Podcast

 

Full Transcript:

Joe Casale, Host:

Hi, welcome to Wrestling Payments. My name is Joe Casale. I will be your host today. I’m very excited. We were just meeting off camera talking about what the podcast was going to be about and I there’s so much ahead. It’s going to be very exciting. I would.

I just got back from a meeting yesterday from the Faster Payments Council and when you talk to the Faster Payments Council, we’re talking about instant payments, real time payments. It’s only one hair away when all of a sudden we start talking about these technologies being cross-border payments. Let’s talk about cross-border. The current systems don’t do cross-border.

So today I have a very special guest, very. I’m not going to even ask him my wrestling questions!  John, if you could introduce yourself, the company, and what you guys focus on.

John Min, Chief Economist at Monex USA:

Sure. My first name is John Min. I am a PhD economist.

My area specialty is productivity, how to improve companies, but I’ve been working with Monex for the past 8-9 years as their chief economist and I do macro analysis. So if you want to know whether you should hold on to NVIDIA or get out, I’m the guide because I try to see where the economy is going 6-9 months ahead, whether it’s going to bend this way, it’s going to go that way and then we provide that as an advisory service to our clients. And second time the Monex, we are international financial institution. We have Monex USA, Canada, Mexico, Singapore, and Europe. Put it all together, we’re about 3000 folks and we focus on one thing only. We’re very good at taking one currency and converting it to another—so FX conversion, and we are also very good at sending that money or transferring that money to 154 different countries.

Because we’re specialists, we are very efficient. For example, all our wire transfers, let’s say they settle within 24 hours. Half the time is the same day. And then our pricing is super competitive, but we’re not a bank, so we don’t compete against the bank. So our sales people, first thing they say is we’re not a bank, your deposit stays with your current FI, everything stays the same. You only consider using us for cross-border payments.

And by the way, Joe, I’m not surprised by the cross-border conversation at the faster pay council, right? Faster payment, Yeah, yeah, because what’s happening based on our survey is that the customers get spoiled on domestic side of the market because nowadays you can do real time payments.

You use wallets, everything is instantaneous. I just did a transaction on my Truist account and boom, money went out. I was like, wow, that’s really fast. But now if I want to do cross-border payments, some of the Fis require you to come to the local branch.

And we actually had a person told us last week not only they had to drive to the local branch, they had to fill out a form to transfer money to their supplier in the UK. And here’s the part that I think is against the Dodd-Frank, he didn’t know how much it was going to be because he had to wait for the confirmation or until the account got debited. So he had to put extra cash into his operational account just to make sure he got covered. So there’s a huge disconnect.

Host:

Yeah, let me ask you this. So we as we were talking earlier.

Scoping the When I think of my everyday life and I live in Massachusetts, which I think we do a lot of international, I never think of that part of banking and business. Can you talk a little bit about for folks who aren’t aware that there’s a lot of, you know, input?

Exports that need to be paid for. Can you scope that issue? You said you’re in 49 states. Talk about that.

John Min:

Yeah, yeah, yeah, yeah. So we’re in all 50 states. In order to operate, we need to get a state banking license. We’re fully regulated, audited and we got to maintain performance bond in various states. So in many ways, maybe we kind of joke around, we’re actually safer, more secure than with the banks because with the banks you’re the licensed national state. We’re at the both levels. That’s number one.

Oh, by the way, only reason is 49. I believe it’s Montana. It’s only state that doesn’t require state banking license. That’s that.

Now in terms of the import export cross-border payment business, I’m a super nerdy numbers guy, so if I go from top down, roughly 15% of the US economy is international, either importing or exporting, that’s one way to look at it. Another way to look at it is there are about 250,000 registered importers scattered all over the United States according to US Census. That’s like 1% of all businesses in the United States. But then 95 to 96% of the manufacturers, they buy supplies from overseas.

