The global payments industry is undergoing dramatic change, driven by new entrants, regulations, customer requirements and technology. Market participants are looking for continual improvements on speed, convenience and efficiency in order to better serve their customers.
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According to Javier Santamaría, chair of the European Payments Council, the industry as a whole has turned its attention to updating payment processes, after years of being focused on surviving the global financial crisis. “I think [renovation] is long overdue,” he says. “We were all distracted by the crisis but now there is accelerating innovation in the payments space.”
In an instant
Beneath the flurry of activity at the consumer interface, a steadily advancing overhaul of many countries’ payment infrastructures into real-time, always-on, synchronous systems is occurring. To date, more than 30 countries have implemented, or are in the process of implementing, instant payments systems.
Importantly, the US, Europe and Australia are all aiming to have some sort of real-time framework in play by the end of 2017. And while Canada is still in the planning stage, it is not far behind.
“With Europe, Australia, US and Canada around the corner, banks can connect most G20 countries in a real-time global payments network,” says Gene Neyer, head of industry and regulatory, global payments at D+H, a payments technology company, and a member of the Federal Reserve’s faster payments task force.
Although most initiatives are currently focused on domestic systems, Samantha Pelosi, senior vice-president, payments and innovation at the Bankers Association for Finance and Trade (BAFT), believes the end goal is cross-border interoperability.
Previously an employee at the Federal Reserve Board and a delegate to the Committee on Payments and Market Infrastructures (CPMI) at the Bank for International Settlements , Ms Pelosi says: “The topic of harmonisation was definitely a focus [for the CPMI]. There is an awareness that we should be working together to build into our national systems the ability to interoperate.” The EPC’s Mr Santamaría agrees that there is a global coordinated vision to have real-time cross-border payments in the future.
Missing links?
Yet true connectivity and interoperability may be difficult to achieve, even though many real-time payments initiatives have decided to use global standards, such as the ISO 20022 messaging standard. Mr Neyer warns of different flavours developing. “There will be subtle differences in ISO 20022 due to local practices; so while conversion problems may lessen, they won’t go away initially,” he says.
Jeremy Light, managing director of Accenture Payment Services in Europe, Africa and Latin America, is sceptical that real-time cross-border payments will be achieved through linking together domestic systems. “When the Clearing House launches real-time payments in the US, for example, will it join up with the UK’s Faster Payments Service [FPS]? I’m not convinced it is a current priority. For example, VocaLink, which developed UK FPS, is also running FAST [Fast and Secure Transfers] in Singapore – this would appear to be a good avenue for linking the UK with Singapore but that hasn’t happened yet,” he says.
And while global standards may be one stage in promoting international collaboration, Mr Light believes the key to cross-border payments is settlement. “Domestic and cross-border payments are fundamentally different when it comes to settlement,” he says. “Domestic banks have settlement accounts at their central bank. Such an easy settlement process is not available for cross-border payments, which is why banks set up nostro accounts with each other.”
BAFT’s Ms Pelosi raises two more challenges to consider: fraud and liquidity, which are also issues encountered when developing domestic real-time systems. “Not only can legitimate payments move faster but so can fraudulent payments,” she says. “Liquidity is another concern. Is there enough liquidity to move those payments in real time, or will they be pending until there is assurance that enough liquidity is in the system?”
Isabel Schmidt, head of institutional cash management, Americas, at Deutsche Bank believes intraday liquidity issues are now coming to the fore. “There is greater understanding today that liquidity is not just a commodity,” she says. “We have particularly noticed that non-bank financial institutions – that is, broker-dealers – have come to quickly understand the value of intraday liquidity and appreciate that such services are remunerable.”
In the end, these technical obstacles are surmountable, says Mr Santamaría; however, the major deterrent is on the business side. “Technically we can make real-time cross-border payments happen, but is it profitable?” he asks.
Improved experience
Not waiting on multiple infrastructure upgrades, bank messaging consortium Swift decided to revamp the service level agreements between its network banks in order to improve the correspondent banking experience, which is facing disruption from new entrants. Swift’s global payments innovation initiative (GPII), while not real time per se, is a “real world” innovation to improve payment visibility, predictability and fee transparency, according to Wim Raymaekers, head of correspondent banking at Swift.
“While corporates may not be demanding instant payments right now, they are looking for greater certainty and visibility in terms of whether the payment has gone through and how much it costs. Therefore we are responding to evolving needs, using Swift’s secure, resilient and compliant platform and bringing in new functionality over time,” he says.
Mr Santamaría agrees with Mr Raymaekers that it is not always about real time. “For example, merchants may consider a card payment to be immediate because the guarantee of payment is there,” he says. “Some may need full availability of funds in a matter of seconds but in many other cases it is more about transparency, predictability and guarantee of funds being transferred.”
The GPII will explore additional areas of value creation, including rich remittance data and a request for payment capability; cost reduction, including better reference data and intraday liquidity control; and open access through application program interfaces (APIs), so that third parties can create their own closed-loop system.
Launched at the beginning of the year, 65 banks have signed up to the initiative as of May. A group is currently involved in a pilot programme and Swift will release the results at the Geneva Sibos in September. The GPII is expected to go live at the beginning of 2017. “The Swift GPII is a good response and proves that [the consortium] is still relevant to the industry by continuing to improve and innovate,” says Mr Neyer.
Promising developments
New technology, such as APIs and blockchain, is also having a disruptive impact on the payments industry. “APIs allow the banks to project their services and functions into the digital ecosystem, so third parties can pick them up and build them into their applications,” says Mr Light, who believes that an “explosion” of APIs across banking is just around the corner.
Todd Latham, chief marketing officer and head of product at Currency Cloud, an international payments platform, is also bullish on APIs, deeming them “the future of transaction services”. Currency Cloud, one of the new entrants responding to market needs, allows clients to access its payments engine through APIs. “The reality is that dealing and integrating with banks isn’t easy to do, so we make it incredibly easy to access a critical service,” says Mr Latham.
API adoption has been given a boost in Europe with the second iteration of the Payment Services Directive. The industry as a whole is closely following the European Banking Authority’s (EBA’s) progress in developing regulatory technical standards for APIs. The EBA is expected to issue draft regulatory technical standards by the end of the second quarter of 2016 and these are likely to be implemented by the European Commission in early 2017.
According to Mr Santamaría, a major question is whether banks stop at what the EBA outlines or go further and embrace the concept of open banking, as is being discussed in the UK. “That is a shift in mindset, not just technology, as to how banks conduct their business,” he says.
Don't believe the hype?
While no discussion on infrastructural change seems complete without weighing up the potential disruptive force of blockchain or distributed ledger technology, not everyone is convinced that it will transform the cross-border payments space, despite the hype.
Mr Neyer stresses that technology in itself is not a panacea. “Technology doesn’t solve problems,” he says. “Today we see solutions based on blockchain achieve exactly the same economics as some of the newer solutions not based on blockchain. So far this technology hasn’t delivered clear benefits.
“We need to look at areas where blockchain is superior to existing solutions. An innovation must be significantly better than the legacy solution to overcome inertia of moving to an unknown,” he adds. “Essentially, there has to be a compelling business case.”
