SWIFT is working really hard to drive innovation in real-time payments, but are you finding that the appetite from the banking sector is just as healthy?
It’s very different depending on location and the players you’re talking to and I think there’s real variation in who’s really pushing developments. For example, are banks pushing the agenda or is it the regulators? The UK has had faster payments since 2008, but it was the regulator that had a big hand in introducing this real-time faster payment system. Before then, the banking system was using BACS, where payments took three days. This is the kind of drive we’re seeing in other countries too.
Then there’s the expectations of a new generation of customers that are ordering items on Amazon, which is delivered on their doorstep in a couple of hours. They cannot understand or accept that the electronic payment will take so much longer. It is natural evolution driving innovation.
Is that realisation and enthusiasm for change something you’re seeing in corporate treasury?
While a lot of payment innovation starts in the retail space, it definitely creeps up rather quickly into the B2B area. A corporate treasurer that can do his personal payments in just a few seconds is naturally going to have an expectation that his business payments are going to be just as fast.
However, it’s not so much a question of being able to reach the beneficiary immediately and to have the money credited to the account quicker, but more a matter of delaying the initiation of your payment a bit more. It’s about using your liquidity more efficiently and making the payment at the very latest moment, which is driving them to push for instant payments.
Does this effectively mean treasurers now have more power and control?
Yes, they now have greater transparency and the power to decide when the money is going to be credited to the account of the beneficiary. Previously, they used tables where they could see that, for example, if you wanted to do a payment somewhere in Italy, this was the amount of time needed to initiate the payment to avoid being late. With instant payments, you can rely on the fact that if you initiate the payment, it’s there exactly when it needs to be.
Is that even more important with cross-border transactions?
For cross-currency transactions we’re working hard through SWIFT gpi, which is bringing about much greater transparency, not just around the charges that are being levied on these transactions, but also around the speed and the time that it takes for the money to reach the beneficiary’s side. With the tracker that we’ve developed, you can see 50% of payments are completed end to end within 30 minutes and 75% within six hours, often where something has to be investigated by a bank, for compliance or sanction reasons. It’s getting much faster.
What we’ve done with a couple of pilot exercises – one in Australia and a recently finished one in Singapore – is link our faster gpi cross-border transactions into a domestic instant payment system. If you do that, you can not only reach your beneficiary in that domestic system, anywhere in the country, you can reach them immediately, or within a few additional seconds.
These systems are running 24/7 and that’s a big difference. To take the example of the pilot exercise that we did with Australia, Chinese corporates, who are initiating payments in Australian dollars to Australia – have a cut-off time in Australia of something like three or four o’clock in the afternoon, or around noon in China. Now, using the instant payment system in Australia, the Australian dollar has no cut off time, so the Chinese corporates were able to make payments 24/7 and reach the beneficiary within seconds.
That sounds truly transformational for corporate treasury. Would you agree with that?
Absolutely, yes. Interestingly, the feedback we received from the Chinese corporates involved in the pilots suggested speed was not everything for them – whether it’s a few seconds, or a few minutes, or even an hour, that didn’t matter too much. The fact that the Australian dollar was available 24/7, really mattered to them.
What challenges are you coming across, and what’s holding back further adoption of real time payments?
Firstly, I think not only for us, but also for the participating banks in such a system, the move to 24/7 is a challenge. The SWIFT network is available 99.999% of the time, but naturally there are a couple of downtime windows over some weekends, where everybody on the SWIFT community knows that we’re reserving that time to complete upgrades, do standards releases and so on. And the banks are using those slots as well to carry out the upgrades on their side.
However, retail never sleeps. Customers expect to have their payment system available at any time, day or night. When we moved into instant retail payments, we went from a couple of hours of allowed downtime per week, to a few seconds per month, which requires a completely different set of software, ways of processing, ways of supporting the community, not to mention a different set-up of the support centres and operations
Secondly, with instant payments, banks are not batch processing or working with files anymore. Every payment is handled separately, instantly and individually. That requires different support functions as well, including different bookkeeping systems, different acquisition channels to capture these payments from customers and reporting channels to go back to the customers to tell them what happened.
Where do standards come into play? Do we need a more aligned global set of standards?
The fact that the standards currently used by retail batch payment systems, for example, are different everywhere is definitely a challenge. They are typically domestic standards agreed by a domestic banking community. Now, if you go international, it makes sense to use a uniform global standard. This is where SWIFT is taking a leading role.
As the payment landscape evolves, there are new things that need to be transported inside payment messages that couldn’t be accommodated previously. This is where ISO 20022 comes in as it allows for extended remittance information, invoice information and structured identification of the different parties in the transaction. Given that there needs to be a migration to instant payments, banks are making use of the new ISO 20022 standard to make that transition fully beneficial. As ISO 20022 is globally accepted as the one single way to go forward in terms of financial standardisation now, it brings different domestic communities much closer to each other, making interoperability much easier.
Given everything you’ve said, when do you think real-time payments, including international cross-currency payments, will be the norm?
That will very much depend on how instant payment systems are going to be facilitated in different countries. There are different approaches. If you look at the Netherlands, for instance, they said instant payments are going to be the default way of doing business.
Now, if you take such an approach as a banking community, then domestically at least, instant payments will take off much, much faster. In order to achieve widespread adoption of instant payment systems you need a good ‘overlay service’ – a commonly agreed service by the banks for their consumer community. That is not currently the case in Europe and is definitely not pan-European yet.
Australia has the biggest adoption curve, I think of all the payment systems that have been created, purely because the Australian community of banks have approached this as a countrywide introduction of a new payment means. If you walk into shops in Australia, you can ask to do an Osko payment and everybody knows that it’s going to be an instant payment to the beneficiary.
If you want to move this cross-border, we can see that becoming a reality in the not too distant future through SWIFT gpi and our instant cross-border trials.