As one of the attendees who experienced Money 20/20 in Copenhagen last month, I am excited by the future of cross-border international payments and how they will become even more seamless in the coming years.
In this article, the focus will be on the existing landscape and what our company sees as the opportunities to grow business. More cost-effective, faster and slicker international payments are very much at the forefront of how we will look to upscale our rapidly-expanding business going forward.
The single euro payments area (SEPA) officially began in 2014 and since then, there have been significant developments in cross border payments in Europe. Some analysts believe that SEPA could be used as a template for international payments right across the globe. There are other market factors and innovations which may challenge this model, or lead to a hybrid solution which combines the best aspects of SEPA with new market entrants and technologies. However it is achieved, real-time international payments are moving much closer to becoming a reality and institutions that do not embrace the opportunity may run the risk of losing out on a growing international market.
Real-time transfers will soon be possible within the SEPA region. The existing scheme uses batch processing to guarantee payments the next day, but SEPA instant credit transfers – aka SCT Inst – will take this one step further and offer almost instantaneous payments. The facility will be available to all 34 countries in the SEPA region, but adoption isn’t mandatory and many banks are holding back due to concerns about the cost and resources required to implement it in time for the November 2017 launch.
The hesitation to move forward is understandable; beyond the considerable financial cost of the new technology required, there’s also the risk of a reputational cost when replacing proven systems with something untested in the market. The risk, however, is the organisations that embrace this opportunity may have the functionality to take business from their more timid competitors. In the UK, instant payments are expected as standard and as this expectation extends to international payments, consumer pressure may lead to further adoption in the industry.
A growing momentum
This isn’t the only change to the payments industry. The second Payment Services Directive (PSD2) came into force in January 2016 and member states of SEPA have until next January to implement the directive into law. PSD2 encompasses both account aggregation and payments initiation and will require banks to provide access to account data via application programming interfaces (APIs). With that requirement comes the opportunity for financial technology companies and the powerful quintet of Facebook, Apple, Microsoft, Google and Apple – dubbed the FAMGA empire – to enter the fray. The result could be that international payments are not only faster, more transparent and cheaper, they could also offer additional convenience if payments could be made internationally via apps such as Google Wallet. We aim to be at the forefront of such an opportunity and fully understand how we can create an even deeper relationship with our clients.
The banking sector is becoming increasingly digitalised and this also drives expectations for faster and more transparent payment processes. However, while customers may have this expectation, the technology has not quite caught up and different regional solutions are rarely interoperable. A new ISO2002 standard has been developed as a worldwide payment code, but different rules continue to coexist across the world, and this is what causes many of the delays.
Further integration is needed. As consumers, we have had a taste of the real-time experience through card transactions and e-commerce and so the demand for more efficient international payments is not going to go away. The challenge is that a real-time payment process must be sequential to ensure it meets regulatory and security requirements.
Faster domestic payments are already a reality in several countries including the UK, the US and Australia as well as across the SEPA region. While quicker international payments on a global scale are the goal, many financial institutions quite rightly have concerns about money laundering and speed cannot be achieved by eliminating any part of the sequence or sacrificing accuracy for speed.
The ISO standard has a role to play in improving the speed, efficiency and security of a payments system by providing data standards which will promote integration and interoperability. However, this isn’t the only option. There is the possibility that technology will change the landscape entirely. Distributed ledger or blockchain technologies could revolutionise the system but it’s worth noting that they face the same compatibility and synchronisation challenges as existing technology and in this instance, the innovation would also require a new architecture to implement.
The role of blockchain
This doesn’t mean that blockchain is a flash in the pan or that it doesn’t have a role to play. Cryptocurrencies and blockchain technologies look set to disrupt the payments industry despite the operational challenges and regulatory hurdles. The solutions have yet to achieve full commitment from the major banks, but they have certainly been noticed. Pilot projects are being set up to examine the use of blockchain for internal settlement and while it is yet to be seen whether it can deliver the promised revolution in international payments, the chances are that it will be essential in the rapidly evolving international payments ecosystem.
Domestic schemes delivering faster payments are growing and international payments are not expected to be that far behind. SWIFT has been offering a cross-border payments tracker that traces and reports on international payments in real time since the beginning of 2017. This is a key part of the SWIFT global payment innovation (gpi) service, which combines the tracking functionality with same-day settlement for international payments. There are currently 20 global banks using the solution and a further 50 are in the pipeline. The organisations are said to be looking at the potential of blockchain and other new technologies to add further value-added services.
It’s clear that when it comes to the question of real-time international payments, it is a matter of when, not if, they will become commonplace. Demand is already there, businesses are looking for the same speed and convenience from international banking as they are used to on a domestic level.
Currently development is being driven by innovation within the finance sector as well as new entrants within the fintech arena. The key will be collaboration, and the organisations that collaborate on innovations are likely to take the lion’s share of the market. It is difficult to know what the landscape will look like once this has been achieved, but it is clear that real-time international payments are on the way. Banks that stand back and wait rather than contribute to the solution may find themselves too far behind the curve and as a result lose customers to more forward-thinking competitors or new entrants to the market.
I came away from the Copenhagen event encouraged by the opportunities that innovative new companies are finding to do business in the financial sector. In the coming years, we can expect our space to look very different to the one in which we currently operate and we fully intend to be at the forefront of this exciting new dawn for international payments.
Time and experience have shown that consolidated post-trade functions enable more informed and concentrated overviews of positions, settlements and liquidity across the globe – thus saving reporting costs, as well as allowing decisions to be made more quickly and effectively.
The only way PSD2 will function effectively and securely, will be through the mobile banking application itself. However, the directive does not specify how secure this access will be, nor, what risks will arise, and for who.
PSD2 heralds a new dawn for mobile payments, as the regulatory technical standards around the upcoming European open banking regulations are expected to put mobile devices at the heart of new payment techniques. But despite the regulatory environment nudging markets towards certain payment types, it is not easy to predict exactly how consumers will adopt the technology.
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