Patricia Hines, CTP Senior Analyst, BankingCelent

MAY 2018

CROSSING THE BORDER: DRIVING INNOVATION FROM INEFFICIENCY

Joseph StarkHead of AmericasEarthport

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Today’s discussion

Drivers and Trends

Traditional Models

External Influences

Emerging Models

Simplifying Global Payments

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What are the drivers andtrends affecting the cross-border payments ecosystem?

3

0.55

0.56

0.61

0.64

1.06

1.59

2.25

0.00 0.50 1.00 1.50 2.00 2.50

Hong Kong

France

Japan

United Kingdom

Germany

China

United States

Imports

Global trade drives the world economy

1.45

2.10

1.34

0.41

0.64

0.49

0.52

0.000.501.001.502.002.50

Exports Imports

Sources: International Trade Statistics 2016 TradeMap and Celent analysis

4

Small businesses represent 97.5% of exporters and 36.2% of export value

0

500,000

1,000,000

1,500,000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016Small Business Large Business

28.9%36.2%

Value of U.S. Exports of Goods

Source: U.S. Census Bureau, A Profile of U.S. Importing and Exporting Companies, Celent Analysis

Note: Small and Medium Exporters are defined as those companies with fewer than 500 employees, those with missing employment data, nonemployers, and companies that reported annual payroll but did not report any employees on their payroll.

$mill

ions

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• Bill payments• Online purchases/

e-commerce• Payment at POS• Charitable donations

Payment types

1

3

5

14 Business

Bus

ines

s

Consumer

C2B

C2B Examples

C2CC2C Examples• Peer-to-peer • Remittances• Personal services

payments

B2C Examples• Employee payroll• Contractor

payments• Reimbursements• Rebates & refunds

B2C

B2B• Supplier payments• Capital purchases• Intercompany

lending• Bank-to-bank

Payment Initiator

Paym

ent R

ecip

ient

Source: Celent

B2B Examples

Con

sum

er

6

B2B accounts for the majority of cross-border volume and revenue

4Global cross-border payments flows, 2015, US$ billion

Global cross-border revenues/ margin as percentage of lows, 2015, US$ billion

C2B B2B

C2C B2C

$405 $765

$135,815

$980

C2B B2B

C2C B2C

$20

$240

$15

$25

1.5%

Source: McKinsey Global Payments Map, Celent analysis

Total 2016 global payments revenue: $1.6 Trillion

6.2% 2.6%

0.2%1.5%

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Borders still matter when it comes to making and receiving payments.

Are traditional cross-border payment services adequately positioned for today’s challenges?

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Traditional cross border payment process using correspondent banks

US Based Bank

Japanese Based Bank

US Federal Reserve

Bank of Japan

US Correspondent

Bank

Japanese Correspondent BankCorrespondent

Banking Fee

¥$

Buyer Supplier

$

$

¥

¥

Process friction

Correspondent Banking Fee & FX conversion

SWIFT Messaging Network SWIFT Messaging Network

Source: Celent

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Critical elements of uncertainty

• When will payment reach the beneficiary?

• What amount will be received after fees are deducted?

• What costs will the originator incur including fees and FX rate margins?

• How many intermediary banks will be involved?

• Will the beneficiary have enough information to easily record and reconcile to accounts receivable?

Cross-border payments have several critical elements of uncertainty

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Potential expenses and savings associated with B2B cross-border payments

Source: The Cost-Cutting Case for Banks-Ripple, February 2016

International payment servicing cost breakdown

1.6

4.4

4.8

5.6

2.5

2.0

20.9 bps

Traditional Cross-Border Payments

2.31.7

5.6

2.5

14.1 bps

Ripple

Currency Hedging

Treasury Operations

Liquidity

Payment Operations

Basel III (LCR)

-33%

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• Relatively high revenue margins persist due to a lack of external downward pressure

• Regulation and increased competition forced providers to reduce fees on domestic payments, resulting in operational cost improvements through front-end automation, process simplification, standardization and outsourcing, along development of new applications for existing payments products.

• With healthy margins, banks and providers have had little incentive for structural changes to cross-border payment models, back-end systems, and operational processes.

• As a result, operational cost per transaction for international payments continues to average well above $20

Lack of disruption in the cross-border payments space

Source: Global Payments 2015: A Healthy Industry Confronts Disruption, McKinsey Global Payments Map

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What are the external influences affecting the cross-border landscape?

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The promise of blockchain

Japanese Correspondent Bank

US Based Bank

Japanese Based Bank

US Federal Reserve

Bank of Japan

US Correspondent

Bank FX Transaction

Fee

¥$

Buyer Supplier

$

$

¥

¥

Process friction

US Based Bank

Japanese Based Bank

FX Transaction Fee

¥$

Buyer Supplier

$ ¥

FX Market Maker

Process optimization

SWIFT Messaging Network SWIFT Messaging Network

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Fintech firms face a dizzying array of regulatory bodiesMoney services business (MSB) example

Source: Celent Analysis (Illustrative), 2017

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How are emerging payment models creating innovation from inefficiency?

