From a regulatory compliance perspective the Open Banking PIS functionality of the Write APIs needs to be extended to enable PISPs to initiate international payments from online payment accounts.
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The Open Banking API’s v1.1 covered single immediate payments (Write functionality) where a PSU can initiate, through a PISP, a one off payment to be initiated immediately from their PCA/BCA account held with an ASPSP.
From a regulatory compliance perspective the Open Banking PIS functionality of the Write APIs needs to be extended to enable PISPs to initiate international payments from online payment accounts, provided and to the extent, that this functionality is available to the PSU, on their ASPSPs’ online payment account, in alignment with the requirements of PSD2.
The international payments to be covered by the new PIS functionality include:
Note: For detailed list of payment types, please refer to section 10.11 of the Appendix.
This paper defines the overall proposition to support this extended API functionality, so that participants (ASPSPs and TPPs) and stakeholders (FCA, HMT, CMA) have a common understanding about what is and is not in scope, and how this proposition will support regulatory requirements and key use cases.
For actual roadmap item definition and problem statement, please refer to sections 10.3 and 10.4 of the Appendix.
Macroeconomic factors influence trade between countries and this can have direct impact on international payments. While presenting steady growth between 2010 and 2014, international payments declined in 2015 due to lower international trade, caused by slow recovery in Europe and slowdown in China. The international payments market in 2015 was estimated to have a transaction volume of US$22 trillion and it is expected to grow by approximately 4.6% over the next five years. Emerging markets are showing higher growth rate compared to mature markets. (EY, #payments, insights, opinions. Volume 16, 2017)There are 4 main categories of international payments:
a) Supplier or Business to business (B2B): These are made when one enterprise pays another. The payments may be made to regular, well-known parties or to occasional or one-time suppliers. In these transactions, the supplier frequently extends credit to the buyer—or may demand a letter of credit or other form of credit assurance. (Glenbrook Partners, Cross-Border Payments Perspectives, 2011). B2B has the highest transaction value of the four segments with US$21 trillion in 2015 (>95% of total). Growth in this segment is primarily driven by growth in small and medium sized enterprises (SMEs). Transaction sizes for these SMEs tend to be lower in value resulting in slow growth of transaction value in the B2B segment. However, transaction volumes have increased and have in turn demonstrated strong growth (EY, #payments, insights, opinions. Volume 16, 2017).
For UK SMEs the following hold: (Accourt, Bank charges on international payments, An analysis of the UK SME market)
b) eCommerce purchasing / Consumer to business (C2B): These include not only the purchase of physical goods (with all of the challenges of shipping, customs, and taxation) but also the travel and entertainment, digital services, and digital goods domains (Glenbrook Partners, Cross-Border Payments Perspectives, 2011).
c) Payroll, retirement, and benefits payments / Business to consumer (B2C): These are made by enterprises to counterparties in other countries. The payees are most often individuals, but this category can also include various B2B-like payments to licensees, franchise participants, and digital contract laborers (Glenbrook Partners, Cross-Border Payments Perspectives, 2011).
d) International remittances / Consumer to consumer (P2P): These are payments made by foreign workers to family members in home countries. As any given worker is apt to make payments to only one country, this domain is measured by country pairs, or “corridors.” (Glenbrook Partners, Cross-Border Payments Perspectives, 2011)
The detailed market analysis can be found in section 10.6 of the Appendix.
OBIE has conducted both primary customer research and secondary market research to identify the existing market offerings and requirements around international payments. In addition, a series of market engagement workshops are being conducted to validate the requirements, especially from the TPP perspective. The following high level use cases that require international payments capabilities were identified. Understanding these allows OBIE to identify the key requirements needed to deliver these use cases.
Open Banking has conducted quantitative and qualitative research to gauge the customer feedback on a few payment journeys for this proposition and to identify areas of improvement. The customer research outcome can be found in section 10.7 of the Appendix. 2 prototypes developed to demonstrate the expected high level user journeys. These can be found in section 10.6 of the Appendix.
(a) what ASPSPs provide to PSUs
(b) what is accessible to ASPSP at this same point in time
(c) what PISPs require in order to support their regulated businesses (optional).
