NAVIGATING THE WORLDOF CROSSBORDER PAYMENTS Top Challenges Facing Businesses Initiating Global Mass Payments

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The multi-trillion dollar a year cross-border payment industry is expanding at an annual rate of more than 10 percent and is in the process of fundamental change. The industry previously dominated by traditional correspondent banking relationships is shifting as more nimble Payment Service Providers enter the market with innovative alternative payment methods that compete with the traditional offerings on both cost and quality of service and address many of the major challenges initiators are facing.

This white paper is intended for companies that need to initiate payments in freelance, royalty, marketplace, e-commerce and other business scenarios that are experiencing the pain inherent in traditional cross-border payment methods. This is also a resource for those looking to expand their business from domestic to international.

Alternative payment methods are reviewed in the light of how each method resolves specific initiator problems, and the applicability of each method is discussed for different payment scenarios. A comparison table of the various payment methods is presented as well as a checklist of best practices recommended for initiators.

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Traditional Cross-Border Payments Payment Systems Domestic Payments Correspondent Banking SWIFT Segmentation

Challenges Facing Initiators

Payment Service Providers

Alternative Payment Methods Debit Card Low Value Payment Network (LVPN) Electronic Wallet

Comparison Chart

Recommended Best Practices

About Payoneer

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20-21

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CONTENTS

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Many of the challenges facing payment initiators today are a direct result of the way that traditional cross-border payments work. In this section we provide a brief overview of traditional cross-border payments in order to understand the issues they introduce and how alternative payment methods address many of these challenges.

TRADITIONALCROSSBORDER PAYMENTS

National electronic payment systems are typically maintained and controlled by the Central Bank of a country. The Central Bank makes adjustments to the electronic accounts of participating banks without the physical exchange of money. Central banks typically deploy:

Payment systems employ cash substitutes and comprise institutions, instruments, procedures and technology to effect the transfer of monetary value between parties. Traditional payment systems are negotiable instruments such as checks and letters of credit. Electronic payment systems span debit and credit cards, electronic funds transfers, direct debits Internet banking and electronic wallets.

Real-time gross settlement (RTGS) systems that support low-volume, high-value transactions between banks. Money is transferred from one bank to another in "real time" and on a "gross" basis. Once processed, payments are final and irrevocable.

Net settlement systems for supporting high-volume, low-value transactions between businesses and individuals. Net settlement systems settle transactions at the end of each business day and are an alternative to RTGS systems.

PAYM E N T S YS T E M S

Traditional Cross-Border Payments 5

Traditional Cross-Border Payments 6

Domestic payments are typically effected through domestic net settlement payment systems within each country. Payment systems depend on both the payer’s bank and the beneficiary’s bank belonging to the same system. Domestic net settlement payment systems are characterized by relatively low transaction costs and a short time period required for funds to clear.

Domestic payment systems use common message standards, facilitating the removal of paper and manual processes by businesses, promoting straight-through processing (STP). STP enables payment instructions to be generated electronically as part of the business process, passed securely, efficiently and cost-effectively to banks, and matched and reconciled automatically via a universal reference number within invoicing, accounts payable, accounts receivable and other systems.

D O M E S T I C PAYM E N TS

PaymentInitiator

InitiatorBank

Bene�ciaryBank

PaymentSystem

Bene�ciary

Domestic payment systems are based on local laws and practices, and participation is typically restricted to existing domestic banking and financial structures.

Cross-border payments are complex because national payments systems do not generally support direct participation by banks in other countries. In cases where one bank does not belong to the payment system, a domestic correspondent bank is used to act on its behalf.

Most of the world’s major banks maintain correspondent banking relationships with local banks in each of the important foreign cities of the world. At least 80 percent of bank-to-bank cross-border payments currently take place through traditional correspondent banking arrangements.

International correspondent banking is a large decentralized network. Each bank makes a decision as to how it wants to handle cross-border payments for its clients. These decisions can be different for paying and receiving funds, and for different countries or categories of payments. Each bank makes an independent decision about how to send, receive and settle payments.

CORRESPONDENT BANKING

PaymentInitiator

InitiatorBank

CorrespondentBank

PaymentSystem

CorrespondentBank

Bene�ciaryBank

PaymentSystem

Bene�ciary

Traditional Cross-Border Payments 77

Wire is the de facto standard for settling cross-border payments by correspondent banks. In many cases, this is overkill for low-value cross-border supplier payments that do not warrant the high security

and immediacy of payment qualities that RTGS systems provide.

Society for Worldwide Interbank Financial Telecommunications (SWIFT) is an industry-owned limited liability cooperative that supplies secure messaging services and interface software for financial transactions to more than 7,650 banks, securities brokers and investment managers in more than 200 countries.