It may not be the major supplier, but they do import parts from overseas. So that’s roughly about another 600,000 businesses. Put it all combined, if you have about 100 businesses in your market in your area, two to three, four or five are actively involved in cross-border payments. Now for those people who are more in tune with how much revenue potential is possible, according to McKinsey in US, we’re looking at about $60 billion. That’s the size of the pie.

And then there’s a super cluster centers, I call it. These are retail. What I just described are just businesses. Retail are–these are people just walking into a branch. My son is studying in Cambridge. I need to transfer money too, I’m an expat. I’m working in the United States. I need to send money. I need to pay for my mortgage while I’m buying a villa, whatever might be in Europe or oh, now big thing is Asia, Mexico and Canada. I need to send money to Canada. I need to send money to Mexico.

When you put that together, we’re looking at a significant amount of business opportunities, but they come in clusters. So if the Washington DC is a big cluster, that’s not a surprise, but North Carolina Research Triangle, there’s tremendous amount of retail business. Huntsville, AL. There’s a lot of individual straight wires. San Jose, CA is one. And I just found another super cluster in the United States. Wichita, KS. Kansas. Really. This is fascinating. Well, that’s because there’s so many international engineers involving aerospace. So they’re sending money back and forth for personal reasons. On top of that, if you account for businesses, I suspect that any if I was listening to this podcast, there’s significant amount of cross-border business opportunities in the market.

And if you don’t see that in your internal business operation, it’s because they’re not coming to you.

Host:

So I have to stop myself because I just want to kind of listen to you. So let me ask this. So we’ve again, we were talking before, and it is not a level playing field. Not every institution has the same buttons and machines and all of that. Can you talk a little bit about that?

John Min:

Yeah, so I think I believe there are 4400 banks. That’s the latest account. Out of 4400 banks, 20 are what are called the first tier banks. They do their own foreign exchange, cross-border payments. They got the infrastructure that tap into SWIFT and whatever might be.

What that implies is that most of the FIs, community banks, regional banks, credit unions, they’re not doing their own cross-border payments. They’re outsourcing it to so-called corresponding bank and right there it causes tremendous amount of problems because you’re servicing a business.

For example, a wine importer in your area who imports a container of wine every other month. Each container is about 30 to $40,000 worth of wine. If you’re getting it from Europe, what that your payment has to be made.

And now that person comes to your retail branch or they call in or they do it online. Well, that transaction is now outsourced to your corresponding bank and that corresponding bank based on their cut off their batch system, there’s automatically one day delay or second day.

Delay. Additionally, the corresponding bank doesn’t care about the pricing on exchange rate because a lot of people don’t know all conversions and we call it FX conversions. They’re over the counter. That’s the technical term over the counter. What that means is they’re negotiated. So whatever corresponding banks say they’re going to mark it up, 1%, 2%, 3%, that’s the price. By the way, in the United States, the typical markup from corresponding banks is up to 3-4%.

Host:

Can you dig into that just for a second, my daughter went to Italy, but I’m going to pay for her hotel and I need to do it right now. And I work with a very local institution. How could that work?

John Min:

Well, so here’s my advice. If you’re doing small transactions like that, credit cards are OK, except there’s a markup in the conversion rate charged by your credit card. Yeah, that’s anywhere from 2 to 3%. Unless you have a very special credit card, but your annual fee is like now $800 a year, whatever it might be, maybe one 1 1/2%, but that’s fine if you’re paying for like 3400 dollars worth of euro, but the wine importer whose invoice is $30K-40K paid 2 percent, 3% on that. That’s significant. So they avoid, they don’t use credit cards, they want to send a payment.

And that’s happening at the time right after he filled out the form, if you will, he’ll filled out the form. What happens usually is you don’t even know as a business person how much it’s going to be until you get the confirmation, because the bank cannot tell you.

Unless the corresponding bank comes back as that this is how much it’s going to cost if that’s the type of relationship. So they’re literally saying this is what I need to send, let me know how much it’s going to cost. Corresponding bank marks that up. It’s not their customer, so.

