A single global payments area – it’s complicated

Making a payment is one of the most common financial activities. Trillions upon trillions of transactions are made every day — some are as simple as moving money from a current account to a merchant in a domestic setting; others are as complex as making sure cash moves between the myriad supply chain payables and receivables across global jurisdictions.

Domestic payment schemes are largely quick and efficient. Priorities have shifted to focus on cross-border transactions, driven by increased investment in digital, new fintech companies, efforts from incumbent banks, and the introduction of many national instant payment infrastructures.

Many view cross-border payments as “slow, expensive, opaque, cumbersome and, for some people, inaccessible”, which was how Kristalina Georgieva, managing director of the International Monetary Fund, described the issue in a September 2021 webinar.

Speeding up payments

To address these issues, at the end of 2019, the G20 finance ministers and central bank governors tasked the Financial Stability Board working with the Bank for International Settlements’ Committee on Payments and Market Infrastructures to deliver a roadmap to enhance cross-border payments. The roadmap was endorsed by the G20 at the end of 2020 and covers both wholesale and retail payments (including remittances). 

Cross-border and multi-currency payment schemes and systems have been successfully launched at a regional level, and include the likes of the Single Euro Payments Area (SEPA), launched more than a decade ago, and, more recently, P27, which aims to establish a single pan-Nordic payments infrastructure.

But where are we heading with global cross-border efficiencies? Is creating a so-called ‘Single Global Payments Area’ a viable solution to cross-border issues and an achievable goal, or should it even be a goal at all?

Much like payments themselves, the answer is multi-layered, complex and concerns infrastructure, standards, regulatory fragmentation and politics.

Sara Castelhano, JP Morgan

The Society for Worldwide Interbank Financial Telecommunications (Swift) is a dominant force in improving cross-border payments. In 2017, it launched its global payments initiative, Swift gpi, which is used by more than 4000 financial institutions and 823 banking groups. With $438bn in payments sent via Swift gpi every day, it represents more than 89% of Swift’s cross-border payments and more than 78% of cross-border MT103s (a standardised Swift messaging format specifically designed for cross-border transactions).

According to Swift, on average, 44% of Swift gpi payments are credited to end beneficiaries within five minutes, 58% are completed within 30 minutes, 79% within six hours, and almost all within 24 hours. These statistics seem to fly in the face of the conventional wisdom that cross-border payments are “slow, expensive, opaque, cumbersome, and inaccessible”.

“[Swift gpi provides] the ability to track payments internationally, find out where they are and — if they’re held up — why and how long they will be held up, so we can investigate,” says Harry Newman, head of banking strategy at Swift.

He continues: “It’s still not as quick as a domestic service might be. It’s not as quick as something like Faster Payments in the UK. So, we would argue that it is a job that is approximately half done.” 

Following on from this strong start, Swift is currently transforming the platform to centrally support transactions end-to-end, in order to enable instant, frictionless cross-border, account-to-account payments. Part of these efforts is the adoption of the data-rich, XML-based ISO 20022 messaging standard. 

Swift has extended the start date for the adoption of ISO 20022 from November 2021 to November 2022, in response to community feedback. “Rephrasing the start date has allowed banks to go at their own pace in adopting ISO 20022, and will reduce the total industry costs of realising the benefits of ISO 20022, together with the new platform,” says a Swift spokesperson. 

Reducing friction

While the banking and payments industry is embarking on a broader, global rollout of the ISO 20022 standard, some are wondering how close it is to achieving cross-border statistics that match most domestic payments schemes.

“First of all, there was a lot of development already. I think Swift gpi really made a difference and has proven that cross-border payments can be executed in a fast way,” says Christian Fraedrich, head of business architecture, corporate bank at Deutsche Bank. “But I agree there is still a lot of friction in the system.”

Mr Fraedrich points to two areas of friction: data; and regional regulations and sanctions. 

“You have your sanctions; you have your country, your code and your compliance control processes,” he says. “With the existing unstructured data, you may end up with a lot of false positives — you interpret a certain text string as a potential sanction set that turns out not to be a sanction in the end.” 

Moving to more structured data with the XML-based ISO 20022 standard offers banks access to richer data which can eliminate confusion and errors in international payments. However, says Mr Fraedrich, “we all need to keep in mind that for those jurisdictions where you have, for example, capital controls, enriching the data format and streamlining processes will help you to a certain extent. But that will never overcome the challenge you have because of local regulatory environments.”

Etienne Goosse, director-general of the European Payments Council, agrees that the adoption of ISO 20022 is vital to solving many of the cross-border issues, “provided that their implementations are not too different”. However, creating an instant global cross-border payments environment may be hampered by something as simple as time zones and differences in opening hours across clearing and settlement infrastructures, Mr Goosse adds, suggesting it could even be more complicated, like the “increasingly demanding and heterogeneous national regulatory requirements”. 

Déjà vu?

For those involved in the development and rollout of SEPA, the ISO 20022 messaging standard is nothing new, and its adherence, even among countries using the same currencies, is anything but harmonious. 

“It’s not easy,” says Sara Castelhano, managing director and head of payments and digital product for Europe, the Middle East and Africa (EMEA) at JPMorgan. “SEPA is still not a single euro payments area. We have local instruments outside of SEPA that still exist in the likes of Italy, Spain and France. They’re still local nuances.”