The SWIFT communication system is what makes it possible for the complex system of correspondent banking to work. SWIFT is not a payments system, but rather a standardized messaging system that banks around the world use to tell each other what they have done and what they want done with different types of transactions. SWIFT provides the message codes and protocols that help a receiving Bank understand the transaction that a sending Bank has sent it, so that the receiving Bank can act accordingly.

SWIFT

SWIFT provides the messaging infrastructure for most electronic cross-border payments today.

Traditional Cross-Border Payments 8

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Banks typically classify the cross-border payment landscape into four broad product segments, each with its own competitive landscape, fee structure and independent delivery mechanisms. The chart below illustrates this segmentation.

SEGMENTATION

Supplier B2B payments are made when one enterprise pays another.

E-commerce purchases include physical goods as well as travel, entertainment and other digital goods.

Payroll, retirement and benefits payments are made by enterprises to counterparties in other countries.

International remittances are payments made by foreign workers to family members in home countries.

This white paper addresses the rightmost quadrants of the diagram representing cross-border payments initiated by businesses.

Individual Business

Indivi

dual

Busin

ess

Remittances

e-CommercePurchaces

BENE

FICIA

RY

PAYMENT INITIATOR

Payout

SupplierPayments

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The decentralized, non-standardized international correspondent banking network has inherent problems that can cause pain for payment participants. Some of the challenges facing initiators of cross-border payments include:

CHALLENGESFACING INITIATORS2

Absence of direct relationships with downstream banks. If a problem occurs (for example, a payment is not received), the initiator may not be able to trace the transaction quickly or reliably.

Time required for a transaction to clear. Cross-border transactions typically take days or weeks to clear, and the period is often not known by the parties in advance.

Limited data transport capabilities and lack of standards. With multiple intermediaries involved, it may not be possible to reliably carry data through to the receiving party, preventing reconciliation, payment tracking and STP. Cost. With multiple intermediaries involved, each charging a fee and/or taking some share of the foreign exchange revenue, these transactions can be expensive for participants. Often, end users do not know whether costs are also assessed to their counterparties. Price-based competition between banks is limited to a small number of corridors between specific countries. The World Bank estimates that globally, sending remittances costs an average of 7.99 % of the amount sent.

Traditional Cross-Border Payments

2Challenges Facing Initiators

5 Most Costly Corridors

South Africa > Malawi

South Africa > Zambia

Singapore > Pakistan

South Africa > Botswana

South Africa > Mozambique

Source: http://remittanceprices.worldbank.org/enAverage total cost includes the transaction fee and exchange rate margin.

14.88

12.92

12.31

12.26

12.25

Singapore > Bangladesh

Spain > Dominican Republic

Saudi Arabia > Yemen

UAE > Pakistan

UAE > Yemen

0.79

1.23

1.50

1.52

1.55

Average Cost in USD 5 Least Costly Corridors Average Cost in USD

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12Challenges Facing Initiators

Initiators perceive existing cross-border payments services as being cumbersome,

error prone and expensive.

Lack of transparency relating to currency conversions that are implicit in the transaction. It is often unclear which party is responsible for exchanging currency and what margin is being added above the inter-bank rate.

Compliance with regional regulatory environments and KYC (Know Your Customer) practices. Countries impose different regulations for preventing money laundering, controlling currency flows and enforcing sanction regimes. Regulations impact the type and size of transactions that are permitted as well as the optimal method of payment to use. Country specific limitations need to be respected in order to avoid failed disbursements.

Lack of end-to-end customer support for tracking exceptions and addressing operational issues encountered by beneficiaries that speak multiple languages

Regional and bene�ciary preferences and practices will also impact the optimal choice of payment method. For example: Beneficiaries living in un-banked regions prefer prepaid cards. Beneficiaries living in countries with strict currency controls prefer LVPN to avoid the high taxation on international WIRE transfers. Freelancers contracting out work will prefer electronic wallets as they provide a closed loop stored value system allowing them to easily receive payments as well as pay sub-contractors.

In correspondent banking, both paying and receiving parties deal directly with their banks. Payment Service Providers (PSPs) provide alternative services for handling cross-border payments for payers and bene�ciaries. These services e�ect the payment transaction for one or both end parties through proprietary systems and networks. PSPs settle transactions �nancially by dealing with correspondent banks on a net basis.

Several long-term trends contributing to fundamental change in the cross-border payments landscape are being led by PSPs. Innovative new payment service o�erings by PSPs address many of the challenges arising from correspondent banking.

PAYMENTSERVICE PROVIDERS3

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Globalization is driving corporations to transact more frequently across borders.

