How Asian banks can regain the cross-border payments crown

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In the hyper-dynamic Asian financial services market, cross-border payments offer a compelling revenue opportunity, driven by shifting trade flows, expanding e-commerce, and a constructive global regulatory agenda. These are fertile conditions for new entrants, which have built market share by offering highly functional and cost-efficient services. Still, with many technology companies battered by equity market sell-offs, banks now have a chance to leverage their core strengths and changing investor expectations to return to winning ways.

After years in which China was the nexus around which all Asian trade flows circulated, change is afoot. More trade flows are emanating from alternative manufacturing centers such as Cambodia, India, and Vietnam. Vietnam, for example, now hosts about 20 of Apple’s approximately 200 regional suppliers.1 Many US and European companies are experimenting with nearshoring and reshoring, further challenging growth prospects amid a decline in Hong Kong trade flows in 2022.2 And as trade shifts, payments are following suit. Meanwhile, geopolitics and the impacts of the COVID-19 pandemic are creating uncertainty over the future shape of trade across the region.

Competition has intensified due to a fast-expanding regional economy, which has fueled e-commerce and boosted digital and financial inclusion. Digital commerce offers both C2B and B2C marketplace opportunities; cross-border business in both areas is expected to grow by more than 12 to 15 percent a year over the next five years.3 Several geographies in Southeast Asia have become digital-economy hot spots, with Indonesia likely to see growth of 25 percent per year through 2025.4

International bodies are playing a role in disrupting the status quo. At the behest of the G20, the Financial Stability Board has partnered with the Committee on Payments and Market Infrastructures (CPMI) to boost competition in payments. Initiatives include global price targets for retail payments of 1 percent of transaction value and no corridor costs to exceed 3 percent by 2027.5 These are prompting many market participants to reevaluate their margins and cost structures. The Bank for International Settlements, meanwhile, has made proposals to cut costs, increase speed, and expand access to cross-border payments systems.6 In addition, central banks are looking to play a more active role in new payments infrastructures, often leveraging collaborative approaches. One such collaboration is Project Inthanon–LionRock, a joint venture between the Bank of Thailand and Hong Kong Monetary Authority.

In response to these dynamics, Asian banks face the significant task of both protecting existing business and aligning with new areas of opportunity. In pursuing these aims, leading banks have shown that four strategic levers can make a difference. First, small and medium-size enterprises (SMEs) are a key emerging battleground. In this segment, banks are well positioned to leverage their relationships to create opportunities. Second, to reassert their credentials, incumbents can take a use-case approach to developing capabilities. Next, partnerships, M&A, and incubation are viable routes to consolidation and expansion, and to leapfrogging technologically. Acquisition of, or partnership with, fintechs, for example, can give incumbents access to, or a jump-start in, the SME segment. Finally, banks can take the initiative on cutting costs and getting operationally fit—performance areas in which they trail many fintech peers.

On all counts, it is worth remembering that fintech competition is not restricted to a single asset class. As new entrants have shown, payments can be the launchpad for a range of products and services. In fast-growing segments such as consumers and SMEs, what is at stake is not just cross-border payments but the entire banking wallet.

A significant prize with growth potential

Asia accounts for about 35 percent of global payment flows, with pockets of growth fueled by the fast-expanding digital economy—the result of rising affluence and increased penetration supported by easy-to-use, secure payments solutions.7 In 2021, the region accounted for over 40 percent of more than $200 billion of global cross-border payments revenues, according to McKinsey’s Global Payments Map, and we expect the market to grow 6 to 8 percent per year over the next five years, due to the full recovery of in-person travel and continued growth in e-commerce.

The biggest payments segment is business-to-business, which generates revenues at least three times those of consumer-facing activities. B2B was also less affected by COVID-related disruptions than consumer-facing businesses were. Now consumer use cases like travel payments are starting to recover, with leading tourist destinations in Southeast Asia seeing upturns in inbound and outbound travel.8 With inter-and intraregional trade flows, which rebounded in 2021, market participants are competing for a significant and growing prize despite the uncertain outlook amid shifting value chains (see sidebar, “Shifting Asian trade flows”).

An area of significant opportunity is SMEs, which are involved with sizable volumes of cross-border payments (Exhibit 1). By way of illustration, in late 2021, the number of micro, small and medium-size enterprises that created new accounts on Amazon’s Indian marketplace grew by more than 45 percent in one month alone.9 Moreover, many SMEs are expanding internationally, often through online marketplaces. As a result, specialist payments companies, such as Nium and Xendit, are growing fast in the B2B space.

B2B payment flows of small and medium-size enterprises (SMEs) offer lucrative opportunities amid rising competition.

