More than 60 countries have now introduced faster-payment systems (FPSs). Brazil just launched its version this week.
These are great. They allow people within the country or market to enjoy instant payments. Details vary, but they usually connect bank accounts, mobile wallets, and even merchants’ QR codes.
This lets banks, fintechs, and merchants operate smoothly, so that consumers can do peer-to-peer transactions or pay bills in real time. There’s no need to type in unwieldy account numbers and passwords, or for merchants to rely on point-of-sale hardware.
This is such an attractive system that consumers are starting to use it for higher-value purchases, and corporations are eager to enjoy these benefits too.
Corporate bankers would love to be able to offer this kind of service to their corporate clients. Corporates would especially benefit from making cross-border payments just as instant and seamless.
This in turn would help banks compete against the global fintech players that can provide cheaper, faster, and better service in things like foreign exchange. Plugging corporate payments into FPSs also means banks can retain that business, and the super-important user data behind it.
Correspondent banks and SWIFT have conducted various pilots to make this happen. They are trying to enable a payment originating in one market be able to slot into the domestic FPS where the recipient sits.
For example, in one example SWIFT enabled payments originating in Asian markets being admitted into Australia’s FPS where they settled in under 30 seconds.
But cross-border payments into instant local settlement systems isn’t taking off. At least not yet.
FPSs have been initially popular for bill payments and consumer peer-to-peer payments. But because each system is isolated within the market, they haven’t been used for remittances. In some countries there are limits on transaction sizes, so they haven’t been popular with corporations.
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Nonetheless, the good user experience is pushing treasurers and financial institutions to want to use these, especially for international payments.
This capability has so far remained stuck in the proof-of-concept mode, however. SWIFT has incorporated the benefits of cross-border linkages into its GPI agenda. But it needs banks, corporates and regulators to get on board.
There are several factors hampering deployment, as outlined by bankers speaking at this year’s annual conference for the Bankers Association of Finance and Trade (BAFT).
Among the challenges to deployment:
- It’s not clear where forex takes place
- Corporates need to integrate an FPS capability into their existing systems for things like accounting, reporting and cash management
- National FPSs vary by tech standards, rules, and domestic factors, so interoperability may be a long way off, particularly for less developed markets
- Treasurers will value visibility and clarity of a transaction over speed
If the industry is able to work towards a single cross-border payments system, it will have to resolve additional questions.
- Does a unified system operate on netting or gross settlement?
- How does the industry connect different systems – is this up to individual banks, or will there be a centralized utility such as SWIFT? Can one entity be trusted to maintain a centralized KYC or sanctions list?
- Will any system be limited by the lowest common denominator – for example, a limit on domestic FPS payment amounts? This would undermine the attractiveness to companies looking to make larger transactions, but it would help get a unified protocol up and running. Using standards like ISO20022 (for securities messaging) can help but are less common in emerging markets.
- What regulations need to change in various countries to make this work?
- If settlement times vary across countries, could a bank or corporate be liable for discontinuities in receiving payments?
- How do crossborder FPS links remain efficient while meeting international sanctions and anti-money laundering screens?
SWIFT is beginning to address some of these via its GPI Instant product. For example, it requires forex transact at the point of origin, and has outlined a minimum set of data that has to be shared. There’s still plenty of friction but it’s a start for moving away from bilateral correspondent banking.
Another trend that could support a unification of FPSs is the adoption of aliases in lieu of the usual information required to validate bank accounts. Much of the work that banks do in payments is around validating identity and reconciling their separate ledgers.
If payments could be as simple as sending an email or a message to a mobile number, it would go a long way to connecting domestic FPSs. It would also make it easy to combine payments information with other data related to the customers and the transaction, thereby generating insights for banks that they can monetize.
The good news is that as faster-payments systems become embedded in local markets, use cases are already maturing. FPSs are being used in some markets for larger purchases, such as for cars or even real estate. This will push banks to develop new capabilities.
Corporations are likewise under pressure to provide their end clients with services as good as what people enjoy in the retail space. If they can access instant payments, they can leverage the data flows to project their liquidity and cashflow needs – a prize that makes investing in real-time capabilities worthwhile.