For detailed Regulatory references, please refer to section 10.2 of the Appendix.
Key evaluation criteria that OBIE have applied for this proposition (that respect the objectives of meeting regulatory requirements as well as being effective and proportionate)
OBIE understands that the international payments proposition may need to support the following functionality:
The following are not considered to be included in the requirements for this specific proposition:
For detailed list of Product Requirements, please refer to section 10.1 of the Appendix.
The following metrics will be required to measure the adoption of the international payments proposition:
These are stated as requirements of the OBIE solution to enable implementers to meet regulatory compliance and/or customer use cases.
Requirements marked as ‘M'(Must) are in scope of the OBIE solution. All other requirements are listed for future consideration. The final column indicates whether each requirement is ‘mandatory’, ‘conditional’ or ‘optional’ for implementation by ASPSPs and/or TPPs. These terms are defined here: Categorisation of requirements for standards and implementation.
The following regulatory references are relevant when considering the scope of item P10:
“In order to meet this requirement, we expect ASPSPs to allow each customer to initiate a payment via a PISP to the same level of functionality that is available to a customer if they initiate a payment directly with their ASPSP. ASPSPs are not, however, required to provide functionality via a PISP that exceeds the functionality they offer to their customers directly”OBIE View:Scope of P10 should create the functionality to enable a PISP, with the PSU’s consent, to request for an ASPSP to execute an international payment order, if and to the extent, this functionality is available to the PSU on their online payment account.
“Payment initiation service providers shall provide account servicing payment service providers with the same information as requested from the payment service user when initiating the payment transaction directly.”OBIE’s View:Under RTS Art 36(4), there is requirement for PISP to provide ASPSP the same information as requested from the PSU when initiating the payment transaction directly. This will require PISP to provide ASPSP with specific information to execute an international payment order, as required from the PSU when directly initiating an international payment from an online, payment account.This information can differ depending on the type of international payment. OBIE will be dependent on ASPSPs to specify their particular information requirements to ensure the appropriate API functionality is built to facilitate this.
Information requirements for both ASPSPs and PISPs applicable to all PISP initiated payments PSR, Reg 69(2)(b):“immediately after receipt of the payment order from the payment initiation service provider, provide or make available to the payment initiation service provider all information on the initiation of the payment transaction and all information accessible to the account servicing payment service provider regarding the execution of the payment transaction”RTS Article 36(1)(b):“Account servicing payment service providers shall comply with each of the following requirements… they shall, immediately after receipt of the payment order, provide payment initiation service providers with the same information on the initiation and execution of the payment transaction provided or made available to the payment service user when the transaction is initiated directly by the latter”OBIE’s View:Under the PSR, Regulation 69(2)(b) and RTS Article 36(1)(b), the information requirements regarding the status of international payments will need to consider the “information on the initiation and execution” available immediately after receipt of the payment order. This will include:
Any status information requirements that fall outside the scope of (a)– (c) above, will form part of the P9: Status of Payment Evaluation.
(1) The payer’s payment service provider must, immediately after receipt of the payment order, provide or make available to the payer the information specified in paragraph (2) in relation to the service to be provided by the payer’s payment service provider.(2) The information referred to in paragraph (1) is—(a) a reference enabling the payer to identify the payment transaction and, where appropriate, information relating to the payee;(b) the amount of the payment transaction in the currency used in the payment order;(c) the amount of any charges for the payment transaction payable by the payer and, where applicable, a breakdown of the amounts of such charges;(d) where an exchange rate is used in the payment transaction and the actual rate used in the payment transaction differs from the rate provided in accordance with regulation 43(2)(d), the actual rate used or a reference to it, and the amount of the payment transaction after that currency conversion; and(e) the date on which the payment service provider received the payment order.PSR, Reg 52:Where an individual payment transaction under a framework contract is initiated by the payer, at the payer’s request the payer’s payment service provider must inform the payer of—(a) the maximum execution time;(b) the charges payable by the payer in respect of the payment transaction; and(c) where applicable, a breakdown of the amounts of such charges.OBIE’s View:In both instances, this information and how is made available to PSU is strictly within the domain of the ASPSP. If ASPSPs consider useful, it can be assessed whether OB functionality can enable the transmission of this information via the OB APIs, as optional fields.These items are currently assessed under P19, which require confirmation from ASPSPs on whether there is a regulatory requirement to assess the building of this functionality by OBIE. In the context of international payments, information relating to the exchange rate and charges could create a valuable functionality if supported by the OBI APIs but appears not to be required by the PSRs.
