THE RACE TO REWIRE CROSS-BORDER PAYMENTS

GLOBAL PAYMENTS 101

If a bank has a direct relationship with a bank in another country—meaning they hold accounts with each other—then transferring the money between the two is relatively simple. Bank A simply sends Bank B a “payment message”—a computer instruction detailing what needs to happen—and Bank B credits or debits the relevant account. If there is no direct relationship then typically Bank A will partner with a “correspondent” bank that has a direct relationship with both banks. However, depending on the currencies or countries involved, a single partner may not always be possible. If this is the case, then Bank A will link with one correspondent bank, which will then link to another that can fulfill the transaction with Bank B. These chains of intermediaries were the reason why historically, cross-border payments took longer than expected.

This is now changing as banks around the world have improved communications technology and expanded their webs of relationships to speed up the process. “Globally, 84 percent of payments are now either direct payments or they have one intermediary,” explains Thierry Chilosi, Chief Strategy Officer at Swift, an international cooperative of banks and financial institutions that provides the most widely used interbank payments messaging service. What’s more, these transactions are often fast, at least when it comes to back-end processing. “89 percent of the payments that flow through the Swift network arrive at the destination bank within an hour,” says Chilosi. “Half make it all the way to the beneficiary account in less than five minutes; about 80 percent take six hours, with virtually all the rest coming within the 24-hour time frame.”

But some financial institutions are also exploring new approaches that could lead to instant cross-border payments of any size, anywhere in the world.

THE RACE TO REAL-TIME

Many countries already have real-time payments (RTP) systems, where the main local banks are directly connected to an automated settlement system managed by the country’s central bank. These allow domestic payments to be processed around the clock and completed instantly. By increasing market efficiencies, RTPs are expected to generate $173 billion in additional economic output by 2026, according to the Center for Economic and Business Research (CEBR).

The impact would be greater still if real-time cross-border payments were available as well. But to do this, different countries would have to link their RTP systems together. This requires technical and legal integration between the central banks of the participating countries, as well as individual banks and banking associations. Technical processes and data formats would all have to be standardized. A single regulatory and compliance regime would have to be agreed for all the participants.

Due to the complexity, linking systems up is usually only possible when parties are close trading partners with good relations and large bi-lateral payments flows. One example is Singapore, which has recently integrated its real-time PayNow network with faster payment networks in India, Thailand and Malaysia, although this is only for smaller payment amounts, such as workers sending remittances home.

says Pawel Szejko, CFO of XTB, an online brokerage that has to frequently move money to client accounts across the globe. “Each country is different and has its own interests. As an online broker we have a lot of clients globally. For US dollars, the payments take a few days and it costs a lot; the charges are taken by corresponding banks. Often our clients are surprised by the fees.”

In the coming years there will likely be further attempts to sync national or regional payments systems together, but this won’t be quick: A single bi-lateral link can take years to establish. “Ultimately, where we want to get to, is the ability to instantly settle any payment in any currency, anywhere, any-time,” says Jason Clinton, Head of Financial Institution Group Sales Europe at J.P. Morgan. “And that will probably require using blockchain technology.”

BLOCKCHAIN DATA NETWORKS

In coming years, then, blockchain may initially be used to improve rather than supplant existing processes. One possible use case is pre-validating payment information. According to data analytics company LexisNexis, up to 50 percent of payments that don’t complete or are delayed are due to simple data entry problems such as incorrectly typing the bank name and address, or getting the account numbers, IBAN or Swift BIC codes wrong.

Pre-validating the beneficiary’s bank account information before the transaction is sent would reduce the risk of failed payments and fraud. But doing this internationally is challenging thanks to the privacy and security concerns around sharing data across borders. “Collaboration amongst financial industry participants is necessary to unlock the power of collective intelligence,” says Onyx’s Sushil Raja, Global Head of Liink by J.P. Morgan, a peer-to-peer data sharing network.

Institutions would be more likely to collaborate on that kind of information sharing if those privacy and security concerns could be allayed. Some believe that a private, permissioned blockchain network could be the answer. That’s because blockchains aren’t limited to financial transactions, they can also enable data transactions. The immutable nature of blockchain means that information can’t be altered by bad actors, and it also acts as a permanent record of what has happened: Users will know where information has gone and who has accessed it. These inherent security advantages could deliver the required level of confidence to achieve mass collaboration.

BACK TO FRONT-END

However the cross-border payments system evolves, it will take time. Industry figures note that making the current system as easy as possible to work with has to be a priority. And that comes down to something which is arguably as valuable as speed and cost efficiency: Customer service.

If an international payment doesn’t arrive or is delayed, a company wants an easy way to have the problem resolved. As Frances Cavanagh, Treasury Global Process Owner for global insurance services provider WTW puts it: “A lot of time is spent chasing transactions that somebody is claiming they’ve not received from the bank. While some of our partners give you the ability to track these transactions through online bank portals, it’s a very manual process.”

Rian Kaslan, Senior Executive Vice President in Digital Business at Bank Negara Indonesia (BNI) shares those frustrations. “Gone are the days where businesses want to call someone. If they don’t get instant updates and notifications, it’s already considered a lack of service.”
Solving this issue is certainly achievable. BNI, for example, has developed a customer portal for business customers, BNI Direct, which provides clients with payment statuses and notifications, for both domestic and international transactions. It also provides information on the documents and information each specific country might need to process payments and transactions.

As international payments continue to transform, it will be important to stay mindful of a Silicon Valley maxim: Start with the customer experience and work back towards the technology.

BY J.P. MORGAN