Online purchasing continues to grow By large enterprises as part of automated procurement systems By smaller enterprises purchasing directlyMultinational banks and corporations are expandingOperational efficiencies are being sought through outsourcingGrowth of non-bank payment service providers: Payments Institutions (PIs) within the Payment Services Directive of the European Commission Money Service Businesses (MSBs) regulated by state authorities in the U.S.

3KEY TRENDS INCLUDE:

FORECASTED GROWTH INVOLUMEOF CROSSBORDER PAYMENTS ($T)

Developed Countries

2010

2020

Emerging Markets

Source: Boston Consulting Group:http://www.bcg.com/documents/file71194.pdf

7.5

6.8

37.1

13.9

Payment Service Providers

Traditional Cross-Border Payments

NEW SERVICES INTRODUCEDBY PSPS FALL INTO SEVERAL CATEGORIES:

Proprietary low-value payments networks that connect directly into the automated low-value clearing house systems in different target countries. Global debit card networks. Card networks including MasterCard, Visa, and American Express create the effect of seamless cross-border payments transactions. The card networks handle foreign exchange conversion and settlement among participating banks, which are required to follow the networks’ operating rules.

FX brokers. In many countries, these brokers supply the needs of high-volume cross-border payment initiators, bundling management of foreign exchange conversion risk with the mechanics of payments. International money remitters. Companies such as Travelex and Western Union offer branded payments services to consumers and enterprises, usually with a variety of “money in” and “money out” options.Online wallet services such as PayPal and Moneybookers are similar to the international money remitters, but focus on online-originated transactions.

Traditional Cross-Border Payments 15Payment Service Providers

PSPs offer initiators alternative methods for paying beneficiaries across borders.

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ALTERNATIVEPAYMENT METHODS 4

In this scenario cross-border payments are handled by a payment system that is owned and regulated by one of the major card networks. The payment system facilitates daily net settlement of funds between participants, addresses the data transport requirements accompanying the transaction, performs any currency conversions that may be required and arbitrates if disputes arise between parties.

The PSP maintains a global card issuing relationship with one of the card brands.

The initiator refers beneficiaries to apply for debit cards from the PSP.

The initiator transfers funds to the PSP and instructs the PSP to load funds to beneficiaries’ cards.

The beneficiary withdraws funds at an ATM in his region that accepts the card brand.

Debit cards are most appropriate for disbursing high volumes of recurring low value cross-border payments to beneficiaries in a wide geographic area.

D E B I T C A R D

4 PaymentInitiator

InitiatorBank

ATM Bene�ciary

PaymentSystem

PSP

Traditional Cross-Border Payments Traditional Cross-Border Payments Alternative Payment Methods 17

Local low-value payment networks act as gateways facilitating the absorption of cross-border payments into a particular region’s low-value payment system. In addition, several PSPs operate at a global level, maintaining accounts and holding balances in multiple countries and currencies to facilitate cross-border payments into different regions by their customers. These PSPs typically also provide wire transfers to supplement their offering and provide wider global coverage.

The PSP maintains a bank account with adequate credit balance in the beneficiary’s country. The initiator transfers funds to the PSP and instructs the PSP to remit funds to the beneficiary’s bank account. The PSP converts funds if necessary and submits an instruction via a local bank account into the regional payment system to transfer funds from its locally-held bank balance to the beneficiary’s bank account.

The beneficiary receives funds into his bank account as if it were a local transfer.

The PSP tops up balances in its local bank accounts as required.

LOWVALUE PAYMENT NETWORK (LVPN)

PaymentInitiator

InitiatorBank

Local BankAccount

Bene�ciaryPaymentSystem

PSP

Traditional Cross-Border Payments Traditional Cross-Border Payments Alternative Payment Methods 18

Electronic wallet services facilitate the initiation of payments and money transfers via the Internet. PSPs providing e-wallet services allow their customers to send, receive and hold funds in different currencies worldwide and to make financial transactions online by transferring funds electronically between individuals and businesses.

A payment initiator typically loads funds into his e-wallet account via an online credit card transaction. Depending on service provider and location of the initiator, direct transfer from the initiator’s bank account via a low-value payment system may also be supported.Initiator sends an instruction to the PSP managed payment system to transfer funds from his e-wallet account into the beneficiary’s e-wallet account.In cases where the initiator and beneficiary reside in different countries, the PSP facilitates the cross-border transaction and may convert currency if the e-wallet accounts of the participants are held in different currencies.In cases where the beneficiary resides in a country supported by the PSP for withdrawal of funds, he may be able to withdraw funds directly to his local bank account. An additional currency conversion may be incurred at this point.Beneficiaries residing in countries in which the PSP does not support withdrawal to local bank accounts are restricted to spending funds where the e-wallet is accepted.