Banks losing market share

As specialist providers and fintechs step into the Asian payments market, they are generating growth at rates often three or four times those of incumbent banks. Established fintechs have seen strong growth even into 2022. Payoneer reported 30 percent year-over-year revenue growth in the third quarter of 2022; Wise reported similar growth figures in June 2022. Smaller players have expanded even faster, posting as much as 200 percent volume gains between 2020 and 2021, while bank revenues remained stable.10

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These trends are reflected globally. In the fast-growing B2B SME segment, nonbank market share has increased from 5 percent in 2014 to 12 percent in 2021 and is expected to rise to 17 percent by 2024 (Exhibit 2). As a rule of thumb, fintech players have gained share by building propositions around four factors: pricing; speed of execution (hours compared with days for banks); convenience, including breadth of products, services (for example, FX), and integration (fully digital and a great user experience); and finally, a digital back end that enables seamless operations. Compliance and know-your-customer (KYC) functions are among the beneficiaries in terms of speed, convenience, and straight-through processing.

Globally, nonbanks are gaining share in the B2B SME segment and outperforming banks.

B2B-focused fintechs are also adding value in areas such as front to back platforms and scale. Many have broadened their corridor coverage to new currency pairs and enabled easy setup for multicurrency accounts. Several offer FX risk hedging opportunities and self-service platforms for SMEs, while others are working to enable easier integration with SME accounting software.

As a result of these innovations, many fintechs are moving beyond payments to target the whole customer wallet, including in trade finance, treasury, and foreign-exchange (FX) risk management. They often provide these services through integrated platforms and increasingly include value-adds such as checkout lending and merchant-of-record services. Some support other front-end providers through API connections and are replacing relationship-manager-driven calling approaches with digital lead-generation tools focused on customers with complex FX needs. The impact is that companies are more willing to use nonbanks across the B2B procurement-to-payment journey, suggesting a possible future in which fintechs, rather than incumbents, control the primary customer relationship.

Complexity and disruption

Disruption in the Asian cross-border payments market is most powerfully illustrated by the emergence of numerous fintechs, which are bringing together capabilities across payments and transaction banking—including FX currency, trade, and treasury services. Many have also added value through services focused on FX risk management, cloud-native technology platforms, and API integration. As a result of intense competition, a range of new provider models are emerging:

  1. Next-generation transaction banking and clearing providers. These often use a cloud-based tech stack and hub organizational structure to offer end-to-end services and provide API-based integration. However, they rely on large banks to serve the back end and offer multi-geography reach. The group also includes fast-growing fintech players that are expanding to offer more integrated solutions.
  2. Tier 1 bank scale-ups. These have developed offerings similar to those of next-gen players. They offer competitive pricing on processing and FX and have global reach, as well as proprietary account infrastructure, enabling them to offer competitively priced on-us transactions among their own accounts across countries.
  3. Open industry platforms that rely on blockchain to create distributed exchange of value. Some banks are creating blockchain-based ledgers to support trusted real-time transactions without the need for intermediaries, while other distributed-ledger players operate among banks.

Given trade, regulatory, and digital dynamics, as well as a rise in intraregional M&A, the current period presents both risk and opportunities. With the geopolitical climate in flux, Asian banks should make careful evaluations of potential growth areas before moving to develop a concrete strategic response.

How can banks respond?

Disruption in cross-border payments markets has left some banks struggling to keep up. However, it has also created opportunities. Banks’ core strengths, including extensive branch and correspondent banking networks, support relationships and servicing in key flow corridors (Exhibit 3). And their large consumer and SME customer bases position banks to launch new services. They also have a cost advantage in interbank markets, as well as extensive risk and compliance infrastructures, implying a lower marginal cost of risk. If banks can compete with fintechs on price, user experience, and speed, there is limited incentive for customers to look elsewhere.

Several strengths give banks the potential to differentiate themselves from fintechs.

Over the coming years, additional advantages may emerge. Central bank digital currencies (CBDCs) and interoperability of payment systems offer potential avenues for exploration as banks consider how the payments landscape may change.

Still, to make the most of the opportunity, banks need to upgrade their service offerings and reach out to fast-growing customer segments. The good news is that recent equity market disruptions—in particular, the impacts on tech stocks—provide a window of opportunity to outcompete on investment or pursue M&A. We see potential in four key areas: the SME market, growth use cases, M&A and partnerships, and improved operating models.

Building SME-centric solutions

While most payments volumes emanate from large corporate clients, opportunities are often located among fast-growing SMEs, many of which are expanding internationally. Moreover, there are significant opportunities among midsize corporates and companies operating in the digital economy, especially in certain regions, including Southeast Asia.

