cost. Clients can choose to use multi-dealer platforms to access the most competitive FX spreads; however, many platforms charge brokerage fees and commissions to handle and execute FX conversions. Additionally, clients may choose to segregate the FX conversion from the payment settlement, which may increase costs if not appropriately managed for the proper client-related flows. Finally, clients should be mindful that it is common practice for banks to charge for reporting, posting payments, and running analytics on accounts.

TxB's response to increasing costs was to adopt a technology-and-digital-first mindset regarding transaction banking. TxB introduced a platform developed from scratch on the cloud, built entirely on APls, offering the possibility for a more intuitive, flexible, and data-rich approach. These features could make clients' lives easier by digitizing and improving the payments experience. And critically, it could give clients control over what processes are most important to them.

CLIENT CONTROL

Putting Clients Back in Control of Their Cross-Currency Payments

In terms of pricing, TxB opts for a simple pay-for-what-you-use model. If payments are routed using the correspondent banking network, clients can track the correspondents being used through TxB’s GPI tracking APls.

Allowing clients to operate in multiple currencies, especially for collections and receipts, is another example of how the TxB approach to solving simple problems is front and center in its solution strategy. Consider a client who does not need every inbound payment converted into a single currency, but rather would prefer to hold multiple currency accounts. TxB supports this by offering multiple physical currency accounts in the US, UK, and Europe. This enables clients to hold currencies without conversion.

CONCLUSION

It's a Journey...

It is abundantly clear that the global payments market will continue to evolve. A confluence of factors is driving that change, including the impact of technology, client expectations, global demographics, and regulations. There have been a significant number of changes in global trade flows and industry fluctuation, as developments in a post-COVID-19 economy continue to emerge.

The market is being reshaped by both traditional and emerging payment providers - not only legacy banks, but also fintech firms and corporates that are pivoting to offer payment solutions. As a result, service providers and users are beginning to seek off-the-shelf solutions that can be tailored to achieve the best results for all parties.

Payments are at the core of transaction banking, and the drive toward more transparency - from the operational execution to the cost of making the payment itself - has emerged as crucial. Global payments are even more integral to international business operations who need to support their customers and effectively deal with their suppliers. Only with additional information can a company make informed decisions about how to optimize its operations. For years, this was an opaque corner of operating a treasury or cash management function. Clients struggled to set up the most-efficient FX payment execution processes, continuing to face miscellaneous and ancillary fees that were frequently viewed as the cost of making FX payments.

Moving cash from one location to another should be a simple process. That is what Goldman Sachs built when developing its transaction bank. By helping clients navigate the current complexities of the global payment ecosystem, TxB is striving to put clients back in control of managing cross-currency payments.

Transaction Banking services are offered by Goldman Sachs Bank USA (“GS Bank”) and its affiliates. GS Bank is a New York State chartered bank, a member of the Federal Reserve System and a Member FDIC. For additional information, please see Bank Regulatory Information.