Our Insights

Betting on payment reform

Developments and disruption in the payments industry

Amid a market backdrop where automation, fraud prevention, and liquidity optimization are of increasing importance to corporate treasurers globally, experts agree that the traditional cross-border1 payment model requires transformation to meet 21st century needs. Payment services continue to be identified by corporate users as being inefficient, expensive and opaque,2 at a time when consumers everywhere expect real-time, less expensive and more transparent solutions.

Key insights

  • GPI has been warmly received by the industry and offers correspondent banks a number of operational benefits as well as potential commercial opportunities
  • Payments is a market which is vulnerable to disruption from agile fintechs, which is forcing existing incumbents to make material improvements to their services

Simultaneously, innovative technologies such as blockchain are viewed as antidotes to many of the operational challenges in the financial system. The landscape includes new entrants, unrestrained by legacy infrastructure and regulatory oversight who are making concerted efforts to disrupt the payments market. In tandem, the market is seeing an influx of new payments ‘fintechs’ enabled by Application Programming Interfaces (API) tempering the discussion around blockchain. The new fintechs have been enabled by open banking rule-changes introduced by regulations such as the European Union's (EU) Payment Services Directive 2 (PSD2).

The GPI message hits home

Lisa Lansdowne-Higgins, VP, Business Deposits and Treasury Solutions at RBC, speaking at SIBOS 2018 in Sydney, said the correspondent banking industry has collectively realized that change is required and concurred its model requires modernization. The demands of the market looking for more seamless payment processing are underpinned by SWIFT's strategy to enhance its cross-border payment service by launching Global Payments Innovation (GPI) in 2017, a tool designed to streamline correspondent banking activities leading to more transparency and traceability, delivering predictable settlement times while ensuring safety and soundness around transactions.

The correspondent banking industry has collectively realized that change is required and concurred its model requires modernization

GPI supports much faster payment settlements, with transactions completing in minutes. Most importantly, GPI gives users unprecedented transparency into foreign exchange costs and intermediary charges, and allows participants to monitor transactions in real-time through a cloud-based tracker.3 By having access to GPI, clients have transparency into the status of payments, resulting in fewer inquiries and assurance of payment settlement.4 The visibility over payments is also a key step in enabling clients to better optimize liquidity positions, improving and addressing long known issues faced by many corporate treasurers.5

“The reception to GPI has been positive, ” said Lansdowne-Higgins. “There are now 80 banks live with GPI and 280 financial institutions who have signed up. GPI has made enormous progress over the last three years. Flows through GPI have been strong, with an excess of USD 100 billion being processed daily," she said. The early success has encouraged the product's architects to add more functionality to GPI, including a stop and recall service (gSRP) allowing payments to be instantly halted via MTR 192 anywhere in the transaction chain.6

Delivering data services through GPI

As GPI gives correspondent banks and their users enhanced transparency on payment flows, providers are looking to leverage the data. Not only will the increased information available through GPI help banks identify areas in the transaction chain where further efficiencies can be implemented, it could also enable correspondent banks to package and aggregate raw payments data using innovative technologies such as artificial intelligence, turning it into useful market intelligence for end clients.

“Looking at payment flows
will give us excellent
insight into macroeconomic dynamics and provide a
lens on potential changes occurring in the market”

“Looking at payment flows will give us excellent insight into macroeconomic dynamics and provide a lens on potential changes occurring in the market. By monitoring the information, it is possible we could create predictive data analytics, which can be shared with customers through APIs on a real-time basis,” commented Lansdowne-Higgins. As customers of correspondent banks, the GPI service along with the potential data benefits it brings, marks the beginning of a turnaround
for the industry.

Differing perspectives on the future of payment

One panel at SIBOS speculated payments will move in one of three directions. The first supposition being that the status quo will be preserved with change happening on an irregular and ad hoc basis. The second scenario envisions greater consolidation in the industry, with GPI acting as a unifying infrastructure. The final outcome imagines a world in which disruptive payment providers proliferate and erode the role of SWIFT, an outcome that could be expedited if US trade protectionism and sanctions prompt impacted corporates to seek out alternative payment solutions.

The most significant threat to traditional payment systems is likely to stem from disruptive technologies like blockchain and AI, tools which could offer a more frictionless service to clients. Ripple, a blockchain-based payments' network, has repeatedly gone on the offensive against SWIFT, arguing that GPI is only a marginal improvement of the existing process, adding that its own proprietary system can offer near-real-time settlements.7 While payment velocity is undoubtedly an important criterion, it is not the only issue that users of correspondent banking services are concerned about.

SWIFT has the benefit of scale with more than 10,000 banks embedded in its network, dwarfing all of the competing alternative payment providers. For institutions at SIBOS, SWIFT is the archetypal trusted utility in contrast to the new entrants who have yet to be properly tested and acquire scalability. Even though alternative payment providers have made significant headway, one expert said correspondent banks are catching up, having put off innovation as they dealt with the after-effects of the financial crisis.

 

You may also like

Sources

  1. Euro Finance (February 7, 2018) More than just ripples in SWIFT's pond
  2. Ibid.
  3. SWIFT - GPI
  4. Ibid.
  5. Ibid.
  6. Banking Technology (April 6, 2018) Swift GPI: move forward or fall behind
  7. GT Review (June 27, 2018) Ripple dismisses marginal improvement of SWIFT GPI