The rapid pace of innovation in cross-border payments continues with new technologies and partnerships being regularly announced. Despite these advancements, commercial users have been slow to adopt these solutions, creating an opportunity for financial institutions to offer tailored guidance.
Weathering the Tariff Storm
Tariffs are reshaping supply chains globally, prompting businesses to reconsider their relationships with suppliers from overseas. For instance, a U.S. company previously relying on its Canadian partner might now opt for a domestic supplier due to increased costs of up to 10%.
Hugh Thomas, Lead Commercial Payments Analyst at Javelin Strategy & Research, highlights that different industries are affected by tariffs in varying degrees:
In the U.S. oil and gas industry, about 30% of inputs come from Canada, making it challenging to shift supplier bases significantly due to specialized supply chains designed for certain types of crude.
The grocery sector, however, might face less resistance in switching suppliers since much of its produce is sourced from Mexico, allowing companies more flexibility to adjust their procurement strategies.
Another factor to consider is how many days of inventory a company holds. In the construction industry, for example, top 10% input sources are cross-border, yet these companies often manage around 130 days’ worth of supplies on hand.
Thomas suggests that if tariffs prove temporary and can be negotiated away on a case-by-case basis by President Trump, providers should identify key industries and support them through the transition.
Making the Donuts
If tariffs persist, financial institutions may see a decline in cross-border payment revenues. To adapt, they could consider new strategies such as:
- Offering escrow solutions where initial payments are conditional on receiving goods.
- Migrating customers to commercial cards to save on Know Your Supplier (KYS) costs and gain potential card provider rebates.
The inefficiencies in cross-border payments, including high transaction fees, slow settlement times, fraud, currency conversions, and regulatory barriers, have prompted the development of numerous systems aimed at making these transactions easier, cheaper, more automated, and transparent. These include programs managed by credit card networks and projects driven by central banks consortia.
Some argue that connecting real-time payment systems globally might offer an effective cross-border solution. Digital assets like cryptocurrency and stablecoins are also seen as ideal due to their decentralized nature and blockchain-based security features.
Despite the benefits offered by these technologies, widespread implementation remains slow. Thomas describes it as glacial,” suggesting that financial services providers must provide impactful solutions without requiring extensive customization from customers.
Two Forces Driving a Reckoning
The current situation presents both challenges and opportunities for financial institutions. Businesses are reevaluating their supply chains amid persistent tariffs, leading to a broader push towards globalization despite increased protectionism. This unprecedented shift forces companies to reconsider how they conduct business.
Financial service providers can capitalize on this by identifying vital use cases for cross-border solutions and delivering products that address immediate needs. Thomas believes these crisis moments can drive significant changes in processes and technologies, potentially leading to a reevaluation of traditional methods.
The confluence of supply chain reevaluations with the ongoing push towards globalization means there is a window of opportunity for financial institutions to offer innovative cross-border solutions tailored to meet evolving business needs.
