Real-time payment remains the holy grail of global transaction processing. And like the grail, it remains elusive.
Despite some progress, companies still face a welter of issues and concerns in managing global payments. A few key developments, however, promise to dramatically change how companies and their banking partners handle cross-border transactions. At the top of the list: the push to centralize payments processing and use digital payments offerings. The launch of the Single Euro Payments Area (SEPA) for cross-border payments automation and standardization in Europe is a big step in the right direction. Meanwhile, some say blockchain technology could change the game entirely.
Essentially, corporates are looking to manage payments and information in a single channel that helps streamline their payment operations across multiple banking relationships, notes Jeff Siekman, director of payment products at Fifth Third Bank. “Executing payments globally requires additional complexities,” he adds, including the headaches of managing bank accounts, particularly controlling access and supporting multiple file formats by country and transaction type.
As a result, says Wolfgang Stockinger, head of cash management solutions for institutional cash, Deutsche Bank, companies are contemplating the use of alternative payment mechanisms to manage regional and global payments, including cross-border Automated Clearing House. He notes, however, that a few issues “need to be considered when injecting payments into local ACH, such as being Financial Action Task Force–compliant.”
According to Pat Malloy, senior product manager, global cross-currency product, at Bank of America Merrill Lynch, there is increasing demand for “companies and government agencies to access low-value clearing systems around the world, without opening a host of bank accounts to support the flows.” Products, such as cross-currency ACH payments, “help to give payers control over FX rates while minimizing exposure to lifting fees that are commonly applied to cross-border wires.”
Companies are also willing to think about new payment options that differ from traditional domestic ACH, says Dean Henry, head of global low-value payments at Bank of America Merrill Lynch. “Cross-currency, digital and alias-based [virtual] payment solutions are now common considerations for treasurers sending high-volume, cross-border payments.”
REAL-TIME REALITY CHECK
The ultimate goal, as ever, is to have a system that supports real-time, global payments. Getting there, though, will take some time—and possibly some big changes on the settlement side.
Judd Holroyde, senior vice president, head of global product management and delivery at Wells Fargo, says proven real-time payments initiatives, such as Faster Payments in the UK and FAST in Singapore, have motivated other markets, like Australia, to aggressively pursue real-time payments. “This helps drive innovation,” he says, “and is certainly one of the influencers in the US’ making the first step in same-day ACH.”
A number of other countries are also working on building real-time payments infrastructure. The group includes Spain, the Netherlands, Germany and Belgium. Notes Holroyde: “As more countries adopt these schemes, the global ‘consumer’ mechanism continues to add more pressure to developed countries [that] are yet unable to meet the emerging consumer expectation.”
These country-by-country initiatives have indeed been the starting point for pushing cross-border schemes. But it is the success of SEPA—a single regulatory regime and payments platform for credit transfers and direct debits that is supported by 48 countries and territories—that has really made the drive for cross-border, real-time payments seem achievable.
Stockinger notes that in Europe, corporate treasurers are now realizing the efficiencies generated by SEPA. “Ideally, they would like to see this expanded on a wider level. Yet with differing market practices, different regulations in multiple jurisdictions, AML [Anti-money-laundering] and sanction regimes, this is something that is very difficult to replicate on global basis.”
Given the increased global attention to real-time payments, the European Central Bank asked the Euro Retail Payments Board—successor to the SEPA Council—to develop an action plan on instant payments. In response, the ERPB stated that immediate payment solutions should leverage the harmonization and integration achieved as part of the SEPA implementation. In March bank-owned European payments infrastructure provider EBA Clearing announced plans to offer Europe-wide instant processing services to payment service providers by 2018.
The ISO [International Organization for Standardization] Real-Time Payment Group is also working to define a single set of harmonized messages for instant payments that would enable interoperability between the different individual initiatives worldwide. It won’t be easy. “When we say real-time, it also implies 24/7 and single message,” notes Gareth Lodge, senior analyst at consultancy Celent. “For many banks, it’s a massive change. They run batch systems, for example, and the real-time 24/7 applies to every single element required for the transaction, not just the payment part itself.” In addition, he says, “most of the time we’re speeding up existing processes rather than redesigning them. Going forward, that’s got to change.”
He highlights that for two banks in different time zones, the points of settlement are never open at the same time. “Whilst banks operate now 24/7, central banks [don’t], and [that] potentially becomes where there is most risk… It feels as if a different approach is required.”
Real time...also implies 24/7 and single message. For many banks, it’s a massive change.
~ Gareth Lodge, Celent
Such an approach could involve Blockchain, the digital public ledger of all transactions in a network. Most of the world’s largest payments banks are looking at the potential of the blockchain to streamline transactions, including trade, lending and payments. But Siekman points out that “many of the same challenges of faster payments exist with enabling blockchain. There is still a lot to be learned about how such a technology would be deployed via banks for cross-board payments.”
Indeed, although the public ledger may be of real use in improving messaging, security and compliance for payments, it is not a settlement system. “We have to put into context the hype versus reality,” says Stockinger. “The infrastructure used today has proven itself when it comes to reliable settlement of large payments volumes and values. It’s scalable and has resilient processes and applications.”
What’s more, the complexity of the end-to-end settlement of payments, especially across borders, raises questions about the blockchain’s architecture and approach. “They are yet unproven in this application,” notes Holroyde. “We will likely see target solutions focused on parts of the cross-border payment ecosystem, rather than a comprehensive, end-to-end solution.”
Backers of the blockchain argue that the biggest challenge faced by banks today is that they must process, record, report, reconcile and audit ever-increasing amounts of sensitive transaction data. “But the legacy infrastructure is outdated, centralized,” says Stockinger, “and the data is largely unencrypted.”
Banking regulations are another concern. “As there is no central operator,” he points out, “the network participants are responsible for implementing local regulatory requirements, including KYC [Know Your Client], AML filtering, etc., as required by the respective banking regulators or other authorities.”
In the end, says Lodge, it all comes back to settlement. “These systems require liquidity to be put into the system to work. At the moment, only banks have that kind of liquidity—and experience of managing that kind of liquidity. So whilst I see definite benefit, I don’t currently see the banks being replaced.”