It’s not going to be competitive pricing and it gets transaction gets done and now you get the confirmation. At that point there’s nothing you can do about it. And then of course a lot of businesses in the United States are captive to their bank because if you wanted to cross-border payments, where do you go, you go to a bank.

Right, right, right. In Europe, there are many, many, many, many more companies like us because I don’t want to say that Europeans more sophisticated, but when it comes to foreign exchange, they’re more aware. It’s just they’re used to it because they go to Switzerland, they’ve got to convert. They go to Poland, they’ve got to convert. United States, we think everything is done in.

Dollars and if you need to do any type of financial transaction, you go to your FI and reality is most of the FIS in the United States, they don’t do foreign exchange, they outsource it. So really the entity that’s making most of the revenue taking advantage of this type of system in the United States at this big 20, maybe top ten, banks and their revenue on the foreign exchange is very significant. I’m not going to be creative at all. You were mentioning current a couple of studies that just came out about the rates that these 20 top guys can charge versus the everyday bank. Can you talk?

So again, I’m a nerdy economist. I get the regular studies published by NEBR. That’s the National Economic Bureau of Research out of Boston. It’s a conglomerate of Harvard and some of the schools in New England area. And one of this research, the peer-reviewed study that I’ll share with you after this podcast is fascinating because what they found is that these top ten major money center banks—they have a unique advantage. In other words, what they found is for the same amount of deposit for their customers, larger banks offer significantly less yield or interest on that versus smaller FI’s.

The implication is—in order for smaller FIS to hold on to that deposit base, they have to provide more yield. So they looked into the reason why there is a delta. The markets should be efficient, and what they found is that bigger banks can get away with it, but they don’t have to a pay higher yield because they offer more advanced, innovative products.

So if you don’t have a very efficient up to the market industry standard service when it comes to cross-border payments, you know there’s local importers and manufacturers in your market, even the individuals who are doing significant cross-border payments. If you want to hold on to their deposit, you got to almost bribe them, provide an incentive by providing a higher yield on their deposit. Now the other implication is those businesses will go to a National Bank in your market to open up an account, not because they don’t like your service, it’s not that they don’t like your history with them, it’s just that they need to send the wire out. It needs to get there fast. I need to know how much it’s going to be. But here’s the trick. In order to do that transaction through, let’s say, Wells or Chase, you need to open up a bank account. Now if you do, then I guarantee you that there is going to be siphoning of the deposit, because in order to do the transaction you need to have cash in your operation account to cover for it. So now your deposit base is at a risk.

So I think it’s really, really important for smaller regional FIS to recognize it’s not that you want to make money on the cross-border payments if you want to defend and hold your deposit base.And be competitive, then you need to keep up with the innovative products and services. That’s why pretty much all the small FIS are going real-time payment and Fed now and things like that. But again, cross-border payments, they’re far behind compared to big money center banks.

Host:

Yep, our RTP and Fed now are not doing cross-border payments. And I I don’t actually see it on the horizon, but super interesting. I want to be conscious of your time. I also want to be so for the listening audience. John is an economist. We could talk about lots of topics. I don’t want to impose on him, but I do want to touch on, just touch on. It’s not going to be a stablecoin episode, but I do want to just touch on it. Because I’ve always thought the easiest way for me to understand a cryptocurrency was to think of it as a different currency, right? Just like a franc or a euro, it was a different currency. There’s an exchange rate. With the passage of the GENIUS Act, how do you see that affecting your business? Are you going to incorporate that?

John Min:

If my answer is going to be based on what’s going to be like 5 to 10 years, I think it’s going to affect the industry significantly.

Because technology itself is beautiful. So, by definition with the Genius Act, the idea is that the stable coin is stable because it’s backed up dollar for a dollar and a trust. So there’s no volatility. It was very difficult to use Bitcoin as a medium of exchange because it just fluctuated so much. So as a business, if I’m going to pay you in Bitcoin, I may be overpaying you or underpaying you based on what’s happening in the market. But the stable coin, I know it’s almost pegged to the dollar, so it’s fantastic, right?

