We live in a world that moves in real time, a world of ready availability.
The length of time that an internet user is willing to wait for a website to load is mere seconds. Payments via PayPal take place in real time. Via Twitter we find out about events taking place on the other side of the world within a matter of seconds. If we want to buy something but don't have time to drive into town, a couple of clicks online later and, depending on the delivery option, the parcel is on our doorstep the very same evening. If the goods come from overseas, we can track them live and see where they are on their journey to us. We live in a world that moves in real time, a world of ready availability.
And when it comes to payment transactions? We readily accept that for international payments the funds are on the move for days, and we see neither the stage of the process of funds, nor any justification for the at times ludicrously high fees.
It goes without saying that this is not a sustainable situation.
So, what will the international payment transactions look like in the future? Are international payments in real-time already a reality today? How will the execution of international payments by banks and companies around the world change and what advantages can we offer here in Treasury as a result of this?
Taking the example of the SWIFT initiative "Global Payments Innovation", abbreviated to GPI, we want to examine which current developments are presently taking place and what the future may hold.
Since SWIFT (Society for Worldwide Interbank Financial Telecommunication) with its "Global Payments Innovation" announced a new service to improve and speed up international payment transactions at the end of 2015, banks and businesses have shown a great deal of interest as SWIFT, with its new innovation, promises to significantly improve correspondent banking business and the execution and handling of cross-border payments.
At the time the service launched in February 2017, 12 banks were already connected to GPI and a further 30 banks had already started implementation programmes to connect to the system. Now almost 100 banks in 224 countries have joined GPI, which roughly corresponds to 75% of all cross-border payments. Around half of the participants are in the EMEA region, 20% in the Americas and a little over 30% in Asia.
To participate in the GPI initiative, businesses and banks must first register for the service with SWIFT. The GPI concept envisages that participating banks will have access to special products using a SLA set of rules and will be able to communicate with each other. The service levels defined by SWIFT for this purpose open up new possibilities to allow international payment transactions to be settled quickly and in a more transparent manner. The "SLA Observers" ensure that adherence to the SLAs is centrally monitored on an ongoing basis.
What has happened so far: The GPI initiative was announced by SWIFT for the first time in 2015. This was followed up by marketing, a presentation of the pilot version at the SIBOS in Singapore, the subsequent pilot phase and the definition of a strategic roadmap in 2016. The first phase of the service has been live since February 2017. This includes the same-day availability of capital – where the GPI partner is in the same time zone – transparency regarding fees incurred, end-to-end payment tracking as well as the secure, continued transfer of important payment information (remittance information).
A second phase, the digital transformation, will follow in the near future. Amongst other things, this is set to allow the user to cancel the payment via the correspondent banks at any stage of the process. Furthermore, it should be possible to transfer enhanced payment information in order to automatically carry out compliance checks and coordination using the associated invoices. Moreover, cloud communication between the participants is to be improved, thereby reducing the error rate when generating payments with respect to divergent local standards or regulatory requirements.
In the third phase SWIFT wants to look into using and harnessing new technologies such as Blockchain.
The disadvantages of the way in which payments were previously processed with correspondent banks abroad are predominantly the delay in the execution of the payment from the time the sender releases the funds until they reach the recipient's account and the lack of transparency regarding any costs that may be incurred. In addition, the often lengthy route via several correspondent banks that the funds take, makes it difficult to track the status of the transfer in a timely manner and to keep track of the transfer from the time that it is confirmed by the sender.
This is where the GPI initiative would step in and create greater transparency through uniform standards and the ability to constantly track the transfer. In addition, remittance information should be transferred along the process chain in order to facilitate the reconciliation and recognition of the payments.
Furthermore, by using SWIFT and its global network, factors such as security, stability and global availability are ensured.
SWIFT, in collaboration with leading transaction banks, has since instigated a feasibility study as the previous correspondent banking model is very complex and costly for banks – and ultimately their customers – due to the continuous updating of the different international accounts. This study should determine to what extent Blockchain and distributed-ledger technology (DLT) could help banks to reconcile their nostro accounts in an efficient and secure manner. Using in-house developed Blockchains and closed user groups as well as strictly regulated data access, costs and liquidity should be optimised when reconciling nostro accounts and risks reduced.
In doing all of this the initiative wants to remain flexible and open to technological market trends and standards. For example, SWIFT is currently establishing guidelines on ensuring comparability with the standard ISO 20022 in a task force together with the Payments Market Practice Group (PMPG).
Therefore in the future using GPI a payment should be quicker, more transparent and traceable at all times without neglecting important security aspects in the process.
The implementation of increased transparency and end-to-end tracking in real-time will unfold as follows:
Using a GUI should enable the customer to track the current status of a payment at all times. From the release of the funds by the sender until they reach the recipient's account, each sub-step via an individual correspondent bank is logged in a cloud based tracking database and is made accessible in real-time.
In doing so, information about the institution involved - location, arrival and release times, reference IDs and individual fees incurred - are available in real time.
Moreover, the current status, duration of the handling process, total amount of fees and an overall tracking Id are visible in the summary.
The tracker can also be linked to an API and subsequently connected to existing systems for further processing. In this way information on the payment status can be integrated, displayed and utilised in a treasury-management system or payment flow system.
The SWIFT GPI initiative once again goes to show that payments are moving towards real-time processing. Cross-border payment flows are also changing along with the developments made in the area of SEPA Instant Payments. The desire for greater transparency, efficiency and speed, as well as an increased level of automation when reconciling payments and accounts, also does not stop at national borders.
The positive effects for Treasury in particular are: improved localisation of liquid funds and timely confirmations from counterparties, increased transparency regarding costs incurred (and reducing them in the future!) as well as efficiency gains regarding the more ready availability of capital (key word "same day") should all be possible. Moreover, the risk of a delay in the payment reaching the recipient and any possible associated penalties is reduced.
Finally, against the backdrop of cyber-crime and increased security requirements for payments flows, improved transparency and quicker payment confirmations as well as the latest technology based on security policies will be key components of future development.
Source: KPMG Corporate Treasury News, Edition 68, June 2017
Author: Tobias Riehle, Manager, Finance Advisory, firstname.lastname@example.org
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