How lack of regulation will splinter cross-border payments

A lot can change in five decades. Advances since the 1960s have brought us a global information system, driverless cars, a tunnel under the English Channel and even brought down the Berlin wall.

By comparison, however, the realm of international finance moves slowly. In fact, the business of global payments is still stuck in the past and the old world of borders and inertia.

The problem goes back 43 years, to the inception of the Society for Worldwide Interbank Financial Telecommunication, aka SWIFT, that was founded in 1973 to implement a messaging standard and a network for transmitting interbank transactions.

Over time, SWIFT has grown to become the de facto method. Already this year more than 1.5bn transactions have been facilitated using SWIFT’s financial institution network (FIN) messages. But could we now be approaching peak SWIFT?

At this volume of payments traffic, SWIFT is creaking. Transactions are slow to conclude and can be error-strewn. Relying on a complex series of business identifier codes (BIC), the system is anachronistic, causing many customers to lose money by wrongly inputting a single character. Investigations can take weeks to conclude, during which the money is stuck in limbo.

Furthermore, SWIFT’s reliance on a third, intermediary bank, between the sender and recipient banks, for clearance places additional wait and inefficiency on the whole process. Furthermore, the system is expensive, with the average small business incurring a fee of about $25 to $40 for each transfer, without taking currency exchange in to account.

Behind the times

If you were inventing a global payment network today, you wouldn’t devise it this way. This is the equivalent of using Morse code in the era of WhatsApp.

With such a problem to address, you would think the time was ripe for an upgrade to the standard. But don’t bet on SWIFT swiftly improving to help users.

As an effective cartel governed by international banks themselves, SWIFT has no incentive to improve. Why would it? Cross-border payments generate around US$45bn in revenue per month for banks, one of their biggest earners. Viewed through that lens, this is a system working well.

But the biggest roadblock to change is not just corporate inertia, it is regulatory. Around the world, national payment environments have begun to adapt to modern markets. In the UK, for example, the Faster Payments standard has worked wonders for reconciling transactions in real-time. Sweden’s Immediate Payments Scheme (BiR) and Singapore’s G3 have made similar advances, whilst, across the eurozone, the single euro payments area (SEPA) framework has significantly simplified the transfer of cashless amounts within the bloc.

But SWIFT’s raison d’être, its global network, is also what is holding it back. You see, SWIFT, by dint of operating globally, functions in a kind of regulatory no-man’s-land. Whilst, at the national and continental levels, strong bodies are acting in consumers’ interests to force improvements from payment systems, there is no such party acting to wring change from SWIFT.

Simply, there is no UK Financial Conduct Authority (FCA) for the world, no central bank for the globe, the United Nations has no role in moving SWIFT to change. Even if individual member banks wanted to change, they would have to force the group to bend, or else implement individual, bank-to-bank messaging rules.

Industry at a crossroads

So the global payments sector finds itself at a crossroads, much like the mobile ecosystem did a few years ago. Witnessing the waning of short message service (SMS), the industry’s GSM Association shied away from upgrading the messaging standard with new features and capabilities. Pretty soon, internet-based mobile messaging apps began taking over, eating away at SMS’ share of conversations.

International money transfers will, similarly, be left to market forces. But it’s highly unlikely the future will lead to the selection of a single, triumphant protocol to usurp an intransigent SWIFT and its FIN. I’d suggest that the answer will be to think a little differently, to be more creative than that.

If SWIFT cannot be brought to change by an overseeing global authority, perhaps the best course of action will be to create a system in which global payments are speeded up by threading new, real-time local systems in to the mesh of international transfers.

Potentially the answer is a central clearing house that, by default, works with the best of the speedy national transfer systems and makes a global transfer only at the very last possible moment.

Specifically, a payments clearing house operator would hold bank accounts of its own in multiple different countries. When a client has to make a transfer, it is the clearing house, and not the bank, that would make the transfer in and out.

In this way, customers would benefit from the speed and efficiency of super-regulated local markets whilst being able to make cross-border payments with more transparency, reduced fees and enhanced status tracking.

Like every lumbering giant, SWIFT won’t disappear very quickly. But, in the absence of reform, a race is about to begin which will set off a competition for billions of dollars in monthly transfers. Something suggests that it won’t take another 43 years to see how things shake out.

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