ELECTRONIC WALLET

Payment Initiator

Bene�ciary

Payment SystemeWallet

Traditional Cross-Border Payments Traditional Cross-Border Payments Alternative Payment Methods

eWallet

Initiator Bank

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COMPARISON CHART5

Comparison Chart

5Cost per transaction

Appropriate transaction value

Time required for funds to clear

Tracking payment progress

Reconciliation tools

Where is currency converted

Cost of currency conversion

Researching exceptions

Customer support

Geographic reach

Finality

Settlement risk

Security

Automation friendly

High

High

Slow

No

No

Beneficiary Bank

High

Difficult

Weak

Worldwide

Yes

Low

High

No

Medium

Up To $10k

Fast

Yes

Yes

Card Network

Fair

Easy

Strong

Worldwide

No

Low

Low

Yes

Low

Low-high

Fast

Partial

Partial

Initiator/PSP

Negotiable

Possible

Weak

Limited

Yes

High

Low

Yes

Low

Low

Fast

Yes

Yes

PSP

High

Easy

Strong

Limited

No

High

Low

Yes

Wire Debit Card LVPN eWallet

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RECOMMENDEDBEST PRACTICES 6

Understand how your current cross-border payments are being made, by category of payment; determine if higher-priced methods are being used for transactions that do not require these features.

Keep in mind that each payment method has a unique set of advantages and disadvantages for payers and beneficiaries that make it more or less appropriate for the type and geographic profile of the payments initiated by your business. 6The profile of payments initiated by your company may warrant using different payment methods. To retain standard interfaces for initiation and reporting, it is recommended to use a single provider that can support all payment methods and geographies that are optimal for your payments.

Investigate means of benchmarking FX rates that can be embedded at the time of payment.

Recommended Best Practices 23

When choosing a payment provider, verify that they provide capabilities and support payment methods that best serve your specific cross-border payment requirements. Factors for consideration should include:

Recommended Best Practices

Geographic and currency reach

Category of payments

Volume and average value of payments

Time required for funds to clear

Finality of transactions

Multilingual customer support for handling

beneficiary enquiries

Reporting and reconciliation capabilities

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Demand updates from banks and payments providers on availability of net settlement based

solutions for cross-border payments.

Payoneer operates a state-of-the-art global payout platform, networking with major banks and Payment Service Providers worldwide to offer a complete range of payment methods to its customers.

Payoneer’s business customers enjoy the convenience and benefits of using a single unified interface for initiating, tracking and reconciling payments regardless of beneficiary location, payment method or currency.

Payoneer’s service enables beneficiaries worldwide to quickly, easily and cost-effectively receive funds no matter where they are located. For payers and payees alike, Payoneer removes geographical borders and ensures smooth, cost-effective, secure transactions.

About Payoneer 25

Complete suite for managing global payouts on a massive scale

Powerful platform powers mass payments to 200+ countries in 100+ currencies

Send funds globally within minutes to your beneficiaries through optimal payment methods including local bank transfers, online account (eWallet) and Prepaid MasterCard® card

Rich integration options and full automation using Payoneer’s API

24/7 customer support for your beneficiaries in 35 languages

Dedicated account management every step of the way

ABOUT PAYONEER'S MASS PAYOUT SERVICES

Payoneer empowers global commerce by connecting businesses, professionals, countries and currencies with its innovative cross-border payments platform. In today’s borderless digital world, Payoneer enables millions of businesses and professionals from more than 200 countries to reach new audiences by facilitating seamless, cross-border payments. Thousands of leading corporations including Google, Airbnb, Elance-oDesk and Getty Images rely on Payoneer’s mass payout services.

With Payoneer’s fast, flexible, secure and low-cost solutions, businesses and professionals in both developed and emerging markets can now pay and get paid globally as easily as they do locally. Founded in 2005 and based in New York, Payoneer is venture-backed, profitable and ranked in the top 100 of Inc. 5000’s Financial Services companies.

By sending cross-border payments through Payoneer, your business will immediately benefit from a comprehensive choice of payment methods and wide geographical coverage ensuing from the network of top tier payment providers that Payoneer has partnered with worldwide. Payoneer’s payment-savvy Account Managers can assist your business to apply payment methods that are most applicable for your business scenarios and geographical requirements, while ensuring low transaction costs, fast clearance, strong security, flexible tracking and superior multilingual customer services.

PAYONEER’S MASS PAYOUT OFFERING =

PAINLESS CROSSBORDER PAYMENTS

ABOUT PAYONEER

Traditional Cross-Border Payments Traditional Cross-Border Payments About Payoneer 26

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