The following table is taken ‘as-is’ from the published roadmap:(https://www.openbanking.org.uk/wpcore/wp-content/uploads/2017/11/FAO-CMA_Proposed-Amendments-to-Agreed-Arrangements_v_final-1.pdf)
Note: This is not a problem statement for the Open Banking P10 item but a problem statement of the general international payments market.Secondary market research performed by the OB Read/Write team has identified the following challenges with international payments
The OBIE proposition for international payments must meet the roadmap requirements in line with applicable regulatory requirements. Further consideration may look to address some of these challenges insofar.
The following section details the findings from secondary research in relation to international payments.
Growing global economy and international trade has allowed consumers and businesses to sell and acquire products and services across global markets. This has resulted in the rise of international payments which has seen steady growth over the last few years. The main factors influencing the rise of international payments are: i) the accelerated growth in global businesses, ii) the consumer preference for mobile and digital, and iii) the disruptive players shaping global payments (EY, #payments, insights, opinions. Volume 16, 2017).Macroeconomic factors influence trade between countries and this can have a direct impact on international payments. While presenting a steady growth between 2010 and 2014, international payments declined in 2015 due to lower international trade. This was impacted by the slow recovery in Europe and slowdown of China’s economic growth rate. The international payments market in 2015 was estimated to have a transaction volume of US$22 trillion and it is expected to grow by approximately 4.6% over the next five years. Emerging markets are showing a higher growth rate of international payments compared with mature markets. (EY, #payments, insights, opinions. Volume 16, 2017)
There are 4 main categories of international payments:
a) Supplier or Business to business (B2B): These are made when one enterprise pays another. The payments may be made to regular, well-known parties or to occasional or one-time suppliers. In these transactions, the supplier frequently extends credit to the buyer—or may demand a letter of credit or other form of credit assurance. (Glenbrook Partners, Cross-Border Payments Perspectives, 2011)B2B has the highest transaction value of the four segments with US$21 trillion in 2015 (>95% of total). Over the last five years, B2B segment growth has slowed down to 2%, however, the transaction volume increased significantly to 9%. Growth in this segment is primarily driven by growth in small and medium sized enterprises (SMEs), which are trading more across borders. SMEs now represent 25% of international trade in the B2B segment (circa US$5.25 trillion). Transaction sizes for these SMEs tend to be lower in value resulting in slow growth of transaction value in the B2B segment. However, transaction volumes have increased and have in turn demonstrated strong growth. The B2B segment consists of international exports and imports of merchandise and commercial services. Global merchandise represents the majority of B2B business. However, transaction value has decreased over the past few years because of volatility in commodity prices. On the other hand, trade in commercial services has grown at a faster rate where travel, telecommunication and professional services represent more than half of international commercial services. The US and EU still dominate B2B transactions, representing almost 40% of international trade (including intra-EU trade). However, the APAC region is becoming one of the most important regions for international trade, representing almost 20% of international trade (where countries like China and India continue to grow at a faster rate than other markets) (EY, #payments, insights, opinions. Volume 16, 2017).