To respond to rising competition, banks can either focus on use-case-specific solutions with stand-alone sales forces or adopt a bankwide mandate to develop an integrated platform and organization model (one P&L) that serves use cases across the whole bank, including products, people, and technology. In all cases, however, there is an imperative to prioritize convenience and value-added services, including digital journeys that seamlessly embed foreign-exchange and cross-border payments as core elements of transaction banking (Exhibit 4). Priorities should include upskilling SME relationship managers (RMs), so they can take a consultative approach (more advisory than sales), and upgrading data and analytics to support reconciliation and FX risk management. Some banks may also need to invest in dynamic pricing engines to enable contextual pricing. Finally, new solutions need to be integrated into both client software platforms and online portals for centralized visibility.

Foreign-exchange and cross-border payments should be seamlessly embedded in client transaction banking platforms.

Focusing on growth use cases

A tried-and-tested approach to building capabilities is to focus on use cases. This helps organizations address customers’ increasing demand for solutions adapted to their specific contexts. For example, pension-related payments often prioritize optionality and lower cost over speed.

Banks should identify use cases that drive the total opportunity and growth, including some focused on the rapidly growing digital economy. The identification will be based on an assessment of differentiated buying factors across each use case, indexed to the feasibility of value capture—which, in turn, will be a function of the strength of the customer relationship, the bank’s capabilities, the intensity of competition, and the structural advantages of the bank’s own businesses and those of competitors. Feasibility should be weighed against the potential value at stake to categorize use cases as high-, medium-, and low-priority focus areas.

Leading banks have shown that capturing share requires setting an aspiration and then defining an appropriate value proposition aligned with end-customer needs. These needs may differ widely. C2C customers, for example, may focus on price and ease of use, while payments for real estate may prioritize safety and trust along with an actual RM supporting them throughout the process. The value proposition will be informed by underlying economics, customer behavior, and competitive dynamics.

Banks must decide whether they want to go granular and pick individual use cases or create an organization-wide mandate for a new cross-border platform across business lines. The latter can be effective at ensuring the ability to invest across the bank, rather than having individual divisions competing for budget and attention.

Banks can introduce new services through a unified cross-border strategy that brings together customer segments (for example, retail, corporate, high-net-worth individuals) supported by a core back-end platform offering real-time FX rates and best routing for each payment. Or they can instead opt for a business-line focus.

Embracing partnerships and M&A

If you can’t beat them, join them. As banks seek to rationalize their cost bases and serve SMEs better, they may consider partnerships or acquisitions (see sidebar, “Build vs. buy vs. partner”). An example from the payments would be Visa’s purchase of Earthport to expand into noncard account-to-account payments.

Potentially rich areas for collaboration are with banking-as-a-service providers and with clearing banks, which can provide access to specific corridors. Through such collaborations—and by leveraging existing solutions (for example, SWIFT gpi) and other utility providers—banks can offer cost-effective cross-border payments services with a limited correspondent network.

Reviewing the operating model

Banks looking to provide cross-border payments need to ensure that their operational capabilities are sufficient to achieve their service ambitions. Priority initiatives should include optimizing cost to serve, revamping digital customer journeys, creating common capabilities across use cases, expanding valued-added services including notifications, and refining FX risk management capabilities.

Recent McKinsey benchmarks underscore the need for regional banks to get a handle on costs (Exhibit 5). Global benchmarks indicate that regional banks relying on correspondent banks to facilitate payments have an average cost to serve 50 percent higher than for fintechs, and they are often saddled with trapped nostro—vostro liquidity across institutions they seldom use.11 Many also face high costs in claims, exceptions, and treasury operations. According to some estimates, globally, as much as 5 to 10 percent of international payments across all banks are subject to additional sanctions-related review, with the vast majority ending up as false positives.

Small and regional banks incur overhead across payments, driving up their cost to income for cross-border payments.

Banks need to make the back end more competitive. This will include rationalizing correspondent banking relationships, streamlining operations, automating manual processes (including automated level 2 checks for sanctions and Office of Foreign Assets Control anti-money-laundering hits), and outsourcing in areas such as exception management to drive more efficient straight-through processing. Banks should also make efforts to net out and batch payments and to identify the optimal route for each payment—passing through the minimum number of banks to get to their destinations.

In a period of significant disruption, Asia’s banks have a shot at regaining share of the cross-border payments market. However, amid a strong regulatory push for better customer services, time is of the essence.

Banks in the region should act on four primary fronts. First, they should expand their presence in the key SME battleground, where significant cross-border opportunities are associated with the growth of regional companies and digital marketplaces. This will also protect their FX and product wallets. Second, they should decide whether to invest in either use cases or organization-wide strategies. In addition, they should remain open to partnerships and M&A, and to leveraging relationships to offer more appealing options across customer segments. Finally, they should put their internal houses in order, by investing in automation and instant payments across borders and considering the potential role of digital currencies. Through these steps, a strategic lens, and a steely focus on execution, they can command a position at the payments table.

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