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Segment

P2P Remittances (C2C)

Cross-Border eCommerce (C2B)

Cross-Border Card Networks (C2B)

Cross-Border Payroll (B2C)

A dizzying array of non-bank segments and providers in the cross-border payment space

Source: Celent Analysis (Non-Exhaustive), 2018

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Segment

Supply Chain Networks (B2B)

Foreign ExchangeBrokers (B2B)

Cross-Border PaymentNetworks (B2B)

A dizzying array of non-bank segments and providers in the cross-border payment space, continued

Source: Celent Analysis (Non-Exhaustive), 2018

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• Cross-border payment platform • Private blockchain using proprietary digital currency (XRP) as a bridge currency

• Real-time transactions• Registered money service business• Targeting low-value payments

• Building Visa B2B Connect using Chain’s Core blockchain infrastructure

• Private blockchain • Near real-time transactions• Targeting high-value payments

B2B Cross Border Payment Models

Visa B2B Connect

• Cross-border payment network • Connects to correspondent banks• Clients include banks and corporates• Supports payments and acceptance• Real-time transactions via Federated Ledger• Targeting low-value payments

• Cross-border payment network • Connects to domestic ACHs• Real-time transactions via Ripple• Registered money service business• Targeting low-value payments

Earth Payment Network

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How can collaboration between fintechs and banks simplify global payments?

Collaboration is key

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Valuation of the cross border

payment industry with expected

growth to $218tn by 2022

$150 Trillion

75% of Fintech

91% of Banks

Agree their primary business objective to

collaborate and enable traditional

firms

Incorporate collaboration with FinTechs in their

future growth strategies

Rapid growth in cross border transactions has lead to both banks and FinTechs working together to best support the growing

demand and optimize commercial opportunities

Opportunities not threats

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The trust and scale of the incumbents combined with the speed, UX and function of FinTechs creates significant value

Source: World FinTech Report Survey, Capgemini, LinkedIn, Efma, and MaRS, 2017

Key reasons FinTechs partner with traditional financial services firms, 2017

30.0%

17.3%

20.9%

31.8%

55.5%

59.1%

60.0%

66.4%

Others

Expertise in Risk Management

Expertise in Regulations

Access to Capital

Better Distribution Infrastructure

Gaining Customer Trust

Achieving Economies of Scale

Brand equity

Our global network, international expertise and years of experience allow us to give your business the freedom to grow

UK FCA regulated

Introducing Earthport

Settling billions of dollars in payments annually direct to over 200 countries

Robust & Sophisticated Compliance

Largest independent ACH Network

FX & Treasury Management

Settlement management

Payment tracking/SLAs

No credit risk Flexible connection options

22Regulated by the FCA – Licensed by the NYDFS

Earthport Model

Flexible funding & FX options Superior Compliance, risk and regulatory experience Message validation and enrichment A suite of settlement methods 200+ countries

One integration multiple benefits

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Global connectivity

Form

at tr

ansf

orm

atio

n

API

SFTP

APIDirect connection

Admin portal

Payment instructions Receivables & Exception flow

Form

at tr

ansf

orm

atio

n

Not

ifica

tion

/ rep

ortin

g sy

stem

s

SFTP

Web services

Send to Bank

Earthport Partner bank

Credits (received funds and returned

transactions)

Process via appropriate route

The value of knowledge

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Best in market risk, regulatory and compliance expertise is a significant differentiator

• Specialized risk and fraud tools to allow growth rather than restrict it

• Maximize growth potential while minimizing operational overheads and risk

• Ensure complete adherence to the complex regulatory requirements in all markets

Robust and sophisticated risk, regulatory and compliance services to suit the needs

of any global business

26Risk assessment

toolsSuspicious

activity reporting

Client funds in a separate ‘trust’

account

Transaction monitoring & incident

management

Segregation of accounts

Externally audited

Sanctions screening

Counterparty risk

assessment tool

Compliance at our core

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Other Europe

CameroonGabonCentral African RepublicChadCongoEquatorial GuineaSenegalCote d’Ivoire

BeninBurkina FasoGuinea-BissauNigerTogoEgyptMoroccoSouth AfricaZambia

GhanaNigeriaKenyaUAEUgandaTanzania

ME/Africa

Canada USA

North Americas

86Countries v ia local ACH

ArgentinaBahamasBarbadosBrazilChileColombiaPeru

JamaicaTrinidad & TobagoUruguay

200+ countries total

AustriaBelgiumCyprusEstoniaFinlandFranceGermany

GreeceIrelandItalyLatviaLithuaniaLuxembourgMalta

NetherlandsPortugalSlovakiaSloveniaSpain

Euro-Zone+

Other EuropeAlbaniaBosnia-Herz.BulgariaCzech Rep.CroatiaDenmarkHungaryIsraelLiechtensteinNorway

Poland RussiaSwedenSwitzerlandTurkeyUnited Kingdom

Asia

AustraliaBangladeshChina Hong KongIndiaIndonesiaNew ZealandPakistan

PhilippinesSingaporeSri LankaThailandVietnam

South Americas

The worlds largest independent ACH network

Seamlessly manage payments globally through a single relationship with Earthport, reducing complexity and meeting your customers’ expectations for cost, predictability and transparency.

World’s Largest International ACH Network

The world through one relationship

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Patricia Hines, Senior Analystphines@celent.com+1 704 969 0763

@PJHines

https://linkedin.com/in/patriciahines

Joseph Stark, Head of AmericasJoseph.Start@earthport.com+1 646 946 0121