The cross-border payments market is probably the most important industry in the world. Trillions of dollars are exchanged every day to cover the settlement of everything from multi-billion-dollar company investments, through to the value of the perishable cargo on a ship that’s stuck in port, all the way down to that rather nice holiday rental you could be eyeing for next summer. International payments are essential to everyone, in every country in the world.
Yet consider this: in a world of high-speed internet connection and instant communication making a cross border payment is slow; so much so that picking up a suitcase of cash and flying with it to anywhere in the world may be faster than making that payment electronically.
But cross-border payments are changing, they are the next major shift in technology to affect the already dynamic payments market.
Firstly, we can’t talk payments without talking about blockchain, or distributed consensus ledger (DCL) to give it its correct title. There has been much talk – and proofs of concept – around DCL with most of them coming to the same conclusion; ‘nice technology, but shame it can’t process higher volumes’.
However, let’s assume that the technology will enable higher volumes of processing, just like everything else ever created that upgrades to the point of usability (your mobile phone battery excluded). DCL can improve the customer experience of an international payment. With simultaneous posting for both the sending and receiving bank, funds availability is immediate, and information about the payment is real-time.
With higher volumes and a private blockchain between the banks, it seems ideal to process at least some of the cross-border payments. What’s more, with the authorities as part of the private blockchain established, it can even keep the regulators fully informed of currency movements.
Secondly we have the global payments innovation (GPI) initiative from SWIFT. This is a solution to utilise the current SWIFT FIN traffic of MT103 and MT199 messages to provide a better payments experience between correspondent banks, and thus to the end-users. With dozens of banks joining the GPI initiative, we will see guarantees of same day value and charges, alongside real-time feedback of the payment (value date, FX rate, charges) from the beneficiary bank to the sending bank, and back through the chain to the initiating bank if part of a multi-bank payment.
This is a defensive measure from SWIFT to protect the existing infrastructure, and as a short term solution it solves many of the problems we have with the current next-day, lack of information, cross-border payment. However, it’s not enough, and only when we see the rollout of ISO20022 based messages with their richer remittance details, will we see true advancement in SWIFT cross-border payments.
The new challenger
There is, however, a new challenger emerging. Immediate payments – aka instant or real-time payments – are the hottest thing in domestic payments…ever. With over 20 countries currently implementing solutions for immediate payments, consumers and businesses will soon be able to move money domestically, or throughout the European Union (EU), in real-time. So it’s only natural to consider how these domestic schemes can interoperate with each other to provide truly global real-time payments. Just today, a news item described a solution whereby the consumer can shout at their phone to send money to ‘John’, and Siri will oblige. Well what if ‘John’ is on the other side of the world?
The International Payments Framework Association (IPFA) was formed six years ago to make automated clearing house (ACH) transactions available cross-border. Banks would interoperate to send transactions, which would then be cleared over the local ACH, cheaply. However, attention has now turned to the interoperability between banks for immediate payments globally. The author’s company, ACI, has been chairing the multi-bank, clearing companies and vendor committee to establish the rules for such real-time payments, and the rules are about to be published.
The use of domestic real-time schemes is still needed to settle to third-party banks, and the scheme service level agreement (SLA) is considered, with an additional five seconds to allow for the international leg. With this, a sender can transmit money from the UK to Australia in less than 20 seconds, cheaply. The needs of the consumer, the small business and the large corporation are all considered. With rules for liability, disputes and returns all present, the IPFA is championing yet another shift in cross-border payments, but one that banks can support alongside their current immediate payments investments.
Of course there are many other bilateral agreements that banks have in place to improve their customer experience. In truth, multiple initiatives are going to be used to service the customer the best, no one solution will solve everything. Yet the fact remains that cross-border payments have a wealth of new technology available to it, and with the continued pressure on costs and pricing, we are entering an exciting new time.