b) eCommerce purchasing / Consumer to business (C2B): These include not only the purchase of physical goods (with all of the challenges of shipping, customs, and taxation) but also the travel and entertainment, digital services, and digital goods domains (Glenbrook Partners, Cross-Border Payments Perspectives, 2011).Retail international volume is poised to take over the business to business market within the next 10 years. It currently represents US$340 billion (1.5% of total) and at 25% has the highest growth rate across all the other segments over the past five years. C2B growth has mainly been driven by e-commerce transactions and brick and mortar online sales. Retail payment margins tend to be richer than in B2B, but current competition and market concentration have driven margins down. Merchants are mainly responsible for driving the shift to e-commerce as they find opportunities to expand their international market through marketplaces, such as Amazon and eBay. At the same time, shoppers across borders, especially in emerging markets, are increasingly buying abroad. This has benefited the C2B cross-border industry, which currently represents 20% of the overall e-commerce industry (US$1.7t in 2015) and it is expected to be 30% within the next 10 years. The C2B segment is moving toward a seamless experience in marketplaces operating similarly across borders and driving international consumer spending. Payment service providers, like Amazon Payments, Alipay and PayPal, have built up the capacities to serve this growing market by managing payments functions, such as currency handling in-house, which is affecting the overall retail market economy and driving margins down (EY, #payments, insights, opinions. Volume 16, 2017)
c) Payroll, retirement, and benefits payments / Business to consumer (B2C): These are made by enterprises to counterparties in other countries. The payees are most often individuals, but this category can also include various B2B-like payments to licensees, franchise participants, and digital contract laborers (Glenbrook Partners, Cross-Border Payments Perspectives, 2011).This segment is mainly focused on businesses paying out payroll, pensions or benefits to offshore employees and contract laborers. E-marketplaces are offering businesses opportunities to provide services and goods to consumers. This segment includes e-marketplaces of services and goods providers, larger corporations paying freelancers (e.g., app developers) and multi-level marketing. B2C is the smallest segment across the international payments, but it is expected to accelerate its growth because of globalized workforces and independent cross-border contractors. This segment represents US$128 billion (0.5% of total) with a growth rate of 7% over the past five years. It has moderate margins, which is a result of low margins enjoyed by corporates B2P, but partially offset by high margins in freelancing payments (EY, #payments, insights, opinions. Volume 16, 2017).
d) International remittances / Consumer to consumer (P2P): These are payments made by foreign workers to family members in home countries. As any given worker is apt to make payments to only one country, this domain is measured by country pairs, or “corridors.” (Glenbrook Partners, Cross-Border Payments Perspectives, 2011)P2P is mainly driven by remittances sent back to the home countries of expats and cross-border contractors who are temporarily working abroad. P2P represents US$600 billion (2.7% of total) with a growth rate of 5% over the last five years. The growth has slowed because of macroeconomic factors, such as lower oil prices affecting the economy and tighter immigration controls. The transaction value of international remittances has been increasing over the past few years. However, the margin continues to decline because of increasing competition and the adoption of new technology. P2P uses a variety of payment methods with varying margins, with the more concentrated volumes of large merchants or concentrated intermediaries tending to have lower margins than more highly fragmented ones. Besides traditional remittances, there are other categories, such as international students’ families sending money to pay tuition and living expenses, which is gaining momentum with the growth of international students. The other category that is also gaining traction is medical tourism (EY, #payments, insights, opinions. Volume 16, 2017)
