FinTech innovators like Earthport, Ripple and Currency Cloud are driving competition in the cross-border payments market and changing customer expectations for international payments. As banks, the traditional players in this market, determine how to handle this threat, SWIFT responded with the Global Payments Innovation Initiative (GPII) in 2015. This project provides a case study of the many challenges of reworking legacy relationships and processes to adapt to the ever changing payments landscape.
GPII hopes to rejuvenate correspondent banking using the SWIFT messaging platform combined with its global reach. Connected banks could leverage GPII to build international payments offerings similar to those offered by the emerging FinTech competitors. There is both hope and concern that after four decades of little change, GPII can deliver on the following promises for cross-border payments: same day access to payments, increased predictability of fees and end to end payments tracking.
However, any solution that is developed on top of the traditional approach to correspondent banking will have a number of hurdles to clear to keep up against the FinTech threat.
Challenges to ensuring same day access to payments.
In the traditional approach to cross-border payments, banks were often incentivised to delay payment settlement. In 2009 the EU authored Payments Service Directive (PSD) reduced the ability of banks to derive a benefit and insisted on a next business day service. However, this only covered transactions that took place entirely in the PSD zone (covering the Eurozone, the EEA and some other currencies) leaving payments where one or both parties were outside PSD out of scope.
Given the lack of legislation outside the PSD zone, GPII attempts to improve collaboration between banks, acting as mediators to address payment delays and offer same-day value.
But as opting into GPII is voluntary, some of the challenges that PSD has faced will remain. With banks looking to reduce their exposure by rationalising direct cross-border relationships, the volume of payments passing through intermediary banks is increasing. Should any of these intermediaries not be signed up to GPII it will be hard to enforce same-day value. However the disparities in customer service this results in could lead to pressure for more banks to comply.
Even so, achieving same-day values may be impossible when payments are moving East and sent after receiving banks’ systems have closed. As backs are unlikely to want to manually backdate payments, the best that can be hoped for is to credit the beneficiary account on the day the payment is received.
This could become increasingly crucial as competitors in the FinTech space promise near real time cross-border payments.
Challenges in increasing transparency and predictability of fees
This has long been a challenge of payments made through correspondent banking, although PSD has prevented the deduction of “lifting fees” on eligible payments. But while this hit intermediary banks hardest, beneficiary banks could still impose charges under their own terms, conditions and tariffs.
GPII does not in itself restrict fees, rather it will offer transparency and predictability on the fees that the both the payer and payee face. In principle, the payer could still agree to pay all charges upfront, so that the full proceeds of the payment reach the beneficiary account.
As this option increases the cost of payment it is not often selected: the intention of GPII is to focus on shared charges, with banks that have opted in agreeing a common fee which can be stated upfront when payments are executed. However, complexity and confusion may once more arise where a bank in the payment chain is not a member of GPII, at which point transparency ceases.
Challenges in end-to-end payments tracking
It has often been noted that it is easier to track an international parcel than a payment. Customer expectations are already being raised by schemes such as the UK’s Faster Payments, which give instant feedback when a payment has been credited. Although international payments are far more complex than domestic clearing, this creates pressure to offer similar levels of service internationally.
SWIFT messaging already provides confirmation of credit, but this only confirms that the bank has received the money rather than the beneficiary account. This functionality will need to be enhanced. Doing so will provide great customer value, and also reduce the great volumes of unnecessary payment cases raised by beneficiaries.
Should GPII overcome the key challenges, it may help banks ward off the threat from the FinTechs.
Certainly banks face a strong incentive to agree to this increased collaboration to overcome such strong disruptors in their market. Yet there is still a long way to go before any bank-driven initiative, including GPII, achieves the critical mass needed to ensure their continued dominance in the cross-border payment market. Many hope that the change of attitude that has allowed GPII to get off the ground will continue to spread, as banks recognise the benefits it offers to both customer retention and their own quest for internal efficiency.
For a more detailed exploration of GPII and the hurdles to its success look for our forthcoming white paper.
By Accuity’s Regional Manager, EMEA Business Solutions, Neil Tagg