“The ISO 20022 development is actually not just about cross-border payments; it is very much a development in the domestic payment scene as well,” says Ad van der Poel, co-head of product management for global transaction services, EMEA, at Bank of America. “We may well be laying down the foundation of a global use case as Swift is moving to ISO 20022 XML, but several domestic clearings and payment schemes are also moving to ISO 20022 XML, such as Chaps in the UK and Target2 in the EU. Similar developments are taking place in the Philippines, Switzerland, Thailand, Malaysia, Singapore, Australia, Canada, Hong Kong and the US. This is all happening within the next three to four years.” 

However, ISO 20022 is not the only standard involved in cross-border payments, warns Ms Castelhano. “We also have application programming interfaces where we’re communicating with corporates and financial institutions,” she adds. “I really think that to move money quicker, you need enriched data and you need standards, because the better the enriched data is, the better machines can read it.”

The proliferation of instant or real-time payments environments around the globe is driving and enabling much of the work in improving cross-border transactions. “While there have been regional real-time gross settlement systems schemes, like the East Africa Payments Systems/Southern African Development Community Integrated Regional Settlement System in African markets, and SEPA covering most of Europe, the latest initiative connecting the real-time payment rails will be a major moment, as cross-border payments will happen in real time. This will not only resolve the current challenges around existing rails, but also open up more use cases for cross-border commerce,” says Michael Gorriz, group chief information officer at Standard Chartered.

Of course, the issues around cross-border payments are wider than the Swift community network and ISO 20022 standards. “Quite often when we’re talking about cross-border, a lot of people within banks have grown up either as a payment operations person or as a foreign exchange trader — and there’s no in-between,” says Joe Higginson, chief commercial officer at Identitii. For Mr Higginson, the problem boils down to three issues: user interfaces, messaging and data, and liquidity movement and relationships. 

“Using the Swift network, banks have either direct relationships with other correspondent banks, or they have indirect relationships and use intermediaries to get payments through from Bank A to B to C to D,” he says. “That, of course, creates lag and time as you go through jurisdictions, but that’s just the payment message — the actual money movement is really a liquidity transfer and that is a treasury problem.”

Paula da Silva, SEB

As a 20-year veteran of the payments industry, Mr Higginson views Swift’s attempt to mandate ISO 20022 as “noble” and on the right path to introducing enrichment around payment data. However, “Swift isn’t the only gateway in the world,” he adds. “We’ve seen technology really decouple; while I was working at Investec, I had built a payments platform that not only connected to Swift, but was looking at alternative payment gateways, like Mastercard Send, Visa B2B and Currency Cloud … and then you start going into the distributed ledger world with companies like Ripple, who are unlocking treasury payments by offering tokenised cryptography coins.”

While ISO 20022 solves a lot of messaging transfer issues, “you still don’t have interoperability globally,” he adds. 

Arun Tharmarajah, head of European banking at Wise, stresses the importance of reaching outside the traditional, global bank network to tackle issues with cross-border payments. He says: “Access to payment systems should become open to non-banks to help speed up innovation and bring about new business models.” Via the Wise Platform, the fintech company allows banks and non-banks, such as Shinhan Bank in South Korea and Monzo in the UK, to access the Wise infrastructure to enable cross-border payments for their customers. 

However, he stresses various global initiatives do not provide an instant fix. “For instance, SEPA is blighted by IBAN discrimination. Companies often wrongly refuse IBAN details that aren’t from their own country. This discrimination has been illegal since 2014, but remains commonplace.”

Nick Senechal, strategy lead for real-time payments at Visa, also focuses on regional areas outside of the Swift community. “There are corridors, which are underserved, where there are banks that are not connected directly to the Swift network, where you have to adopt a network-of-networks approach — that’s where you need to form strong partnerships.”

It is with those underserved areas where transparency is of utmost importance, says Mr Senechal. “If we know a payment is going to take longer to deliver in a certain market, we want to be able to tell the customer that upfront, so they have that expectation when their payments are being delivered, [and] after-the-fact confirmation that it has been delivered,” he adds. “This level of coverage that you have in the market is something that the G20 is trying to address.” 

With 195 countries where payments could occur, all with separate regional alliances, political regimes, regulatory bodies and interpretations of standards, the establishment of a Single Global Payments Area in the style of SEPA or even P27 in the Nordics is unlikely. However, when looking at the majority of cross-border payments, a global payments environment exists, says Paula da Silva, head of transaction services at SEB.

“In reality, Swift is a global single payment area — [almost] all banks in the world are connected to that,” she says. Before Swift, each country had their own local format, local clearing cycles, and locally specified amount of characters in the payment flows. What Swift is doing now with the ISO 20022 rollout is migrating to something all organisations involved in payments can read and reuse. 

“If you forget Swift, and just think that everyone in the world embarks on ISO, then we all have a standardised way of making a payment. And if we do, it doesn’t need to be a single global payment area — we are talking to each other in a coherent way,” says Ms da Silva. “If you do have a standard, you will be able to do that in the Swift network or in any other local or global network.”

Standardised, coherent and easy access to this global payments data is vital to improving customer offerings and guarding against financial crime, she adds. “It’s a little bit like, if you did a comparison with safety belts,” says Ms da Silva. “You could invent your own, but nowadays you have a standard for safety belts.” Criminals are looking for the weakest link in the global payments chain, she notes. “We have to be totally connected and transparent to not finance terrorists or not finance things that we don’t want to do.”