Eurozone poised for cross-border real-time payments
The number of EU countries with real-time payment systems continues to rise, but prospects for systems that work across borders remain uncertain outside Europe, though block-chain technology could offer one solution.
The Euro Retail Payments Board in December identified instant payments in euro as one of its main objectives.
Banks will need to raise their game to start offering FX conversion in real time
The organization expressed concern that the emergence of new solutions might end up creating a fragmented market in Europe, with its chairman emphasizing the need to avoid closed systems that don’t communicate with each other.
Real-time payment systems such as Faster Payments in the UK were not established to address the issue of cross-border payments – they are domestically focused and still link into older infrastructure to enable payments between different countries, observes Tristan Hugo-Webb, associate director of the global payments advisory service at Mercator Advisory Group.
However, as more countries go live with instant payment systems, it will be easier to link them and Europe is uniquely positioned to facilitate such links.
In March, EBA Clearing, a bank-owned provider of pan-European payment infrastructure solution, announced its intention to offer Europe-wide, instant payment processing services to payment service providers by 2018.
“This highlights the industry momentum towards real-time payments and that instant cross-border payments will be a reality in the relatively near future,” says Hugo-Webb.
A study on interoperability of immediate payment systems, published by the European Automated Clearing House Association (EACHA) in January, suggested a cross-border service could be established “within a reasonable timeframe” by connecting the current operational systems within the European Economic Area.
The EACHA proposes a decentralized model for cross-border immediate payments, based on a bilateral exchange between its members rather than the creation of a new scheme.
However, it also acknowledges this model would have restricted geographical scope initially, since it would be limited to existing payment systems that cover the UK, Sweden, Poland, Norway and Denmark.
Gary Wright, CEO of BISS Research, says the impetus to change payment systems in Europe is much stronger than in other parts of the world, while Gene Neyer, Fundtech’s senior vice-president of payments product management, is optimistic about the outcome of the EACHA’s challenge to the industry to develop a co-operative, Europe-wide solution.
“This is likely the most efficient way for the industry to evolve, since cross-border flows are still small compared with domestic flows,” he says. “This cooperative integration would not pose a challenge, as both the technology and the governance required are well understood and available.”
It is also too transparent. You may not want to know how much your customers are paying you and who they are
Gareth Lodge, Celent
Processes and protocols will probably follow existing industry practices, with banks taking responsibility for doing the currency conversion and using the clearing houses only for clearing and settlement in a single currency, suggests Neyer.
“Details of settlement between banks and clearing houses will need to be worked out, but that is a technical task rather than a conceptual challenge,” he adds.
“Banks will need to raise their game to start offering FX conversion in real time, though. Some alternative networks are doing this today, thus challenging banks by demonstrating that cross-currency real-time payments are well within industry capabilities.”
The other option for offering instant payments in multiple currencies is technologies such as the Bitcoin block chain – the public database that underpins the cryptocurrency, which is also referred to as distributed or public ledger – or Ripple, which is one of the most prominent examples of a decentralized ledger.
That is the view of Barry Kislingbury, lead consultant at ACI Worldwide, who is confident that “within the next several years” instant multi-currency payments [based on ISO 20022 and other globally accepted standards and rules] will be a reality.
The use of a distributed ledger mechanism to facilitate cross-currency – or in the example of Europe, within currency – settlement between systems is an option, agrees Kris Kubiena, VocaLink’s proposition delivery director.
“Extensions to this technology can be used to facilitate a market for foreign-exchange transactions to provide a more open and responsive alternative to fixed correspondent relationships,” he says.
Gareth Lodge, senior analyst at Celent, observes that Singapore has developed a real-time payment system that is currency agnostic by using the universal financial industry message scheme ISO 20022 as the message container.
The block-chain technology, as a ledger of ownership, can be used to confirm that a change of ownership of currency has taken place.
However, Lodge warns that block-chain solutions, such as Ripple, only address part of the value chain.
“For instance, they don’t have a reporting mechanism – you put money in, but nothing tells you where and when it has come out at the other end,” he says, concluding: “It is also too transparent. You may not want to know how much your customers are paying you and who they are.”