Now second part with the stable coin, if you’re going to you send stable coin to India. So we’re actually looking into a case where you as a customer can sell dollars Fiat currency by US stable USDCC, let’s say, and then you send that to a wallet in India. So instead of taking three to four days to send funds by SWIFT with the markup exchange rates, this is almost instantaneous transfer and it’s fully transparent from a compliance KYC/AML perspective, it’s not only transparent, and the cost of doing a transaction is not going to be 50-60. It will be a few pennies, assuming there’s no markup to it. The only challenge right now that exists is that recipient of Indian rupee in my wallet in New Delhi—If I want to convert that to Fiat, my local currency, so I can go to a local shop and buy my cup of tea, whatever it might be. Not all financial institutions would be able to do that. So right now it’s very narrow application. There are few financial institutions in India that will do that.

But then it’s not going to be as liquid. I cannot send stable coin to China, Vietnam. We work with a lot of nonprofits and a lot of folks in Africa working on different NGO projects. They want to get paid in stablecoins. The problem is when they receive stable coins, converting it to local currency, that’s the challenge. But a lot of people want to receive their stablecoins because they don’t want to hold on to the local currency if there’s high inflation.

Host:

So I I think of this all the time and you just gave a great example of it, so everything’s connected, right? Everything’s connected, but different, right? And stay with me for a second. I know I sound a little weird right now. The idea of a stable coin is wonderful. You know, I’m going to exchange money from a wallet to another wallet and poof, it’s there. It’s like, it’s like magic. It’s there.

But when you get into the reality of of well, in India, here’s the facts and the you may not be able to transfer it. In China, there may not be a market. You’ll have a wallet full of stablecoins. What are you going to do with it? Won’t be able to do anything with it. Can you talk a little? I was just on the edge of understanding, following your story, can you visit that again as far as the intricacies of a country and how stable coins work or don’t work, or even is that true with dollars as well? Would in India, would there be a challenge exchanging dollars in rupees?

John Min:

No, because pretty much all the financial institutions in India can convert dollars to Indian Rupee, and that’s true in China as well, except in China, the recipient also has to send paperwork to the government to say “I’m getting paid because of this.” Because there is capital control in China, they want to make sure no money comes in or out without government noticing it.

Now, going back to stable coins, there is a LOT of demand for stablecoins, but if you actually look at the common profile, demand comes from countries with a high rate of inflation – Argentina, Brazil, Turkey, the suppliers over there want to get paid in stablecoins, and it makes perfect economic sense. Stablecoins are tied to the US dollar, so you wouldn’t have to worry as much about loss of purchasing power due to inflation.

If I’m buying something from overseas, it’s better for me to use stablecoins to pay for it instead of using local currency to buy the foreign currency because my currency is depreciating by 12%, 7%, 8% every year. So if you look at it, that’s where the demand is for stablecoin right now. Before stablecoin, it would have been dollars or some other currency.

Ultimately, the technology of stablecoin is so much better than the current network of messaging, which is really SWIFT, right. 4,000 institutions almost emailing each other. Now it’s gotten a little better with the ISO 20022, there’s standardization in the fields and messaging, but again, it’s just global commerce being run by “why don’t you debit this and credit that for me? You debit this and credit that for me.” And yeah, that’s the pipeline versus a fully transparent, instantaneous public Ledger that says you own this, you own that, you own that and there’s a track record of transparency. So technology is superior, but I think it’s going to take a long time to really take over the SWIFT.

Host:

And for folks who don’t understand, and this is again, my interpretation of SWIFT, SWIFT is a message. It’s not. It’s not a payment. It’s not like cash.

John Min:

No, no, no. Cash doesn’t leave. Yeah, exactly. I’m literally sending a message to another bank, other side of the pond, other side. The Pacific and say you have my money debit here, credit this account in Tokyo.

