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How better payments will change our lives

A vast change is taking place within the structures that enable payments across the world. Faster payments initiatives, such as those launched in the UK, America and Australia, have been seen at the domestic level, as have local and regional open banking initiatives from Europe to Singapore.

The same is happening on the global level and soon every payments system will be exchanging information on international payments in a standardised way, further increasing efficiency and reliability.

Some of the pressure for financial institutions to deliver more effective payments stems from the convenience provided by digital services in our everyday lives. Digital tools are enabling faster communication, simpler access to information and more direct connectivity.

“We expect a seamless user experience in everything we do, whether we are at work or in our personal lives,” says Harry Newman, head of banking at interbank payments co-operative SWIFT. “We all agree payments should be instant and convenient for the people making them. It’s fair to say that the old world of international payments was built some time ago and that’s why it’s being upgraded to deliver a modern experience.”

Whether it’s businesses transferring large sums across borders or retail bank customers making micro-payments, users expect a fast, convenient and consistent experience regardless of their location

This is an enormous task. “Broadly speaking there are two approaches,” says Mr Newman. “You can create a closed-loop system where all participants follow one set of rules. This makes efficiency gains relatively easy to achieve, however you quickly run into a dead end as your reach is limited only to parties within that closed system.

“Or you can develop an open ecosystem, as we have done together with our network of over 11,000 financial institutions, which allows value to be transferred globally from any account to any account, regardless of currency or regulatory jurisdiction.”

An open cross-border payments system is inherently complex, as it is comprised of many players and requires adherence with multiple sets of rules and jurisdictions. However, whether it’s businesses transferring large sums across borders or retail bank customers making micro-payments, users expect a fast, convenient and consistent experience regardless of their location.

Global unity

SWIFT has a long history of engaging with financial institutions to develop an open ecosystem and the organisation is leading the way in ensuring it continues to meet the needs of end-customers. Most of these institutions are already in the process of modernising their payment systems and moving towards real-time transactions. To achieve this, the industry has come together around collaborative initiatives such as SWIFT’s global payments innovation (gpi).

Many institutions are also developing relationships with fintech firms that have the capacity to experiment with new technologies and ideas, then apply their learnings together in the real world. The challenge is in connecting hundreds of individual firms in such a way that the system hangs together, but still allows individual banks to create unique service offerings.

“If I move a payment quickly, then goods can ship quickly; the supply chain shortens and the amount of capital involved reduces, which has a very significant impact on trade. But it only works if you are getting the data to the end-recipient in the right form, in a standardised way and with sufficient information in the message for it to be processed automatically,” says Stephen Lindsay, SWIFT’s head of standards.

Building systems individually and then connecting them after the fact risks creating gaps in communication between the different platforms, particularly as they evolve. For financial firms to work effectively with one another and fintech partners, and to have the capacity to adopt innovative new approaches as they arise, they must be able to communicate seamlessly.

Seamless communication also enables firms to leverage cloud service providers to manage data in a secure way or application programming interfaces (APIs) to support the movement of data. “The whole basis of using cloud infrastructure and APIs is that businesses can innovate by partnering with other players, particularly newer technology companies, and use APIs to link between systems,” says Mr Newman. “This is how you get innovation quickly.”

A common language

Mr Lindsay adds: “Future-proofing our current designs and technology means we must have a common and consistent way of describing payments and the additional data that goes along with them.”

To this end, SWIFT has engaged closely with financial and non-financial companies to facilitate adoption of the ISO 20022 messaging standard for use in payment schemes, from instant payment models to the massive real-time systems used by central banks, nearly all of which are now converging on ISO 20022.

“As international trade increases and value chains get longer, you have more players involved with the data,” Mr Lindsay notes. “This international standard, ISO 20022, ensures the data remains consistent no matter what technology is used to make the payment itself.”

The end-game is to have the major traded currencies in the world for both cross-border and domestic payments running on the same rich, common standard. As firms increase the level of automation they employ in processing transactions and trade, the reliability and depth of data that is included within a payment message will also increase the ability to use machine-driven processes.

Real-world impact

The end-to-end transparency and speed of international payments has already come a long way in the two years since SWIFT introduced gpi. SWIFT gpi members – more than 3,500 financial institutions are sending more than $300 billion via the service daily – can now provide their customers with full transparency on where their payments are, what has happened to them and ultimately when they reach the end-beneficiary.

“We know approximately 50 per cent of all payments are reaching the beneficiary in under 30 minutes, many of these in just minutes or even seconds, and nearly 100 per cent of them are made within 24 hours. So we’ve already taken huge strides towards delivering instant global payments,” says Mr Newman. “As more and more banks improve their back offices, we will see this trend continue for the world’s payments.”

Industry-wide adoption of ISO 20022 is set to enable this even further. Richer and better use of data will open up many new efficiencies, including in the area of compliance. With about 10 per cent of global payments being stopped due to sanctions-screening – the vast majority of which are false positives, SWIFT estimates – a more effective reading of payment messages will have a material impact on the cost of doing business and the speed of payments overall.

The result of these tectonic shifts is that financial institutions are able to deliver improved service levels to their clients, with transparency on processes and fees, faster payment speeds, and certainty when funds have been delivered.

“At the end of the day, the winner in all of this is the end-customer. And financial institutions that embrace the opportunities are able to innovate more to offer new and better client experiences,” Mr Newman concludes.


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