By Edward Ireland, Joint Head Commercial Product Management – Financial Messaging, Bottomline
If only cross-border payments were as simple as watching a movie. And they can be. Because if you look at the history of digital transformation since the turn of the century, we’ve already seen dramatic achievements in the blink of an eye.
For example, in 1997, if you wanted to see the top grossing movie of that year (Titanic) you had three choices. One, go to a movie house and sit uninterrupted for three hours. Second, go to the video store and see if Titanic had been released on DVD to hire. Or three, you could rent the DVD from a new company called Netflix, who would send the DVD by mail delivery to you between two to five days later.
Fast forward just ten years. Now, you simply go to Netflix.com and in just a few keystrokes you can access and watch a movie of your choice, in the comfort of your home. With a few lines of code and a few terabytes of streaming bandwidth, digital technology brought films into the 21st century, just as Apple and Spotify have with streaming music.
This example is a gross simplification of the entertainment industry’s growth, and I can almost hear engineers and other executives from Netflix groaning as I write. But it illustrates a point about cross-border payments, which is, that when you apply digital transformation in this context, the difference can and will be dramatic. Will it be as dramatic as DVDs vs streaming? Time and what steps the banking and payments industry take will tell. But cross-border payments are poised to make a great leap forward, finally making progress on an issue that has proven quite difficult for the industry to solve.
Challenges to making cross-border payments efficient
Speed and scale – which have been allies in pushing consumer payments forward – have been harder to achieve for cross-border payments which until now, have been slow and inefficient. The reasons for this have been well-documented. First, the absence of standardized formats and protocols across different payment systems and banks hinders interoperability, leading to delays and errors in processing transactions. Second, cross-border payments often involve multiple banks and intermediaries, each with its own systems and processes. Third, the time factor. Banks and financial institutions operate within specific business hours, which can cause delays in cross-border payments that need processing outside these hours.
But the biggest hindrance also contains a clue to its future: legacy payments infrastructure can contribute to inefficiencies in cross-border payments, as they lack the necessary digital technology and connectivity for faster and more streamlined processes. A bank that maintains legacy processes for cross-border payments will be slow and inefficient. Banks that have aggressively embraced digital transformation on their development roadmap have made cross-border payments faster, more transparent, and more efficient. I would argue that the reason the industry has been slow to progress is because so many individual banks – and countries – have themselves been slow to progress. If you want speed, you need scale. If you want speed and scale, you need to be digital.
So, while cross-border payments have certainly improved, there are still steps that need to be taken by the payments industry before we can achieve that “Netflix” moment. There are three key tasks.
The way forward – three key steps
SWIFT cooperation: I recently returned from SWIFT’s flagship conference, Sibos, where it was apparent that the organization has done a great job taking cross-border payments and settlements forward. I don’t see any other company or international organization putting forth their own version of the truth in this area. It starts with SWIFT gpi, which introduces a set of standardized processes and technologies to enhance the entire payment process. One of the key features of SWIFT gpi is the ability to track payments in real-time. Another vital aspect of SWIFT gpi is the introduction of faster settlement. By leveraging existing messaging standards and optimizing processes, SWIFT gpi enables near real-time availability of funds in the beneficiary’s account, reducing the time it takes for cross-border payments to be credited. Along with new complementary regulations from the EU Parliament on instant payments and the UK’s New Payment Architecture initiative, I’m confident that SWIFT will continue to lead the way in bringing cross-border payments into the digital era.
Aspire to end-to-end visibility: Banks need to use all the tools available to improve cross-border payments, because when they do so, more businesses and consumers will use them. For example, look at the UK’s Confirmation of Payee name checking service, which was developed by Pay.UK and mandated by the Payment System Regulator. Although the payments here are domestic, this example is useful. The industry had a huge problem with authorized push payment (APP) fraud that stopped businesses and consumers from using push payments. By developing and mandating Confirmation of Payee, businesses and consumers no longer have to guess whether their payments will arrive at their desired destination. Cross-border payments find themselves at a similar juncture. Why make a cross-border payment unless you are confident it will be completed accurately? SWIFT has doubled down on the use of pre-validation, which is the cross-border equivalent of Confirmation of Payee. By using pre-validation, banks can verify payment details in advance, ensuring all necessary information is accurate and complete before sending the payment, which will reduce errors and delays.
Take ISO 20022 to the next level: ISO 20022 messaging supports the use of pre-validation checks, but it’s only one of the reasons banks need to continue their journey with this messaging format. The UK has mandated its use, but only at the most basic “connectivity” level. ISO 20022 provides a standardized and structured approach to payment messaging that arguably contains all the cures for the ills that plague cross-border payments. It enables financial institutions to exchange comprehensive payment information, reduces the risk of errors, and streamlines the payment process to enhance the overall cross-border payment experience.
A positive future
There are other obstacles to cross-border progress, such as the continued use of correspondent banks, and also additional factors that could contribute to its success – for example, the IXB initiative from The Clearing House in the US. But I’m confident that the three steps outlined above will move the needle toward more speed, scale and efficiency. Will cross-border payments have that Netflix moment? Realistically, it might not be that dramatic. But, given the continued momentum toward digital transformation, the industry can only benefit from working better together to drive greater ease and efficiency in cross-border payments.