Increasing Efficiency in Global Payment Processing
The single euro payments area (SEPA) will lead to considerable benefits in terms of standardisation, larger volumes and lower costs. But is has become increasingly apparent that processing non-euro payments still lacks these advantages and will become more and more expensive relative to SEPA payments.
Europe is not the only region where efforts are being made towards standardising intra-regional payments. In the US, the National Automated Clearing House Association (NACHA) is breaking down the walls between national payment systems by means of its new International ACH Transaction (IAT) rule. The Federal Reserve Banks have reacted promptly and are implementing the International Payments Framework standard for the processing of payments from the US to Europe and vice versa. This first concrete elaboration of the strategic partnership for cross-border payments is based on an increasing market demand for efficient processing of low-value cross-border credit transfers on a global level. Starting in early 2010, the Federal Reserve Banks will offer banks a cost-efficient channel for processing cross-border payments in euro, US dollar and sterling.
Compared to the number of domestic transactions, cross-border payments are characterised by relatively low volumes and high associated fixed costs. The cross-border service offering from the Federal Reserve Banks will support banks in further reducing their processing cost base and strengthen their competitive position in the market. By offering a standardised channel for cross-border payment processing, banks will not have to worry about the complexity of maintaining different cross-border systems. This will also greatly reduce the need to maintain an extensive correspondent banking network for cross-border payments.
The Federal Reserve Banks and Equens are both founding members of the IPF. This is a membership organisation that consists of more than 20 banks and central banks, clearing and settlement mechanisms (CSMs), associations and software vendors based in Europe, the US, Canada, Brazil and South Africa. Its aim is to establish business rules, standards and operating procedures to improve cross-border credit transfer payments based on the ISO 20022 standard through a contractual framework binding the members to these business rules, standards and operating procedures. The Federal Reserve Banks and Equens will be the first to implement this cross-border processing scheme.
The IPF rules will enable interoperability between existing domestic or regional payment systems, the exchange of transactions in multiple currencies, and settlement that will leverage existing procedures. The rule-making body of the IPF will provide an overlay structure that facilitates interoperability between CSMs and banks, with the member banks providing transaction volume (e.g. bank-to-bank, bank-to-CSM and CSM-to-CSM). In three to five years, the IPF is expected to enable multi-currency, non-urgent payments to any other member organisation – whether through a CSM or directly through member banks – using the same standardised process and operating procedures. This will allow member organisations to incorporate new countries and/or currencies quickly and efficiently, lowering processing costs and eliminating the complexities in international non-urgent payments.
Equens and the Federal Reserve Banks are building a bridge between their respective geographies with a transfer protocol based on the IPF ISO 20022 standard, which is very similar to the SEPA standard. They will act as ‘gate openers’ for the transatlantic traffic by translating the incoming messages into the common IPF standard, send them over the ‘bridge’, where they will be taken up and further put forward to the recipient financial institutions. Thanks to this collaboration, the banks in the US will be able to transfer payments to all countries whose domestic currency is the euro. It will also be possible to send sterling to sterling accounts and US dollars to US dollar or euro accounts held in Europe.
The above will be phase one in a process in which banks and processors from other parts of the world are welcome to participate. Equens is searching for partners in geographies that are likely to benefit immediately from connecting to the initiative. We are already in contact with financial institutions in Canada, South Africa and South America, and are looking to make contact with leading financial institutions in the Asian and Australasian regions.