Global trade flows are shifting, with new economies emerging as global forces and trade increasingly occurring intra-regionally. So, just how are payments systems facilitating this change?

If commerce and trade are the lifeblood of an economy, then payment infrastructure is its circulatory system, and cash management professionals sit at the heart of it. Although the environment in recent years has been challenging for cash management professionals, longer term structural trends are being played out that affect not only how the world interacts, but also how it transacts. Treasurers now find themselves in an environment where the direction of trade flows is shifting, and how funds move around the world is becoming more efficient. 

In its Global Economy Watch report, consultancy PricewaterhouseCoopers argues that 2013 is the year when people will start to see how the global economy will look for the rest of the century. The contribution of emerging economies to global gross domestic product – in purchasing power parity terms – is projected to overtake the contribution of advanced economies in 2013 for the first time since such matters have been recorded. 

It is not just a shift from West to East, but rather a move to multilateral and multidirectional trade flows where emerging markets increasingly trade with each other. Regional connectivity and intraregional flows make up a significant part of this landscape. Figures from the World Trade Organisation (WTO) show that 71% of exports in Europe remained in Europe in 2011, while in Asia, 53% of Asian trade was exported to Asian countries. Meanwhile developing countries are experiencing a shift from not only being the producers, but also the consumers of the world’s goods and services. 

In 2012, the International Monetary Fund’s (IMF) World Economic Outlook report noted a two-speed recovery to the global economy, with a split between the weaker growth in the developed world and the brighter prospects in emerging markets. In its projections for this year, the IMF describes a three-speed recovery. Emerging markets continue to perform strongly, and the developed world is split between the weak growth in Europe and a more positive outlook for the US. 

China's shift

In the context of global economic growth, the contribution of China has been changing. By 2010, according to the WTO, China had already overtaken Germany and Japan to become the world’s second largest trading partner after the US. And since it outlined its economic vision in its 12th five-year plan for 2011 to 2015, China has been moving its industries up the value chain and shifting to a model where domestic consumption is more significant. While developed countries previously looked to China to make their goods, now those countries are considering how to sell products and services to China’s emerging middle class. As China’s interactions with the rest of the world increases, so is south-south trade between the emerging economies of Asia and Latin America. 

The size of China’s inbound and outbound flows are not yet reflected in the use of its currency, but the project to internationalise the renminbi aims to change how China transacts with its trading partners. The use of the renminbi is increasing; 47 countries were using it for more than 10% of their payments with China and Hong Kong in May, according to the Renminbi Tracker report from international payment network Swift. The report notes that Italy and Russia have been strong adopters of the renminbi, along with the UK, Singapore and Taiwan.  

While the process of liberalising the Chinese currency is ongoing, the distinction between offshore and onshore renminbi means that barriers remain for funds to flow directly into the country. Payments travel onshore in China along the rails of the China National Advanced Payment System (Cnaps) and foreign banks need to connect to a member bank of this domestic payment system, either through a correspondent bank in China or through a clearing bank in an offshore renminbi centre. Cnaps is not based on Swift standards, and the current clearing arrangements create additional links in the renminbi payment chain between foreign banks and China's central bank, the People’s Bank of China. 

World currency

The vision, however, for the internationalisation of the renminbi is that the Chinese currency will one day be fully convertible and will be able to flow as freely as the US dollar. Part of implementing that vision is an international payments network in China that enables banks around the world to connect directly with its central bank. 

China is currently developing the China International Payments System (CIPS), a network based on international standards that will enable international renminbi payments to be more efficient. CIPS will be similar to the Clearing House Interbank Payments System, the US network for domestic and international large-value payments. Once the system is up and running, it will have a significant impact on the way China transacts with its trading partners. The development of CIPS falls in line with the upgrade of other payment infrastructures, which has implications for treasurers working in an increasingly connected world. 

The project to internationalise the renminbi and develop CIPS is based on a political vision of the Chinese authorities to facilitate trade. Similarly in Europe, the creation of the Single Euro Payments Area (Sepa) was based on a political vision. That vision was to dissolve trade barriers, with there being no distinction between national and cross-border transactions, so that Europe can trade as a single entity. And the creation of Sepa provides the payments infrastructure to underpin those transactions so that funds can flow seamlessly across national borders in the region. 

Although the implementation of Sepa has been complex, and weighed down by the lengthy harmonisation of national standards, the project is significant because its aim is to overhaul the patchwork of domestic payment systems in Europe. As with CIPS, Sepa shares a goal of simplifying the assortment of current arrangements to increase the connectivity and efficiency of payments. 

Now corporates and financial institutions are gearing up for the February 2014 deadline when direct debits and credit transfers must be Sepa-compliant. This comes at a time when other jurisdictions, aside from China, are also upgrading their infrastructures and implementing large-scale projects. 

Need for speed

There is a wider trend of moving to real-time payments, a switch that will likely gather pace in coming years. The UK was the first to launch real-time payments, in the form of the Faster Payments Service in 2008. The shift to faster payments meant that individuals in the UK could receive inter-bank transfers in hours, rather than waiting a few working days.

Other markets followed the UK and in 2011, for example, the Nigeria Inter-Bank Settlement System launched NIBSS Instant Payment, and in 2012 Poland launched the real-time system Express Elixir. The trend toward real-time payments is expected to gain momentum, with Singapore and Australia the next markets in line to make the move to faster payments. 

In the UK there is a new project under way to link the Faster Payments Service with mobile phone numbers. Once complete, the service will enable payments between bank accounts by using mobile phone numbers instead of sort codes and bank account numbers. Combining real-time payments with mobile has the potential to transform not only the speed of settlements, but also the nature of economic interactions. At an individual level, for example, buying a second-hand car would have involved writing a cheque, waiting for the cheque to clear and picking up the car many days later. With online banking, the process is quicker, but with real-time payments and mobile, the process is more convenient, instant and the buyer can drive away with the car that day. The power of mobile also means that individuals can sell goods and receive payments straight into their bank account, without the need to accept card payments. 

Real-time payments speed up the settlement process with knock-on effects for commerce; if payment is received, goods can be released. And if people are paid quicker, they can pay someone else, and so on. For consumers, this overcomes inconveniences, but the wider significance is for corporates whose business is based on collections and payments from consumers. For example, if utilities companies are able to receive individuals’ payments in real-time via a mobile phone, or if online retailers can receive funds faster, the collections cycle is reduced. For treasurers sitting at the heart of such organisations, the pulse of commerce has quickened.

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