Recently I had the opportunity to sit down with SWIFT head of Oceania Bill Doran to discuss how payments are changing on a global scale.
What are the biggest trends impacting the global payments at the moment?
With the exponential take up of smartphones and other devices such as wearables, banks are being challenged to come up with new products that allow their customers to make payments using these devices. These payments can take place in a traditional shop or within an online shopping App on their phone. In order to support this ‘always on’ economy, the banking industry has needed to upgrade its payments infrastructures to make them more ‘digital friendly’. You see this in domestic payment systems which are moving to real-time. In Australia, SWIFT has partnered with the Australian banking community to design, build and operate the New Payments Platform (NPP).
Another development that has the potential to revolutionise banking and payments is the move towards Open APIs. This can be regulatory driven, such as in Europe and the UK, and more recently in Hong Kong and Australia, or it can be private initiatives undertaken by large, global banks. By allowing third parties (e.g. FinTech companies) to access banks’ customer data, and in some cases, to initiate payments, banks are being forced to come up with new ways to monetise their APIs and to keep customers within their systems and ecosystem.
Blockchain/DLT is here to stay. I don’t think the technology will be used any time soon for wholesale bank to bank payments however there are still many use-cases within the payments process where it could provide good business benefits. One such example was described in SWIFT’s Proof of Concept for real-time reconciliation and liquidity management of Nostro accounts. However, this POC showed that banks are not ready for the mass adoption of the technology, nor is the technology itself at the level required to support mission-critical applications. However, I think it’s inevitable that the technology will mature and when that time comes, SWIFT will be ready to support our members with the adoption of whatever use cases make the most sense.
Finally, the biggest thing happening in global payments at the moment is SWIFT’s global payments innovation (GPI) initiative. In a little over 2 years, we’ve managed to get 60 banks live, sending 100 billion USD every day via the new and improved service. Banks are reporting reductions in enquiry costs as well as higher customer satisfaction rates. We have held a FinTech challenge to open up the platform to new innovative services and we have a strong roadmap of future service improvements planned.
What needs to happen before real-time cross-border payments become a reality?
The reality is that cross-border payment times are already fast under SWIFT GPI. Today, close to 50% of GPI payments are credited to their end beneficiary in less than 30 minutes and many of these are happening in seconds. In fact, the fastest GPI payments recorded today are taking 8 seconds to complete (including crediting to end beneficiary account). And with domestic systems going real time, it makes sense to connect GPI with these systems to achieve real-time payments end to end even when there are intermediary banks involved.
Having common standards is also vital to ensure market infrastructure interoperability with financial institutions. ISO 20022 is the default standard for real-time domestic payment systems so the adoption of this standard for international messaging will also help with the linkage of the cross-border payment system with domestic real-time systems. SWIFT is currently consulting with its community to determine the best timeframes and approaches for the adoption of ISO20022 for cross-border transactions.
But the biggest hurdle to achieving real-time cross-border payments using the existing systems is getting banks to agree on business rules that will remove friction from the process. For example, banks need to agree on who does the FX conversion, screening requirements, limits on dollar amounts, mapping of cross-border message into the domestic format, etc.
Many fintechs are disrupting banks by already offering cross-border payments at a lower cost. Where does the SWIFT network fit in this status quo where the 'middle man' is no longer necessary?
There’s a lot of competition in cross-border payments. Banks and their customers have been utilising services provided by various payment providers for many years now. Whilst some of the names are relatively new, many of the companies have been around for a very long time. There will always be providers who will find new value propositions that will attract new customers to their offering. And this competition is a good and healthy thing as it drives improvement and innovation.
Blockchain/DLT has inspired a new wave of competition in payments because the potentially disruptive technology has the capability to remove the need for central institutions in the process of exchanging value. However, new technology is not enough. If you’re truly going to disrupt correspondent banking, you’re going to need to disrupt existing business models and this means that any new entrant is going to need to have reach to all accounts and currencies in all countries, have a viable Nostro/Vostro alternative for settlement, regulatory support, implementation cost that is justified by cost savings and superior customer propositions. I don’t think there is an organisation that is close to ticking all of those boxes.
In terms of cutting out the middleman, well this poses more challenges for banks. Correspondent Banking evolved because banks don’t have the capacity to have direct relationships with every other bank in the world due to the burden of KYC (Know Your Customer) and cost of relationship management. And so a network of relationships has evolved and each bank is relying on its banking partners to move funds on behalf of their respective customers. In this current climate of de-risking, which is seeing a reduction in the number of relationships; it is difficult to see a situation where all banks have direct relationships with every other bank.
What do you see being the biggest flow-on effect of the launch of the NPP?
The New Payments Platform (NPP) went live in Australia in February. The NPP is a fast, versatile, data-rich payments system for making payments any time of the day, any day of the year, with direct line by line settlement at the RBA. The NPP dramatically speeds up payments, not only putting the money into the accounts of recipients faster but since it utilises the ISO20022 standard, the payments also include a lot more data. The NPP also introduces the capability to direct a payment to a unique identifier such as a mobile phone number, email address or business number which will remove the need to quote BSB and account numbers when requesting payments.
All of these new base capabilities, combined with open access governance, should see new innovative payment services being launched on top of the platform well into the future. For example, FinTech organisations can use the NPP’s features and reach to create and offer new and competitive payments products or services.
SWIFT partnered with the Australian banking industry to design the NPP and after delivering the ‘Basic Infrastructure’ components, we are now responsible for operating this new critical infrastructure.
How will that effect Australian enterprises?
At the most basic level, the New Payments Platform will improve cashflow management because businesses are able to make and receive payments any time of day, any day of the week, any day of the year, including all public holidays.
The Platform’s data capability also presents enormous potential for businesses digitising their back office, from simpler invoicing to automatic reconciliation across core business processes. Data-focused organisations or the banks themselves will ‘overlay’ new products or services on top of the Platform, leveraging its capabilities.
Businesses will also benefit when Government departments improve the speed and efficiency of payments for goods and services, adopt e-invoicing and reduce the need for manual reconciliation.