Why is it so difficult for PSPs to differentiate themselves in the market?
The market for cross-border payment service providers (PSPs) has become increasingly saturated over the past 15 years, making it challenging for these companies to differentiate themselves against the competition. Initially, these financial institutions emerged as an attractive alternative to traditional banks, which were charging exorbitant fees of 2-3% for FX and international payments, even for common currencies. This high-cost environment created an opportunity for PSPs to enter the market and compete primarily on price.
The barriers to entry for PSPs were relatively low in the past, particularly in the UK where spot foreign exchange is an unregulated service. This led to a rapid proliferation of providers, with many startups entering the market. The industry quickly became crowded as more players entered the market. Price competition naturally intensified, driving margins down to near-zero levels. What had initially been a key differentiator for PSPs – lower costs – became unsustainable as a long-term strategy. This "race to the bottom" in pricing led to a period of consolidation, with many being bought out, merged or operating at a loss.
In response to this challenging environment, PSPs began to seek new ways to stand out. Service quality emerged as a crucial area for differentiation, with a focus on four key aspects: speed of delivery, payment transparency, security and accessibility. Of these, speed is the most important as consumers and businesses increasingly demanded instant cross-border payments.
To improve transaction speed, PSPs started developing extensive correspondent banking relationships. This approach allowed them to move funds and make payments quickly through local bank accounts. However, establishing these relationships is a time-consuming process, often taking 12-18 months to finalise and requiring dedicated partnership teams.
RTGS.global steps in here, allowing for instant relationship formation between financial institutions, potentially revolutionising the speed at which cross-border transactions can be processed. This technology provides a new avenue for PSPs to differentiate themselves in an increasingly competitive market.
Why has there been a lack of innovation in this space to date?
This is primarily due to reliance on traditional correspondent banking methods, a process which has remained largely unchanged since the invention of SWIFT in the 1970s. This dependence on the correspondent banking method has created several barriers to progress and innovation within the sector.
PSPs have been largely constrained by the operational limitations of their correspondent banks, including working hours and geographical locations. This often results in transaction delays due to cut-off times and time zone differences. These long payment chains comprising several banking intermediaries all repeating the same checks are highly inefficient and make it extremely challenging to track the location of funds at the various stages of the transaction.
Establishing and maintaining relationships with multiple correspondent banks is a complex and resource-intensive process. Each integration requires substantial time, labour and capital investment, making it challenging for PSPs to expand their services or improve existing ones rapidly.
RTGS.global offers a more streamlined approach by allowing PSPs to establish a single relationship that can facilitate transactions across multiple regions and currencies. This significantly reduces the need for multiple integrations, lowering both initial investment and ongoing operational costs.
To demonstrate the power of the RTGS.global platform, a controlled test was carried out where €100 was sent via the traditional correspondent method. The process took three weeks, during which time there was no information available on the status of the payment and at the end, only €52 arrived. When the same transaction was made via the RTGS.global platform, the transaction took place instantly with 100% of the currency arriving intact at the receiving end.
What are PSPs' three main pain points?
PSPs face three main pain points in their operations: high upfront costs, access limitations and liquidity management challenges.
The first pain point revolves around the costs and complexities associated with offering instant payments. To provide this service, PSPs must pre-fund foreign accounts, which requires accurate forecasting of inflows and outflows. However, forecasts are inherently prone to errors and when discrepancies occur, PSPs must quickly source emergency funds. This often leads to reliance on expensive credit lines or overdrafts from correspondent banks, particularly burdensome for smaller PSPs who cannot negotiate favourable terms.
The second pain point is related to access and integration. Traditional methods require PSPs to integrate with multiple correspondent banks, each with its own proprietary API. This process is time-consuming, resource-intensive and expensive, requiring significant engineering efforts. The complexity increases with each additional correspondent relationship, creating a fragmented and inefficient system.
The third major pain point is the fragmentation of liquidity. PSPs typically maintain relationships with multiple providers to ensure best rates, terms, and payment options, as well as to mitigate risks associated with potential offboarding. This results in funds being spread across various nostro bank accounts with different correspondent banks. Managing these dispersed funds is challenging for treasury managers, who must constantly monitor and move money between accounts to meet various payment needs. This fragmentation is further complicated by different cut-off times and payment rails offered by each correspondent bank.
On the other hand, RTGS.global enables "just-in-time" funding instead of the current "just-in-case" approach, potentially reducing the need for expensive emergency credit lines. It also simplifies integration by using standardised ISO20022 messages instead of multiple proprietary APIs. Furthermore, RTGS.global introduces the concept of pooled liquidity, where PSPs can maintain a single network account to pay out to multiple providers, significantly simplifying liquidity management and enabling more efficient operations regardless of what time the transaction is taking place.
How does atomic settlement help PSPs service their customers better?
Atomic settlement, specifically Payment versus Payment (PvP) settlement, ensures that both currencies in a foreign exchange transaction are exchanged simultaneously and instantly. This method removes the need for sending your currency first and then waiting days for the new currency to be made available: instead participants can immediately source (and use) their currency requirements.
The key advantage of atomic PvP settlement is the elimination of settlement risk. In this process, funds are only exchanged if both parties have sufficient funding, effectively removing the possibility of one party fulfilling their obligation while the other fails to do so. This instantaneous and guaranteed exchange significantly reduces the risk exposure for PSPs and their clients.
What else is it about RTGS.global's solution that PSPs find attractive?
An increase in transparency – participants and their clients know exactly where their cross-border payments are. Unlike traditional correspondent banks, which often lag behind in terms of technological advancements, RTGS.global's network is designed to be highly communicative and responsive. It provides real-time notifications to participants at every stage of a payment's progress, keeping all parties informed about the status of their transactions.
This level of transparency directly addresses a key priority. Knowing the exact location and status of their money at any given time is among the top concerns for businesses when choosing a payment service provider.
By offering instant settlement, RTGS.global's solution allows PSPs to offer faster, more efficient services to their clients. This can be a significant competitive advantage in an industry where speed and reliability are crucial.
