The cross-border payments industry and the correspondent banking network that underpins it stand at a crossroads.
For far too long, the service that corporates and consumers have received from their banks when transferring money internationally has been slow, expensive and opaque: quite at odds with their new expectations and digital experience in buying goods and services.
Late in the day, Swift, the membership organization of 11,000 banks, is urgently pressing ahead with its global payments innovation (gpi) to address all this.
However, by falling behind, the banking industry has already encouraged abundant competition from technology companies aiming right at the heart of their core business.
In 2015, Nicolas Cary, co-founder of Blockchain, the most popular bitcoin wallet provider then with 3.7 million users, put the banks on notice of the danger they were in.
“If I want to send value anywhere in the world, I can now do it instantly, like sending an email,” he said. “Our vision is to completely re-imagine how the world transacts.”
He reminded the banks why millions of their customers were looking to other providers by pointing to the chair he was sitting on at a Misys Forum in London.
“Right now, it would probably be quicker and cheaper for me to hire a courier to package up this chair and deliver it to New York than it would be for me to send the money from New York to London through the banking system to pay for it,” he says.
Three years on, bitcoin has boomed and bust, but Blockchain now has 30 million wallets, with customers in 140 countries and has processed $200 billion of transactions.
Finally, the banking industry has responded with the leading global financial institutions behind Swift gpi pressing ahead. The question now is how fast regional and local banks will adapt and whether global adoption – now scheduled for 2020 – will usher in close-to-instant cross-border payments at low cost.
Swift, the cooperative founded in 1973 to automate manual payments processing and standardize associated messaging, launched Swift gpi in 2017.
Built using cloud-based tools on top of banks’ existing messaging and processing systems, it aims to make cross-border payments much faster and much cheaper, with payments hitting beneficiaries’ accounts on the same business day they are initiated.
Swift gpi also makes it much easier for payers and beneficiaries to trace exactly where along the chain of intermediary banks between them a cross-border payment stands at any given moment.
It can take three months for a bank to connect into Swift gpi, but with more than 80 banks already live on the system sending 700,000 payments a day, and with another 300 signed up – the two groups between them accounting for 180 of the world's largest banks – the roll out now has strong momentum.
Time taken to complete Swift gpi paymentsSwift gpi is very fast
On busy days, the gpi banks have been transferring $110 billion in cross-border payments between them. Some 50% of gpi payments are now being credited to end-beneficiary accounts within 30 minutes.
This is a big improvement.
The new goal is near instant cross-border payments, at least where real-time domestic payments systems are modern enough to accommodate this and their opening hours are extendible.
In October, Swift announced the result of trials with banks in China, Thailand and Singapore transmitting payments to and from Australia, which benefits from having one of the most up-to-date domestic payments networks. The fastest payment made directly between gpi banks in these corridors was initiated from a bank in Singapore and credited to a beneficiary account at an Australian bank within nine seconds.
Now, after the latest Swift standards release this November, the entire Swift network of 11,000 banks and other financial institutions will be required to include a unique end-to-end transaction reference (UETR) in their payment instructions, irrespective of whether they are themselves a gpi-enabled bank yet or not.
“This is a huge step forward,” Ingrid Weisskopf, head of payments, financial institutions at Commerzbank, tells Euromoney. “Think of it as being like when you send a parcel and it has a reference number for you to track.
“All banks in the Swift network will be obliged to attach this unique reference to any payment they initiate or that they receive from a correspondent and forward on to another bank or to a beneficiary.”
It won’t eliminate the errors that led JPMorgan recently to set up its interbank information network on blockchain to resolve stuck cross-border payments. If a bank forgets to fill in a beneficiary’s name or address properly, a payment will still be queried.
Weisskopf says: “Unfortunately, we may still get the ‘beneficiary claims non-receipt’ message, but the reference number will make it much easier to immediately identify the payment being queried and go into the cloud and discover where and at which bank it has stopped.”
That should speed up resolution of stuck transactions.
Clients will not have to pay more for much faster payments. “Fast and efficient cross-border payments will become the standard and the price will come down,” says Weisskopf. “There won’t be a traditional slow channel that’s cheap and a fast channel that’s expensive.”
Instead, greater visibility on where a payment is at any moment will expose sunk charges that are often passed on to corporations and which have been difficult to unbundle.
Weisskopf suggests: “It will become very obvious to clients which are the expensive steps in a payment and we will have to find the best way to pay as directly as we can to the final beneficiary.”
I have a vision of the client treasurer with a portal through which they can see where each current payment transaction stands- Ingrid Weisskopf, Commerzbank
The best way for big payments banks to do that would be to maintain large networks of correspondent banks, so that a payer’s bank in Europe, for example, might transfer directly to an in-country correspondent bank in Asia where the payment is due, ideally to the very bank where the ultimately beneficiary has its account. That rarely happens.
The Accuity Bankers Almanac lists 22,000 banks around the world and that probably undercounts the total, with more non-banks now involved in payments. Worse, the global regulatory crackdown on terrorist finance and money laundering has severely disrupted correspondent banking.
“To keep the cost of payments low, it makes sense to directly execute as many payments as possible,” says Weisskopf. “We are in Germany and a lot of our corporate clients are exporters, so we do have access to a correspondent bank network covering all important international financial and economic centres.
“But in recent years, regulatory requirements and a new risk perception have led to a reduction of these networks in the industry. Banks have to think very strategically based on a risk-and-return analysis how to maintain them.”
Former correspondents of Danske Bank are probably right now reviewing the strategic decisions they took to handle payments in and out of its Estonia branch and what the ultimate liability for doing so might be.
Meanwhile, a debate among the larger cash-management banks asks whether payment flows will further concentrate between fewer regional and global banks, with the gpi-enabled leaders perhaps re-routing payments so as to avoid non-gpi banks until the last step in transfer to a beneficiary.
“There will be steps along the way to full adoption of gpi,” Weisskopf points out, as Swift strives to sign up smaller local and regional banks and bring corporates on board as well.
“In the end, I have a vision of the client treasurer with a portal through which they can see where each current payment transaction stands, review particularly important ones and be 100% confident that they will be completed in a short space of time and not returned.”
During the summer, Swift gpi began testing an enhanced standard that will allow corporate treasurers to initiate and track gpi payments to and from multiple banks and integrate gpi flows into their treasury management systems.
Lisa Wagner, group treasury manager at Microsoft, says: “The ability to access a greater level of payment information in a timely manner through Swift gpi will bring immediate benefits to our payments experience with greater transparency and responsiveness to our vendors.
“Providing multi-bank information all in one place and in the same format fits into our modern finance roadmap.”