Industry intelligence: How neobanks can use cross-currency transactions to boost revenue

Thought Leadership· 4min

October 3, 2022

Today, in order to stand out and attract new customers, neobanks should look to create distinct features and services that set them apart from their competitors. One such area is cross-currency transactions, where there looks to be a golden opportunity for neobanks to boost their revenue and consolidate their position in the market.

Cross-currency opportunities for neobanks

According to projections from the Bank of England the value of cross-border payments is estimated to increase from almost $150 trillion in 2017 to over $250 trillion by 2027, equating to a rise of over $100 trillion in just 10 years.

Therefore, there is a big opportunity for neobanks to capitalise on this growing market. Not only can they potentially create a differentiator that sets them apart from the competition with fully managed cross-currency transactional services, but by approaching it in the right way, they can also make these services very profitable. 

The challenges of the cross-currency opportunity

However, there are good reasons why few neobanks — or some traditional banks for that matter — have fully developed their international offering. Building out a cross-currency transaction mechanism is a complex, expensive and strenuous endeavour

The process of converting from one currency to another and then delivering it into the appropriate country in a timely, traceable and cost-effective way is actually very complicated and backed by multiple systems, services, products, partners and ecosystems in order to do so. 

Liquidity providers, SWIFT, ACH as well as trading systems and execution systems all have to interact seamlessly to perform this process. FX risk management can unnecessarily tie up liquidity better used elsewhere.

Choosing the right partners

Forming a strong partnership would be a sensible route for an easy access model for any neobank that wants to exploit the opportunity that cross-currency transactions present.

Neobanks generally focus on their domestic market so they will need to find a partner that gives them easy access for their customers to pay in multiple countries and currencies globally, all with a simple funding model in their domestic currency which removes the need for management of multiple currencies in their own treasury department. Trying to build this all for themselves would take a significant amount of time, effort and experience that may not be practical.

How to deal with US clearing 

Offering a service that gives customers access to the Eurozone and the rest of Europe is one thing, but the US is a whole different kettle of fish. One of the biggest problems for cross-border business is the ability to clear in the US.

The obvious route to the US is working with a partner with established cross-border and currency capabilities in the country. However, with the introduction of new faster payment systems in the US such as FedNow and TCH combined – and also with the ability to democratise access to the clearing houses in the US - there is a huge opportunity for banks overseas to gain access to schemes more efficiently or even directly. 

 

Written by

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Andrew Frost Head of Cross Currency - Specialist Sales

Andrew is Head of Cross Currency - Specialist Sales at Form3, based in the UK.