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Great expectations for wholesale payments

The retail payments space has witnessed a great deal of innovation over the past few years. To date, this has not been matched on the wholesale side. Christian Westerhaus, global head of product and strategy, institutional cash management, at Deutsche Bank looks at how developments on the domestic retail side are influencing client expectations in wholesale payments and assesses the steps the industry is taking to enhance the cross-border payments experience.
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Christian Westerhaus embedded

Recent advances in technology can only be described as phenomenal. We now live in a world in which virtually everything is instantaneous. Indeed, scores of digital applications provide access to products and services at a moment’s notice. Essentially the world is shrinking as individuals can plug into anything from anywhere at any time. The boundaries between work and life are blurring and consumers have entered a constantly connected world.

What does this have to do with payments? Increasingly, expectations around ‘instantaneous events’ are coming to bear on the payment experience. As a result, the number of instant payment schemes emerging across the globe has experienced a surge, with almost 50 countries currently deploying or running such schemes. Nearly all of these initiatives are being developed at country level, but that is not surprising given that approximately 95% of payments are domestic.

Regulators have driven forward the move to instant payments in many jurisdictions, such as the UK, Singapore and Australia. Increasingly, however, consumer demand and the recognition of associated business opportunities are driving these developments, as seen with schemes in Germany, the Netherlands, Italy and Belgium.

Having an instant payment infrastructure also fosters innovation and competition. Over the past few years, new competitors and financial technology companies (fintechs) have entered the payments space – in many cases encouraged by financial regulators – and now provide a range of mobile payment services.

In the short to medium term, the next transformation in the payments industry will come when immediate payments can be executed at a cross-border level. EBA Clearing, for example, has announced its intention to offer Europe-wide instant processing services to payment service providers by 2018. This is a significant development in the payments landscape. Interoperability at a global level, however, will be much more difficult to achieve given know your customer and anti-money laundering compliance, as well as varying regulations in multiple jurisdictions.

Retail and wholesale differences

In many instances, corporate business models are beginning to shift from a classic business-to-business model to a business-to-consumer one. For business-to-consumer payments, instant payment infrastructures will therefore play a greater role in the future. However, there are different circumstances when considering instant payments as a channel for corporate or institutional payments. Large corporate operations, processes and systems are set up for overnight settlement, for example.

Undoubtedly corporates will see a number of benefits from adopting immediate payments. For example, corporates could potentially improve their working capital by accessing funds posted in real time, rather than dealing with delays related to the clearing cycle of slower payment types.

But if instant payments do develop in the corporate space, a far more complex problem arises as the transaction values increase significantly, which moves credit and liquidity issues to the forefront. It is due to these factors that the topic of instant payments – at least at this stage – is not corporate treasurers’ main priority (in contrast to merchants). They are much more concerned about transaction transparency and traceability, as well as ensuring the highest possible security level.

Improving cross-border efficiency

In terms of innovation, improving visibility and control over cross-border transactions is where banks need to refocus their attention. Corporate cross-border payments are fundamentally the veins of international trade. To make these payments, corporates rely on their banks which, in turn, depend on correspondent banking partners to provide efficient services.

The correspondent banking model is based on infrastructure that has been built up over the past 40 years (contingent on Swift messaging) and is proven to be stable and resilient. Indeed, users see great advantages in the current system: it is global by definition, broadly understood within the banking industry and comprehensive in its reach. Virtually all banks participate in some manner.

That said, many of the expectations customers have become accustomed to in their everyday lives, such as transparency and utmost convenience, are spilling over into wholesale commerce. Without a doubt, there is a realisation within the banking community that we need to proactively respond to customer needs for more speed, transparency and predictability of time and cost in cross-border payments. Customers will simply no longer accept a payment potentially taking up to three to five days to be processed end to end with limited ability to track or trace.

A Swift proposal

Recently Swift and the banking community launched the Global Payments Innovation Initiative (GPII), which seeks to bring the cross-border payments business in line with current customer expectations. The GPII will look to build on existing correspondent banking foundations by providing an overlay of new global business rules. More than 65 banks have signed up for the initiative, which will be built on a basis of compliance, global reach, co-operation and standards. A new service level agreement rulebook is being created aiming to deliver:

  • Same-day availability of funds.
  • Transparency and predictability of fees.
  • End-to-end payments tracking.
  • Transfer of rich payment information.

Piloting of the system is currently under way with results to be announced at the Sibos conference in Geneva in September. The plan is to have a ‘go live’ date towards the end of this year.

The GPII will undoubtedly result in a significant improvement for banks’ corporate clients, increasing efficiency and lowering costs. Just how each bank envisages its integration of GPII is ultimately the decision of individual providers.

Deutsche Bank sees smart integration as the way forward. As part of its future developments, this entails including application programming interfaces to support service and status requests, digital documents and digital signatures, data visualisation to provide insight and potentially blockchain/distributed ledger technology. Existing popular payment applications, such as  the Deutsche Bank Autobahn Cash Inquiry app, will also be integrated as part of the bank’s future-looking payment ecosystem.

Payment and enquiry journey 1

Transaction processing today

  • Swift is the main carrier of the messages from one actor to the next.
  • Each participant in the value chain is limited to its own data environment and communication is unidirectional (from left to right).
  • There is no unique end-to-end transaction reference being transported.
  • None of the actors can track the payments end to end, which means there is no clarity about where a payment is or when it will arrive at the recipient.
  • Each of the intermediaries could also charge handling costs and deduct that from the original amount, making it even harder to reconcile the received payment with the original invoice.
Payment and enquiry journey 2

Transaction processing – going forward 

  • The new unique transaction reference will allow payment tracking.
  • The Global Payments Innovation Initiative payment tracker in the cloud will contain feedback from the correspondent banks.
  • The feedback that participants provide will contain information about where the payment is, processing times and charges.
  • The information in the cloud will help banks provide a client experience similar to the package tracking by a postal service (for example, UPS or Fedex).

 

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