Magic is only for fairy tales, but new technologies promise a magical transformation in cross-border payments.
In an era when digital devices can seamlessly connect and share information at the press of a button, sending money cross-border is a relatively arcane process characterized by a sluggish pace and opaqueness around fees. Much of the inefficiency stems from the number of intermediaries—correspondent banks—that handle a payment as it moves from entity A to entity B. These intermediaries typically levy fees along the way, but these charges are not always transparent to the remitter or the beneficiary.
“The real problem lies not with paying dollars to the US—that is relatively transparent,” says Martin Runow, global head of client product solutions, corporate cash management, at Deutsche Bank. “However, when paying money into Asia or Africa, you may not know whether fees are being charged by correspondent banks or not.” Monika Aminiova, EMEA market manager in treasury services at BNY Mellon, says that companies may find difficult to ensure transparent and reasonable fees even for payments in more liquid currencies such as the Japanese yen, particularly for high-value payments because Japanese banks tend to charge a percentage instead of a flat fee.
The introduction of the Single Euro Payments Area means eurozone cross-border payments in euros should cost no more than a domestic payment. But as Stephen Baseby, associate policy and technical director at the UK’s Association of Corporate Treasurers (ACT), explains, a UK corporate, for example, will enter a euro payment in SEPA format, but into a UK banking or fintech portal. “Each will have its own charges,” he says.
Outside of the EU, the question of fees charged by intermediaries is even more complex. “An EU bank sending money to, say, China, for example, has no control over what its Chinese agent bank charges to deliver the cash to its customer,” continues Baseby. “At the extreme, nor does the Chinese bank if its regulators set the fees.”
Given the number of intermediaries involved, a cross-border payment can take hours or even days to reach the beneficiary’s account, with little or no oversight of the process. “There is a level of frustration among corporates and a perceived lack of control over cross-border payments,” says Runow. “You push a button…then you don’t actually know where the money is.”
It may seem that only elfin magic could make cross-border payments more cost-effective, efficient and transparent, yet a number of solutions are emerging—all vowing to transform the user experience. New entrants offer alternatives that bypass the traditional correspondent banking model. One such company is Ripple, a venture-backed start-up using distributed ledger technology.
Ripple’s magic dust, says Marcus Treacher, the company’s global head of strategic accounts and former global head of e-commerce for transaction banking at HSBC Bank, is the ability for sending and receiving banks in a cross-border payment to have direct, real-time communication with one another to confirm availability of funds and share other information (Know Your Customer, sanctions, fees, payment details and timing of funds delivery). Our software “can revolutionize how value moves cross-border, improving efficiency, oversight and timeliness,” explains Treacher.
A bank’s back-end systems are connected to the Ripple network through an application programming interface. Ripple then uses the Interledger Protocol to update legacy ledgers of the sending and receiving banks’ systems. “When the systems agree, the payment can happen,” explains Treacher, “Ripple moves the amount from the sender’s account into a holding account on the bank’s books. The movement of funds cross-border happens immediately, whereas in today’s system it can take three days to clear.”
Ripple uses the term “atomic payment” to describe payments on its network that settle in near real time (seconds, instead of hours or days). “For corporate treasurers the impact will be profound,” says Treacher. “An atomic payment means that all the work that goes into managing payments will be significantly reduced.”
The New Vs The Reliable
Baseby of ACT says corporate treasurers are monitoring developments in new technologies such as distributed ledger, as well as utilities managing high-volume and low-value payments. “One point to keep in mind is that no payments system can be said to operate in isolation,” he says. “Each must integrate into banking systems and into the corporates’ enterprise resource planning systems.”
Most of the large global cash management banks have internal pilot projects exploring technologies such as distributed ledger and mobile digital wallets. Yet correspondent banking is unlikely to disappear altogether. “The correspondent banking model is globally standardized and relatively dependable,” says Jason Tiede, head of innovation for global transaction services at Bank of America Merrill Lynch, Natalie Willems-Rosman, head of payables and receivables in global transaction services EMEA at BofAML comments that at the moment, reliability aside, customers primarily seek more transparency and cost efficiency in cross-border payments.
Talking (basis) Points
Not wanting to reinvent the wheel but recognizing the need to improve speed and efficiency of cross-border payments, banks are piling into a new initiative spearheaded by the Brussels-based SWIFT (Society for Worldwide Interbank Financial Telecommunication) network, which carries most of the financial messaging between banks involved in cross-border payments globally. SWIFT’s global payments innovation initiative (GPII), which has 73 signatory banks representing 75% of all cross-border payment flows on the SWIFT network, aims to give corporate clients a “dramatically improved payment experience, with same-day use of funds, transparency of fees, end-to-end tracking and transfer of rich payment information,” according to SWIFT.
SWIFT plans to build a database in the Cloud that will be updated by participating banks as the status of a payment changes. The database will enable every bank that touches a cross-border payment to seamlessly share information with other banks. “Banks will no longer need to ping messages back and forth,” says Runow of Deutsche Bank, a GPII signatory. “All the information will be available in the Cloud.”
Tiede of BofAML says SWIFT’s GPII is analogous to being able to follow a parcel on sites such as Amazon or USPS.com. “You can track each step of the way and see the status of the payment from its origination to its destination,” he says. “Previously, when an asset [payment] moved from one bank’s ledger to another, those ledgers didn’t talk to one another.”
Aminiova of BNY Mellon, which is an active participant in GPII, says the initiative should bring cross-border payments to a new level. “The intention is to process payments in the major currencies within the same day and target a four-hour window as the new standard,” she explains. “All participating banks will have to sign a service level agreement and will need to provide advice regarding fees. That will be visible to the remitting bank, which may integrate this information into their electronic banking systems so it is visible to the customer.” Aminiova says there is also room for additional information connected to the payment to be sent. It should also be easier to track the payment—which is assigned a unique reference number—in case of any investigations.
That four-hour window is a far cry from the seconds that alternative networks such as Ripple promise, but from a corporate treasurer’s perspective, speed is not necessarily the Holy Grail. “Treasurers want reliable payment terms: that is, the right amount of money delivered to the right place at the right time,” says Baseby. “Speed, cheapness and visibility are desirable, but so are security and overall efficiency.”