Head of sales & network management global transaction banking, Societe Generale
“We will never entirely eliminate friction in cross-border payments,” says Didier Balland, head of product development & marketing, cash clearing services, global transaction banking at Societe Generale, “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.”
The digital transformation in financial services has accelerated the pace of cross-border payments and in many cases payments can be settled almost instantly. But within this environment, there are still frictions leading to the need for enquiries or investigations. According to Swift, 2%-5% of cross-border payments are subject to such an enquiry or investigation, resulting in a time lag in the payment being completed.
Both internal and external factors can be the cause of such friction. For example, each country with which a bank interacts may have its own rules, regulations and requirements for data. Understanding the different requirements globally requires a high level of expertise. Problems can occur when clients provide information that is incorrect 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 also means that cross-border payments are difficult to automate.
Swift estimates that managing enquiries costs banks 25 to 35 times more than the payment processing itself, and efforts to automate cross-border payments processing have had very limited success.
The tools to fight friction
Standardizing cross-border payments formats will help financial institutions to eliminate many of the factors causing friction. Swift’s move to the richer file format of ISO 20022, which is easier to understand and brings more fields into play, will make life simpler for financial institutions and their correspondents. The format will allow more data to be included so that it can satisfy different local regulatory requirements.
Financial institutions can also reduce friction by implementing dedicated platforms for cross-border payments. These would 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. It is unlikely that financial institutions will ever achieve 100% STP rates, and digital tools must be combined with the expertise of experienced staff. For the small number of payments that require investigation, financial institutions will need experts dedicated to cross-border payments who 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 different approaches to compliance and screening, across institutions as well as jurisdictions. 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 cooperation, they could better coordinate the mandatory requirements to be included in a payments message.
“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,” says Olivier Miet, head of sales & network management global transaction banking at Societe Generale.
The cost driver
In the tight-margin environment of banking, financial institutions continue to seek low-cost operations. And the key to low-cost cross-border payments is to reduce friction as much as possible.
The payment frictions banks face can be categorized as technical or logical. A formatting problem, for example, would be a technical payment block. Theoretically, such a problem could be tackled by creating and observing standards around formats and, over the longer term, the 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 as the differences in local markets will continue to bring friction. Another example is intra-day liquidity management, whereby banks are more rigorously checking the available liquidity on a correspondent bank account – live – creating a new source of potential friction.
The road towards frictionless payments
Deeper cooperation between Swift, its member banks and regulators across the world will help to remove many of the frictions that arise in cross-border payments. Technology also has a role to play.
Swift global payment initiative (gpi) is already addressing several of the issues. For example, it pre-validates payments before sending them across borders, helping to improve STP rates. Before they send a payment into the system, correspondent banks can use application programming interfaces (APIs) to direct them on which fields to complete 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 sources of friction, but with the use of standards and technology, they will be able to make friction a minor inconvenience, rather than a major obstacle, while providing both fast and safe cross-border payments.