While international payments account for less than 20% of total payments volumes, they comprise about 40% of global payments transactional revenues, and generated $300 billion in global revenues in 2015. At a granular level, major differences exist in revenue contribution and associated revenue margins depending on the nature of the transaction (e.g., trade versus treasury), the geographic corridor and the end customers involved (consumer or commercial). (McKinsey & Company, Global Payments 2016: Strong Fundamentals Despite Uncertain Times, 2016)On one hand, consumer-to-consumer (P2P) remittances generate a healthy 6.2/% global average revenue margin (including fees and foreign exchange margins). This resulted in $25 billion of global international payments revenue which is 8% of total revenues. On the other hand, higher value business-to-business (B2B) payments brought in $240 billion revenue, resulting in revenue margin of circa 20 basis points which is quite lucrative. Given the average transaction value of $15,000 to $20,000, this implies a typical fee of $30 to $40 per transaction. (McKinsey & Company, Global Payments 2016: Strong Fundamentals Despite Uncertain Times, 2016).Since 2011, the annual international payments revenue growth has not exceeded 4% and reached a post-crisis low in 2015 with 2% growth. The muted growth is mostly attributable to slowing global trade and GDP, and reinforced by gradually eroding revenue margins (annual decreases averaging 2% between 2011 and 2015). The impact of this negative climate is felt more keenly in B2B payments. These payments drive roughly 80% of international payments revenues. Banks retain a near 90% share of this segment. McKinsey projects an average CAGR of 4% for the period 2015-20, assuming revenue margin compression continues at the same pace as in the recent past (McKinsey & Company, Global Payments 2016: Strong Fundamentals Despite Uncertain Times, 2016)The historical persistence of relatively high revenue margins on international payments is due in part to the fact of facing the same systemic pressures as domestic payments. Forced to reduce domestic fees in the wake of heightened regulation and increasing competition over recent decades, banks responded with drastic cost reductions for domestic transaction handling through front-end automation, process simplification, standardization and outsourcing and development of new applications for existing payments products. As international payments did not face the same regulatory and competitive pressure, banks have had little incentive to innovate structurally on customer offerings, back-end systems and processes. And as international payments revenue margins remained healthy and price erosion moderated, no structural cost-reducing processes were introduced across the industry. As a result, operational cost per transaction for international payments continues to average well above $20 (these costs vary widely across institutions and between cross-border corridors). Over the last few years, however, this situation has been challenged by structural developments. While these challenges yet have to drive meaningful fluctuations in market share, there are clear signs of accelerating revenue-margin compression and customer pressure making the current situation unsustainable, in terms of revenue levels, but also system efficiency. This makes the case for urgent and fundamental change to the correspondent banking business (McKinsey & Company, Global Payments 2016: Strong Fundamentals Despite Uncertain Times, 2016).The International Payments proposition of Open Banking is expected to impact both SMEs and Consumers.
UK SMEs import goods from multiple suppliers abroad who need to receive payments for delivering the goods. SME companies are making a large portion of these international payments to their suppliers using online banking platforms. 90% of companies are executing payments online (financial-i, International Payments Survey, 2011).In 2016, the total value of UK imported goods was £468bn. Of this, £141bn was generated by SMEs (i.e. businesses with less than 250 employees), with 149,000 SMEs importing goods from the EU of total value of £80bn. Moreover, Non-EU imports reached a value of £61bn, generated by 89,000 UK SME businesses. The total number of people employed by these SMEs was 2.8m (HMRC, UK trade in goods statistics by business characteristics 2016)The Eurozone is still the largest import trading partner, but non-EU trade has grown much faster in recent years. The top country of imports for UK businesses is Germany, followed by the US, Netherlands and China (HMRC, Summary of Import and Export Trade with EU and Non-EU Countries – Annual 2009 – 2017). Trade with the EU is overwhelmingly settled in Euros. The U.S. Dollar is the most popular currency in which to be invoiced from non-EU countries (65.6% of value). Sterling, with 22.7% of the total, was the second most popular currency in which UK companies were invoiced for imports, followed by the Euro (5.2%) and Canadian Dollar (2.8%) (Accourt, Bank charges on international payments, An analysis of the UK SME market).
