FinTechBlockchainWhat are the teething problems with real-time payments?

What are the teething problems with real-time payments?

Infosys Finacle’s Head of Europe, James Buckley shares his views on the teething problems that need to be overcome if real-time cross border payments are to become a mainstream reality.

“Real-time” is something of a buzzword in finance at present. Amidst all the excitement that innovations bring, it can be hard to home in on the relevant technology. What’s more, regulation can often be an added barrier to increasing the use of real-time payments, especially when it comes to cross-currency and cross-border payments.

However, James Buckley, Head of Europe at Infosys Finacle feels there are additional teething problems worrying the sector that need to be overcome if real-time cross border payments are to become a mainstream reality.

James Buckley, Head of Europe at Infosys Finacle

“It’s not so much regulation as macro-management of a country’s financial position which is a key worry for the central banks and regulators in many countries,” he says.

“For decades there’s been a fairly standard set of models for cross-border payments in particular vis-à-vis the low end remittance – the Western Union type models, and very high cost and very lucrative at the corporate commercial cross-border end, a standard correspondent banking model with all the attendant liquidity and positions held in country and very much next day or day plus two type settlement model.

“This means that you’ve got a fairly conservative model in terms of managing one’s position at a country level. That model has been in place in part through the earlier idea of exchange control, so it’s still there today in the context of managing flight of cash.

“For example, the situation earlier this year when China devalued the Yuan, one of their concerns was obviously of flight of funds from the mainland economy, mainland market. But that can be managed if you’ve got a standard set of models in terms of correspondent banking and limits on payment flows at a macro level between different banks on either side of the border frontier. That can be managed from a central bank and therefore central government point of view quite easily.”

Real-time payments in the real world

Of particular concern with cross-border real-time payment flows are the consequences when crises hit the global economy.

“In that model you introduce a degree of change which requires the central banks to be plugged into a real time world, also proactive and reactive in a real time and near real time world when stretches hit systemically.

“Whether it’s the day that Lehman Brother’s collapsed and liquidity froze, whether it’s a change like we saw recently with respect to the Yuan being devalued, or whether for example on 31st January the UK crashes out of the EU and causes mass destruction in the financial markets,” he adds.

“Jumping the gauntlet” into real-time payments

Buckley acknowledges that using real time efficiencies to improve the economy was a well-trodden path and that there was now a race to provide cheaper real-time cross border payments.

“The real focus obviously for corporates and banks as well as central bank authorities is to be able to jump the gauntlet of the cost of Swift and the cost of doing business and move into a much cheaper world of real time cross-border payments. For banks that includes the ability to provide advanced currency services, whether it’s HSBC or JPMC or Barclays, they are all vying for that segment of the business in terms of what cross-border means,” he says.

Blockchain solution, blockchain problems

As blockchain and digital currencies move real value rather than just messages, they muddy the waters further, and Buckley believes that these solutions bring their own problems.

“If you’re moving real value, whether it’s bitcoin based or not, that’s non-repudiatable value. If you build a system based on the ability to provide non-repudiatable value that everyone agrees to and build in multi-currency, you’ve got a mechanism that doesn’t require a message and settlement capability, you’ve got a real value movement cross-border and this becomes a problem for capital flight.

“That model is out there, the problem is how do you manage it if you allow it to systemically emerge? How do you manage your country level treasury operation?”

From Swift to Blockchain

In the remittance space, Buckley says that SWIFT has already begun revolutionising its cross-border payments. However other schemes and players are emerging.

“The biggest corridor between anywhere in the world in terms of remittances is between the Middle East, places like Dubai in particular and Abu Dhabi, and India because there are huge itinerate workforces in the Middle East. Most of the workforce comes from the Indian sub-continent and 90% of what they’re doing is repatriating that money back to their families in the home country. That’s a huge corridor.

“We worked with Emirates NBD on one side and ICICI on the other to build a blockchain-based replacement for what was effectively a SWIFT-based backbone and moved the cross-border payment from a day’s settlement to 36 seconds. Initially we started with the message-based blockchain and then we moved onto the settlement side as well.

“That’s allowable from a regulatory point of view because the flows are forward funded, are fairly predictable and you can always put a brake on it from either side of the corridor, so to speak. We have set that up. What ICICI has done with it is to use more modes in its own network to then offer payment services for Middle Eastern banks via Emirates NBD or directly in the Middle East to get payments up to North America – initially in Canada but obviously the prize is the US – so that they can provide a cheaper alternative to the standard correspondent banking models that get monies up to North America.”

Classic models are numbered

Developments such as those listed above lead Buckley to believe that the model used for remittance could eventually undercut the classic SWIFT model. Indeed, he says that it is “inevitable” the current model will die.

“At some point the structures will be in place to allow real-time, cross-border, high value payments that settle in real-time as well. There’s nothing stopping that model being implemented today from a technology point of view anymore. All the components are in place and they have been for some time.

“There’s nothing stopping the banking world saying: ‘well actually our SWIFT consortium is just a bit of a closed shop, too unionised and too expensive, we can do this more efficiently at a cheaper price point and still make a lot of profit without the current model’. That’s where I think it’s heading.

“If you look at it from a corporate’s point of view, increasingly when they’re looking at their operations in countries, increasingly they are being offered real time payment capabilities, there’s open banking PSD2 in Europe, open banking in places like Australia and Hong Kong, Japan are looking at it, Canada, US et cetera. Everyone is looking at open banking and APIs and they’re in various states of maturity.

“Obviously in Europe we have PSD2 with the sandboxes, supposedly coming next month. If they do it will be interesting, if they don’t obviously there will be a lot of potential fines floating around, but that’s where we’re at. I feel like we’re on the cusp of something very, very interesting!”

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