Lost in transit: the problem with international payments
Today it’s possible to communicate with nearly anyone at any time and track down even the most obscure information with a few taps on a smartphone. In this world where “instant” has become the norm, it’s clear that international payments has not caught up.
Sluggish settlement times for international payments have always been a major problem for operators and brokers in the private air charter business, given the global nature of the work. We estimate that more than 15% of charter bookings in North America and 25% in Europe involve cross-currency, cross-border bank payments.
Compounding the difficulty of international payments is the industry’s preference for wire transfers, which account for 90% of all payments. Wire transfers typically need to pass through multiple hands and can take several phone calls to coordinate — and quadruple that number if something goes wrong.
The other complications involved in the practice of international payments today include:
- Cyber-security and fraud threats. Of the $858 million in payment card fraud in the aviation industry each year, $639 million is borne by airlines. International payments pose a higher risk of fraud or cyber-security attacks because they involve more stages, people, countries, businesses and organizations.
- Risk of wire fraud. Phishing scams enable fraudsters to pose as the business requesting the transfer. They provide the payee wire instructions that direct the money into their own account.
- Difficulty exchanging atypical currencies. Popular global currencies like the Euro, Sterling and the US Dollar are regularly traded on foreign exchange markets. This means that transfers in these currencies will typically go quickly. But transferring currencies that are less widely used may take longer.
- Lack of transparency. Payments can be hard to track and fees can be unclear.
- Reliance on open hours. Weekends, bank closing times and different time zones can also delay payments.
The very real cost of delayed payments
In January 2018, the weighted average cost of capital (WACC) in the US was 8%. So from an operational perspective, what does a delayed payment actually cost a business each year? There’s a model to calculate the cost of a delayed payment:
Cost to Borrow Money (WACC) / 365 Days x Days Payment is delayed.
A business aviation operator with an average delay of 3 days per payment will end up bearing a cost of 7 BPS (0.07%) per transaction. Individually it does not sound like much but it will start to add up!
On top of this financial cost is the added time and stress of trying to find out where the money is being held up.
21st century solutions (at last)
While fintech has been evolving at break-neck speed, cross-border payments and money transfers have clearly been stuck in the previous century. This backwardness is what led us to create PayNode, a secure system built to facilitate the large-scale, international payments that are typical in the global business aviation industry.
There are promising innovations in other sectors, too. Some of the biggest international banks, such as Santander and Barclays, are introducing blockchain technology for international payments. Since blockchain is an incorruptible public ledger, it eliminates the need for several intermediaries, making money transfers far quicker and easier to track.
By Magnus Henriksson, Managing Director at PayNode