Host:

Excellent. All right. I know you have to go, but let’s pivot right now for the problem. So the problem, I think we defined it pretty well. The problem of maybe having access to the tools. You brought me back to my economics days with an efficient market, but an efficient system to not only service the international payments we have today, cross-border payments we have today, but as stablecoin onboards, do you have any advice for member my I like to think of my members, but financial institutions, the savings and loans, the the community banks on how to approach this problem?

John Min:

I think the keyword is partnership.

With the right partner, with the API technology and everyone going to ISO 20022, it’s almost becoming a plug and play, right? And literally as a FI, I can plug into the best in kind services and then put it all together and provide that level of super competitive efficient services to your customers.

So when it comes to cross-border payments, there’s no reason why you can white label. Even our platform or our competitors platform at Monex we can white label a platform within two weeks and then you can just plug into API. Then you can offer cross-border payments as what the service does actually better than these money center banks. And here’s the best part now instead of just giving the transaction and that the big banks make all the money on cross-border payments, you can monetize your cross-border payment customers transactions, and that could be significant.

That wine importer I was talking about – with about $30,000 per year in euro transactions — you can charge about 2% markup instead of 3%, so you’re super competitive. That’s $600 worth of fee income. Forget about the wire fee. Everyone focuses on the wire fee. To me, that’s like a petty nuisance revenue. Real revenue comes from the markup and exchange rates.

And these wine importers, they import once a month, twice a month. So you’re looking at $600 with the recurring fee income coming from the wine importer every month, but twice a month and multiply that by all the importers and manufacturers in the market.

It’s a significant revenue flow that’s going to make a difference to your bottom line. That has nothing to do with the yield curve. That’s the best part. Yeah, it has nothing to do with the interest rates.

Host:

I sort of, I pride myself on having a podcast that goes a little bit, a little bit deeper. So, I know in the past there have been logical things. The easiest one is, is the in the ACH, they implemented this IAT transaction. No, we’re not talking about cross-border at all, just they implemented this new technology and they had to delay it because in the industry, the financial institutions were not up to date in their software releases. So all the cores said our software does it.

Except all the financial institutions were behind, so they all had an upgrade to be able to take advantage. You say, you said, if I can repeat it back, that this is with all the technology available today.

It’s an easy onboarding.

You know given vendor management for onboarding all of that. What’s the difference we’ve seen between “it’s easy today it could work” or they should do something about this. Because it’s not a a “could,” this is happening. Stable coins are coming along, this is already cross-border.

It’s already a big deal. You may not know about it because it’s being taken care of in that corner of the institution. We don’t know what’s happening over there. Any any deep dive?

John Min:

Well, OK, deep dive under the hood if you’re using any core processor like Q2 Jack Henry, FIS Pfizer, we’re already in there, so it’s just a matter of flipping the switch. That’s easy. If you have your any banking platform, then we can plug in our API and provide cross-border payments. So if you’re a treasury management system from a third party, pretty much everyone, our standard fits there. So you’re just adding a tab that says cross-border payments. When you click, you’re literally coming to our platform. At that point, it’s a single sign-on.

So seamless–that day, your customer doesn’t leave your environment. And we do all the transaction, KYC, AML, everything else. The easiest way to do it is just white label our platform.

Many business say “we want to do cross-border payments,” “I don’t want to come to your branch.” Or “your services, it takes three to four days,” “your pricing is not competitive,” “you don’t have the currency that we are dealing with.” That’s a big issue right now because you know, supply chain has moved out of China and has gone mostly to Southeast Asia, Vietnam being a hot destination, and the Philippines. And now they’re looking for Vietnamese Dong. That’s the name of the currency. Philippine pesos. And you don’t offer that because you only offer G7, the common currencies. You can simply take the our platform, white label it – it takes two weeks to white label. You put your logo, color, everything else on it and you just extend the service to your business client and they would just get on there to all the transactions. KYC, AML everything else is done behind the scenes and we do get audited by state banking Commission. So we actually have a higher standards than most FIS when it comes to cross-border payments. And again, the best part, you monetize it immediately.

 

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