Research Note

Solving the “trilemma” of cost, risk and speed in cross-border payment

By Siddharth Chandani

As real-time processing becomes the norm in domestic payments, how long would it take for cross-border payments to catch up?

  • Growth of domestic real-time payment systems
  • Exploring the future of crossborder ‘real-time’ payments
  • The uptake of SWIFT’s global payments innovation (gpi)

 

The rapid pace of digitalisation and growing market pressure for fast and transparent cross-border transactions have led payments to undergo significant infrastructure modernisation. In order to meet service standards and increased regulatory demand, new emerging players have increased the pace of disruption to capture parts of payment value chain.

Given the movement to harmonise national payment systems across the region, the focus has shifted to address the cost of international payments and offer speed, reliability and traceability for the corporate users to improve overall experience. In the previous Asian Banker annual survey of payment trends across Asia-Pacific, innovation in payment solutions and drive to digital the latest survey, priorities have manifested themselves into growth of instant payment platforms and infrastructure to improve existing capabilities. With more countries joining the ranks to offer domestic real-time payments, the impetus for global, cross-border payments is even greater.

Growth of domestic real-time payment systems

Legacy payment systems are being replaced by real-time infrastructures, necessary for delivering quick-to-scale products and customised transaction services.

Enabling financial institutions and corporates to make and receive domestic payments between accounts in real-time, the New Payments Platform (NPP) in Australia was collaboratively developed and launched by 13 financial institutions, including the top four Australian banks. In addition to supporting instant payments based on the Fast Settlement Service (FSS), NPP accommodates more data-rich information such as remittance, tax into payment messages.

Commonwealth Bank of Australia (CBA) has made available the platform to its clients via Commbank app, replacing the need to remember account numbers and passwords. It highlighted ISO20022 behind the infrastructure of NPP that would create a global standard of data messages, as opposed to fragmented messaging formats.

For UOB Singapore, centralisation and standardisation in payments processing was a key advantage to make transactional flows efficient. It cited that demand for real-time payments and transaction notifications will continue to accelerate, driven by users on the go.

Bangkok Bank opined that creation of new payment infrastructure for real time interbank payments was key in preparing for the digital economy. Leveraging on the ASEAN Economic Community, it is among five Indonesian and five Thai banks commissioned by the Bank of Thailand and Bank Indonesia (BI) as an Appointed Cross-Currency Dealer (ACCD) to promote business transactions in Indonesian Rupiah and Thai Baht.

Exploring the future of crossborder ‘real-time’ payments

Cross-border payments are usually characterised by slow processing times and lack of transparency around transaction flow and pricing. A complex and frustrating process to manage, corporate treasurers expect more transparency and accountability from their banks on their international transactions.

One way of overcoming this is to create a network of access points to domestic clearing in countries where they experience significant flows. This is often costly and a drain on liquidity unless there is sufficient volume to support it.

For dominant domestic banks such as Bank Mandiri in Indonesia, it may make sense to leverage subsidiaries and big correspondent partners for each payment currency to capture these payments flows, and is indicative of a wider trend in ASEAN.

Although the vast majority of international payments are still routed via banks and through correspondent networks, the cross-border payments industry is rapidly transforming with the entry of non-bank digital players. As alternatives to banks, these payment aggregators or financial technology firms are making a strong presence in the industry.

With focus on making international payments more reliable, low cost and as simple as domestic ones, Earthport offers an alternative to traditional correspondent banking model. The hub and spoke model supports banks and MTOs having single relationship with Earthport, instead of multiple banking relationships. INTL FCStone provides an integrated solution for cross-border in approximately 175 countries.

While current cross-border corporate payments take one or more days to reach the intended beneficiary, distributed ledger technology (DLT) holds the potential to fast transform that. Ripple’s real-time gross-transfer system is based on its own digital asset, the XRP. XRP integrates messaging and settlement required to clear and settle payments of funds between the sending and the beneficiary bank. Institutions such as Satander, UniCredit, UBS, Standard Chartered, BBVA, Mizuho Financial Group, MUFG, Yes Bank etc. are a part of RippleNet, its DLT network.

The uptake of SWIFT’s global payments innovation (gpi)

To counter the emerging rise of payment aggregators, SWIFT gpi provides a platform for all participating banks committing to disclose fee structures. The core of SWIFT gpi is based on a set of standardised and multilateral service-level agreements.

Banks identified lack of standardisation in codes, scanty information on fees or progress of transaction statuses as key challenges to efficiency in cross-border payments. To provide consistent and value- added global payment services, 21 out of 76 total banks from Asia-Pacific are now live on SWIFT’s gpi platform.

To counter the aforementioned challenges in making cross-border payments efficient, safe and transparent, a number of banks cited use of SWIFT’s gpi service to deliver tangible improvements to their client’s cross-border needs. Installation of SWIFT gpi tracker for end-to-end and real-time tracking enabled easier pass-through of tracker information to corporates, reported banks.

To make its remittance services competitive, Woori Bank in South Korea highlighted expansion of its international network, affiliate partnerships with member banks using the SWIFT gpi remittance service. With the gpi service, the bank aims to cut fees charged and lower the time required for digital channel remittances.

Being a pioneer in Taiwan for the SWIFT gpi service, E.Sun bank is concerned about developments around suspicious transactions and the need to install an anti-fraud platform. The bank identified adoption of new international bank transfer standards and upgradation of its internal platform to monitor foreign currency transfers as best practices.

As one of the prime movers of SWIFT gpi, Deutsche Bank outlined further regulatory emphasis on currency control, fraud prevention and sanction implementation, bringing cross-border transfers under greater focus and scrutiny. The bank identifies its association with SWIFT gpi via the tracker to largely realise benefits in payment tracking and transparency.

Demand for real-time payments is beginning to have a profound impact on the payments ecosystem for all stakeholders. Clearly, global transaction banks are at an advantage to gain market share on their scale and lower unit costs of investments. For smaller and mid-sized banks at the front of international payments transformation, the need to carefully consider their business models and strategically choose their ‘area of play’, are top priorities. Corporate clients now face scores of better choices and deals, but only at the cost of increased complexity and risk. The need to trade-off cost, speed and risk when opting for suppliers appears to be the ‘new trilemma’ in cross-border payments



Keywords: SWIFT, Digitalisation, Cross-border Transactions, Regulation, Technology, Payments
Institution: Commonwealth Bank Of Australia, UOB, Bangkok Bank, Bank Of Thailand, Bank Indonesia, Bank Mandiri, Satander, UniCredit, UBS, Standard Chartered, BBVA, Mizuho Financial Group, MUFG, Yes Bank, RippleNet, Woori Bank, E.Sun Bank, Deutsche Bank
Region: Asia Pacific
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