Are fintechs the answer to cross-border payment pains?


During a CFO South Africa webinar, Verto experts Tim Rudman and Ola Oyetayo, as well as Hatch Africa CFO Craig Sumption, unpacked the challenges and possible solutions when it comes to cross-border payments.

South African CFOs face a unique set of challenges when it comes to international payments in the evolving world of finance in South Africa. The intricacies of managing cross-border transactions can be costly and complex, impacting an organisation’s financial health.

Tim Rudman, COO of Verto, speaking at a recent CFO webinar on cross-border payments, explains that the five most challenging aspects for CFOs in South Africa when it comes to transferring money across borders are cost, complexity, the speed of payment and settlement, access, and then trust in education.

In terms of cost, Tim says that bank charges are very high because banks have a monopoly when it comes to foreign exchange (FX), as banks own between 75 percent and 85 percent of all transactions in this sector. “It’s a fairly opaque area.”

Yet, banks need to pull in revenue as they have large back offices and have high infrastructure costs, says Tim.

“The banks in South Africa, particularly the Big Four, have monolithic applications, systems, processes, people costs, and they are very expensive from a unit economic perspective. So, they must also increase their fees when it comes to cross border to service a client just because of their clunkiness.”

In addition, banks may not have all the currencies required to complete a transaction, which means companies need to find another bank to facilitate the deal, adding cost to the process, says Tim.

At the same time, there are intermediary banks along the way, says Tim, that add additional charges to the process. It is very important as a finance director, or CFO, to ask your bank to cover the charges along the vertical process, he adds. Otherwise CFOs or FDs need to work out how to recoup the amount between the invoice and the value of the payment.

In terms of complexity, FX controls locally require a large amount of reporting, and the onboarding process is “clunky” as different sets of paperwork are required for inbound payments versus outbound, says Tim. He adds that there is also tax compliance that needs to be considered, and other global compliance measures such as Know Your Customer.

At the same time, speed is vital for local businesses, as required documents take time to be approved, while intermediary banks slow down the speed of payment. Coupled with a very volatile exchange rate, “it’s nigh impossible to hedge your balance sheets and to budget properly; you have to almost be superstars to get that completely right.”

The role of fintechs

Less obvious from a South African point of view is access and education in terms of available options. Smaller companies, for example, face additional paperwork and fees as it is harder for them to register with corporate banks. “That makes life difficult for SMEs to operate in South Africa when they do imports and exports,” says Tim.

A trend that is being seen in the UK and US is that banks are buying fintechs to speed up processes and make onboarding for smaller companies easier, says Tim. He adds that more needs to be done in terms of building trust around fintechs, which are also regulated and constantly improving security. “The adoption has probably been a little slower than people would like, particularly in South Africa.”

Ola Oyetayo, CEO and co-founder of Verto, explains that fintechs have adapted to the unique needs and requirements of different regions and currencies. “

When we think about South Africa, and virtual as a market, we’ve done a bit of homework. And one of the things that we will be building is a solution to digitise that process to be able to move money out of the country.”

This, adds Ola, will take away a lot of the pain and the time it takes to move money abroad. In terms of currencies that aren’t liquid, Verto has built a marketplace to cater for these currencies, such as the Nigerian naira or the Kenyan shilling. He says this allows companies to be more certain when it comes to FX rates through an algorithm that matches a company with businesses on the other side of the equation, guaranteeing the deal will go through at a particular rate.

“In that way, we’re able to match buyers and sellers using fintech infrastructure.”

Ola says that, when it comes to large banks, they sometimes can’t change their processes. Fintechs, however, are “laser-focused” on trying to improve efficiencies in almost all aspects of the market in which Verto operates. One aspect he mentions is that a core focus to streamline processing is the onboarding process, from documentation through to payment now that the company has entered the South African market.

“We have a routing matrix that chooses the speediest banks and the less cost-intensive banks. This allows the transfer of money much faster than the traditional way some transactions only land the next day if the payment is done after a bank’s cut-off time.

“We’ll be looking at it with a keen eye to see if we can improve the process.”

Real life

Craig Sumption, FD at Hatch South Africa, confirms Tim’s view of the world of FX, adding that there are also soft costs such as time, frustrations, inefficiencies, and the regulatory environment that requires a lot of paperwork to be put together. “If people interpret some of the Reserve Bank regulations differently, they then come back and ask other questions or look for further documentation. That back and forth is really painful.”

Hatch South Africa takes several steps to mitigate these cost implications, says Craig. The first is that it does its best to remain cash-strong as a company, which allows for flexibility.

“No one can ever predict the perfect exchange rate to either pay or receive funds, but you try and manage that as best as possible.”

Should the payment be large, says Craig, there is wiggle room to negotiate with banks in terms of fees and FX rates. “We try and accumulate as many payments as we can, which gives us enough volume to negotiate a slightly better rate.”

Another solution Craig cites is having a database account, which enables it to keep different currencies, trimming the margin when it comes to exchanging funds.

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