Banks and instant payments – the current and future sweet spot

The next big advances will be made in the international arena and already the statistics speak for themselves. Thanks to the SWIFT global payment initiative (gpi), somewhere in the region of 40% of all cross-border end-to-end payments are processed within five minutes, from the point of remittance to the point of final receipt^[1]. 

For optimists, those for whom the glass is half full, we are well on the way to creating a new normal in the payments landscape. But one must acknowledge the cry of pessimists, for whom the glass is half empty, and accept that there remains a good deal more work to do. 

The major obstacles are readily identifiable and negotiating them successfully will not be a simple matter. It will require a combination of will, investment in technology, geographical coverage ‒ either directly or indirectly ‒ and other resources, including patience. 

Which takes us to the key issues that have been identified as the subject of the panel to which this article will act as something of a companion piece. 

Banks have successfully shown that they can deliver fast, sometimes even instant, cross-border payments around the world with SWIFT gpi. We are asked whether, with a growing number of banks signing up to join the service, traditional banks can regain the market share lost over the past few years to the ranks of alternative providers ‒ the so-called challengers and disruptors, often financial technology firms with a severely limited product range, who are offering cheap cross-border payment models. 

In all the excitement surrounding the brave new digital world, it can be easy to forget that banks retain a number of advantages over would-be disruptors; advantages based on history, brand recognition, reputation, geographical reach (directly or indirectly) and proven track records. But at the same time – and as long as a consumer does not experience any trouble – speed and cost remain the major triggers for selecting an international fund transfer provider. For corporate treasurers, it is obviously another story. 

That we have reached our current level of attainment in the speed of effecting international payments is little short of astonishing, given the constraints imposed upon the global financial world by geography itself, physical distances and differing time zones. Not to mention an almost bewildering array of long-established local working patterns, differences between legal and regulatory jurisdictions, and distinctive cultural and social habits which dictate that not only daily opening hours but also opening days themselves can vary markedly, particularly when it comes to religious and secular public holidays. 

A payment instruction initiated in Australia and aimed at a beneficiary in France, for instance, might well arrive at its planned destination when the local clearing system is simply closed. When a payment cannot be processed in such circumstances, hours might be lost. This understandable constraint explains why even a straight-through-processing (STP) payment cannot always reach the beneficiary’s account as fast as expected by consumers who are accustomed to immediate delivery. This constraint will persist until a way is found to channel cross-border payments to local instant payments mechanisms. 

Even then, two obstacles remain to be overcome. It might be the case that payments are blocked for client-specific reasons or for matters related to compliance issues, further dragging down the average rapid or instant payment execution times. 

Another delaying factor is the need to effect an exchange rate conversion at the beneficiary level. If the issuer does not denominate the payment in the currency of the beneficiary, the payment cannot be, by definition, instant. 

An important element in this context is education of the remitting client in matters pertaining to foreign exchange. Alternatively, auto-conversion schemes should be seriously considered by the ordering bank to optimize the speed of their cross-border transactions to instant systems in the country of destination. 

Sticking with the theme of technology, but with a more positive edge, another driver of faster to instant payments is growth in the number of capable global systems. There are around 40 such clearing systems in the world today, compared with around 30 only a few years ago. This instant payment wave will undoubtedly continue to grow in number and reach, with SWIFT gpi aiming to surf on it and continue to encourage the interconnection of systems. 

Among the major upcoming investments in the payment industry, the ISO 20022 migration is certainly among the biggest and the most challenging, given its huge and widespread impact on current IT systems. It should bring richer payments messages, increasing the chances that all the information needed to apply payments or instruct compliance cases is provided. On the other hand, it could lead to more compliance alerts requiring the refinement of certain parameters in filtering tools. 

A key part of that future is of course automation. Full STP ‒ from payment initiation to payment receipt ‒ is essential for instant, accurate payments. Without full STP, it just will not happen. 

Against such a multi-faceted backdrop, I would argue that the banking industry's performance looks good to date. If only we can identify the most effective way to render pricing for lower value payments more attractive, and so prevent digital native operators from eating into that segment of the market. 

^{[1] Source SWIFT, June 2019.}