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Transaction bankingAugust 8 2022

Swift fights to keep up in a changing world

New contenders are challenging the dominance of Swift in the cross-border payments space, compelling it to improve on its flaws. Heather McKenzie reports.
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Swift fights to keep up in a changing world

In a rapidly evolving cross-border payments world, Swift has managed to remain relevant by making incremental changes, says Swarup Gupta, financial services lead, Economist Intelligence Unit (EIU). However, the ongoing military action in Ukraine is likely to cause disruption in cross-border payments, which will potentially challenge the dominance of Swift.

An EIU report on digital payments observes that most cross-border payments still travel through the correspondent banking (CB) network, with flows underpinned by Swift’s messaging service. The removal of Russian banks from the Swift network and a ban on card payment channels from operating in Russia, however, is exacerbating trends that “were already apparent”, according to the report.

“Even before the war, Swift had encountered criticism for its relative inflexibility and lack of transparency. Even more worrying is the retreat of correspondent banks, the cornerstone of the Swift system,” says the report. According to the Bank for International Settlements, CB relationships declined by 25% between 2011 and 2020, despite the value and volume of cross-border arrangements increasing substantially over the same period.

New kids on the block

Alternatives to Swift are appearing: Russia has developed the System for Transfer of Financial Messages, China operates the Cross-border Interbank Payment System and India has developed the Structured Financial Messaging Solution. While proponents of such systems may want to avoid settlement in US dollar, Mr Gupta says that at present that this is technically not possible.

The EIU report says that Russia, China and India could encourage international trade denominated in their own currencies, or enter into bilateral trade agreements to avoid settlements in dollars or euros.

“Although the US dollar’s dominance of international trade will remain unchallenged in the short and medium term, emerging powers in Asia will try to reduce the greenback’s influence to avoid runs on their foreign-exchange reserves and mitigate the impact of any future disruptions,” according to the report.

Mr Gupta believes that “in the real world, transactions need to go through the CB network and use US dollars. For some commodity transactions, exchanges are being made, for example between the ruble and rupee, but these are very specific, must be agreed in advance and are costly,” he says.

Swift safe for now

Setting up and scaling a fully fledged, alternative bank-messaging system would be expensive and time consuming, says the EIU report. “It would also have limited real-world impact, given the prevalence of dollar-denominated cross-border flows.”

For this reason, the EIU believes Swift will remain the dominant network, “as long as countries and lenders come together to improve the Belgium-based network”. Mr Gupta says this is happening in the short-term with developments such as Swift gpi, which delivers greater transparency on cross-border payments.

Swift will also make greater efforts to bring additional banks from countries with smaller gross domestic product levels onto Swift gpi. “The aim will be to increase use of Swift gpi and bring in more transactions,” he says.

Asia’s dynamic digital payments landscape

Among the forecasts the report makes is that Asia will lead in adopting cross-border payment linkages, allowing travellers across the region to purchase goods and services by scanning quick-response (QR) codes.

“Asia represents the most dynamic digital payments landscape worldwide,” says Mr Gupta. “Freshly-minted fintech firms are solving long-standing issues with legacy payment methods, often by using innovative mobile applications, capturing a young customer base in the process.

“Emerging technologies, such as QR codes and real-time payments, have become the norm, with digital wallets displacing established card networks in some countries and inhibiting their growth in others,” he adds.

In some major markets, such as India, a shift away from cash has also become an explicit government policy goal, with regulators launching several incentives to encourage innovation. “Digital public goods, like India’s fast payments system, United Payments Interface (UPI) and China’s central bank digital currency, the e-yuan, are playing a major part in achieving these policy goals,” says Mr Gupta.

The EIU report expects increasing involvement from government entities to facilitate the development of the fintech sector, promote financial inclusion and aid the flow of remittances from overseas workers. In April 2021, Singapore (PayNow) and Thailand (PromptPay) were the first countries to interlink their faster payments systems.

Additional countries, especially in Asia, have since unveiled plans for similar tie-ups. For example, the Philippines is planning to integrate its real-time and QR-code payment systems with those of Singapore, Malaysia and Thailand.

“This process will also be facilitated by the development of central bank digital currencies,” says the EIU report. “These digital currencies aim to provide efficient and inclusive payments services, which traditional systems have failed to provide, and also emerge as trustworthy alternatives to private projects such as stable coins and cryptocurrencies that (in theory) peg their value to another currency or commodity.”

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