Important points to note (financial-i, International Payments Survey, 2011):
For UK SMEs, international trade is worth over £700bn, of which £365.3bn takes place within the EU, £162.92bn of which are outgoing payments (SEPA payments) (2014 figures). Based on this last figure the transfer costs for these payments were estimated to be £3.96bn. For non-EU countries the international trade value was £360.5bn in 2014. (Accourt, Bank charges on international payments, An analysis of the UK SME market)
There are some challenges involved in trading abroad, whether exporting or importing. In addition to currency risk, currency costs and foreign payments issues are a major concern, especially for SMEs. However, these costs are all too often seen as an ‘inevitable’ cost of dealing with foreign currencies. In general terms UK banks lack transparency on currency exchange rates and margins. Each bank generates its own FX rate for the day and it is provided by an internal system which customers do not have access to. In some instances the bank’s exchange rate is not even provided before confirming the payment so it is unknown to the customer how much is going to be charged for the transaction. (Accourt, Bank charges on international payments, An analysis of the UK SME market)Banks researched during this analysis show a common lack of transparency in divulging the spread costs (on the other hand, fees are publicly available in most cases). In general terms, the SMEs need to be a bank customer or make a real payment in order to get information on the spread and the total cost of the transaction. Some banks do not even guarantee an exchange rate until the transfer has been made. This makes the comparison and decision making process extremely challenging for the SMEs. Banks’ FX rates are automatic, system-generated rates which vary by the minute/hour based on a number of parameters. The banking sector does not offer a clear breakdown of the costs. While almost all of them show the transaction fees on their website there is no public information on foreign exchange rates (not even when a customer rings the bank), which is where the majority of the profits on the transactions are derived. Rates tend to get better as the transfer amount increases, but there is no clarity on how much better the rate gets and the improvement is not the same for all the banks surveyed. (Accourt, Bank charges on international payments, An analysis of the UK SME market)Banks buy and sell currency at a certain buying/selling rate which is significantly more advantageous than that applied to their customers. Although we cannot forget the fees (sometimes quite hefty, up to £40 or more) the bulk of their revenues from international transfers come from the spread. (Accourt, Bank charges on international payments, An analysis of the UK SME market)Summary of issues identified:
This section focuses on the customer experience of UC1 “Supplier Payments from invoicing (B2B)” and UC2 “eCommerce Goods and Services (C2B)”. These have been examined and developed into customer journeys and prototypes.
SME payment journey: https://invis.io/83F7GP1VU#/272021717_00_-_Hero_LoginThis design enables the SME to initiate international payments directly from within their Hero accounting package. This is still a single payment and there is no reference to repeated payments or multiple payment submissions. The SME customer will be redirected to their ASPSP and will authenticate and authorize as per the existing single immediate payment journey.
eCommerce payment journey: https://projects.invisionapp.com/share/A9F6EDJU5#/screens/271685053This prototype enables consumers to purchase goods online from a company based abroad, making the international payment for the purchase goods directly from their consumers bank account, using Open Banking.
Primary customer research performed by Ipsos, included 25 interviews in total:
Findings from customer research highlighted the following key points:
Detailed findings from the customer research conducted by OBIE can be found in the attached report below:
The OBIE proposition model is based on the OB Single Payment model through using a PISP for the payment initiation but extends the model and the specification to be able to support all the international payment requirements as per the PSD2/PSR regulations. The basic propositional model is shown below:
Note: This is only an example diagram. The proposition model also includes payments in non GBP accounts in the UK.
In addition to the regulatory payment information requirements, the OBIE proposition may try to address some of the main issues with international payments identified from the market research. These include:
Please refer to the high level requirements section 10.1
OBIE considers the main uses for the international payments to be the SME payments to businesses. This is because of the size of the market segments and also because the SME market is currently using the bank accounts to make those payments. The eCommerce use case has a lot of potential and will grow in size massively of the following years. OBIE is considering this to be a target use case with high potential; however, there are challenges that need to be addressed in order for the OBIE to be successful in this segment.
Caveat: The below table is the current view of the P20 roadmap item and is subject to change due to future CRs.
In order to make an International Payment, the PSP will need some of the following details relating to the Beneficiary’s bank account:
Note: When IBAN/BIC are used, not mandatory to have a sort code for payment sent to UK in currency.
The information required is different for each country. For further information please see the table below:
Note: For payments in Euro the customer does not have to provide this, the sending bank must derive it from the beneficiary IBAN.Need to confirmIf that all banks can derive this form the IBAN.
Note: Whilst the SWIFT BIC is required to route the payments, for payments in Euro the customer does not have to provide this, the sending bank must derive it from the beneficiary IBAN. Need to confirmIf that all banks can derive this form the IBAN.
In addition, SEPA Instant Credit Transfer (SCT Inst) if supported by ASPSP
Note that CHF is an EEA currency as it is official currency of Liechtenstein, although Switzerland is neither in the EU nor in the EEA.
b. Intra-EEA using non-EEA currency (any currency)
c. One Leg Out (any currency)
2. International Payment Types to be supported by Open Banking
Payments initiated by PISPs using Open Banking Write APIs, should be able to cover payments to be executed under the following international payment types:
3. Charge Models
Payments initiated by PISPs using Open Banking Write APIs, should be able to cover the following international payments charge models: