“We will never entirely eliminate friction in cross-border payments, but how we respond to it and resolve any blocks to payments will be key. Reducing the amount of time, it takes to resolve an issue will reduce the amount of friction.” Those are the words of Didier Balland, Head of Product Development & Communication, Cash Clearing Services, Global Transaction Banking at Societe Generale.
The digital transformation of financial services has accelerated the pace of cross-border payments; in many cases payments are settled almost instantly. But within this real or near real-time environment, friction that can lead to enquiries or investigations still exists, slowing down the payment process. According to SWIFT, 2%-5% of cross-border payments are subject to an enquiry or investigation, resulting in a time lag in the payment being completed.
The source of such friction varies, including internal and external factors. For example, each country to which a correspondent bank sends payments can have its own rules, regulations and requirements for data. Understanding the different requirements globally requires a high level of expertise. Problems can also occur when clients fill data fields with the incorrect information or in the wrong format. Because there is no single, global regulator overseeing cross-border payments, there are many different formats and peculiarities. This fragmentation means cross-border payments are difficult to automate.
SWIFT estimates that enquiry management is costing banks 25-35 times more than payment processing itself and that efforts to automate cross-border payments processing have had very limited results.
The tools to fight friction
Standardising cross-border payments formats will help financial institutions to eliminate many of the frictions. SWIFT’s move to the richer file format of ISO 20022 XML, which is easier to understand and brings more fields into play, will make life easier for financial institutions and their correspondents. The format will allow more data to be included which can satisfy local regulatory requirements.
Financial institutions can also reduce friction by implementing dedicated platforms for cross-border correspondent payments. Such a platform can enable a bank to route payments quickly and efficiently to the appropriate correspondent and automatically populate that payment with the correct data in the correct format in order to process it straight through.
Automation alone will not solve all the problems a financial institution faces, however. Digital tools must be combined with the expertise of experienced staff. It is unlikely that financial institutions will ever achieve 100% STP rates, and for the small number of payments that require investigation, financial institutions will need expert people who are dedicated to cross-border payments and can quickly check what information is missing in order to let payments go through.
The role of financial regulators
A significant number of cross-border payments are stopped because of the different approaches to compliance and screening. Document and compliance checks often have to be made. Even within a particular regulator’s jurisdiction, banks may have different risk policies and manage different lists of names, requiring certain payments to be stopped and checked on a daily basis. One bank may stop a payment for a certain individual, while another may not. Typically, the only way for a financial institution to deal with any payments that are blocked is to have dedicated IT and compliance teams to undertake screening and comprehensive work-throughs.
If regulators engaged in greater collaboration and co-operation, better co-ordination of what is mandatory for particular fields in a payments message would result.
The cost driver
In the low interest rate and tight margin environment of the banking world, financial institutions continue to seek low-cost operations. The key to low-cost cross-border payments is to reduce friction as much as possible. However, the only way to reduce friction is to process payments straight through.
The payment frictions banks face fall into two categories: technical and logical. An example of a technical payment block would be a formatting problem. Theoretically, such a problem could be removed by creating and observing standards around formats. Over the longer term, technical friction may be removed via such standards and better IT systems.
A logical block, on the other hand, arises from an individual bank’s internal compliance rules. This is a challenge for banks as the differences in local markets will continue to bring friction. Another example is intraday liquidity management: banks are more rigorously checking – live – the available liquidity on a correspondent bank account, creating a new source of potential friction.
Olivier Miet, Head of Sales & Network Management Global Transaction Banking at Societe Generale says: “It is very important for all of the financial services industry to unite behind technical and compliance standards for cross-border payments; if the industry manages to stay united behind standards it will help everyone to improve the services that are provided to both retail and corporate clients.”
The road towards frictionless payments
Deeper co-operation between SWIFT, its member banks and regulators across the world will help to remove many of the frictions in cross-border payments. Technology will also have a role to play.
SWIFT gpi is addressing several blocks in cross-border payments. For example, it pre-validates payments before sending them across borders, helping to improve STP rates. APIs (Application Programming Interfaces), on which correspondent banks can call before they send a payment into the system, could direct banks about which fields must be filled and how. Artificial intelligence and machine learning processes are already used to alleviate both technical and logical frictions.
In a real-time payments world, speed and transparency in cross-border payments, as well as security, will be essential. Financial institutions may not yet be able to eliminate all frictions, but with the use of standards and technology, they will be able to make friction a minor, not a major, inconvenience, while providing both fast and safe cross-border payments.
About the authors
Olivier Miet is Head of sales and global network management, cash clearing services and Didier Balland is Head of product development and marketing, cash clearing services at Societe Generale.