Making cross-border payments smoother

Due to the globalisation of trade and the rise of new information and communication technologies, the world has become a “village” and will be even more so in the future, with consumers and businesses of all sizes increasingly interacting with each other instantaneously and at low cost. These expectations have become the norm and apply equally to cross-border payments.

Multiple pressures

There is growing demand for banks to make international payments smoother. This pressure comes from customers (individuals and businesses), who are looking for immediacy and the ability to make a payment at any time. It also comes from the competition posed by alternative players; the payment card sector, which wants to protect its position and capture some of the growth in this market; and payment infrastructures, which are pushing banks to adapt by expanding their reach. Not to be outdone, SWIFT has released its SWIFT gpi service, which offers shorter payment times and more transparency, and more recently started its SWIFT Go initiative, which provides consumers and SMEs with a frictionless and inexpensive service for small cross-border payments. Additionally, since mid-2020, public officials in charge of payment authorities, including regulators, central banks and executive bodies such as the European Commission, have also put a spotlight on this topic, as illustrated by the “3 Ps”: people, planet and prosperity. The first seeks to foster social inclusion by allowing people to send funds to relatives on the other side of the world; the second incorporates Corporate Social Responsibility aspects. Finally, smoother international payments will contribute to the growth of trade, and the world economy along with it. In this context, globalisation is seen as a vehicle for prosperity and peace. This stance by public officials shows a willingness to engage with the private sector on this matter.

Roadmap

In order to best respond to these players, payment authorities should set 2027 target for the banks in the fourth quarter of 2021, in terms of cost of payment, speed of execution (24/7/365 availability and immediacy), transparency of information (what it costs in total, what the beneficiary will actually receive, etc.), as well as access to systems with neglected areas of the world that have been hit with sanctions or embargoes, exposed to AML/FT risks or subject to strict trade and exchange control rules. This is a difficult knot to untangle, as services and requirements are increasing while prices will continue to fall. This context can only reinforce the consolidation underway in the cross-border payment market and the corresponding banking sector, since the players likely to see their volumes consolidate are those who can invest in smooth, low-cost operational processes and offer attractive prices to their customers.

There are obstacles to overcome...

However, the desire to create a single global payment area still faces obstacles such as immediacy, foreign exchange, interoperability and controls in the broader sense of the term. While technology already allows for 24/7/365 transactions, the lack of smooth trading is partly due to central bank settlement systems that are not open continuously. On this point, however, their operating hours have been increasingly extended. Starting in November 2022, the European Central Bank will open at 2:30 a.m., compared to 7 a.m. at present. And in the near future, the central bank settlement systems will be open 24/7/365. This raises a “Follow the Sun” issue for banks, as they need systems that can interact with customers 24/7/365. This requires substantial technical and human resources to ensure surveillance in the event of an incident, “repair” transactions, carry out controls to avoid any fraud, etc. In terms of foreign exchange, any transfer that is not originally converted into the currency of the destination country requires a foreign exchange transaction on receipt of the payment, which can take time. As for interoperability, technical formats may differ from one area to another. Lastly, the lack of harmonised enforcement for all types of control rules (capital, foreign exchange, compliance, etc.) is a real obstacle, even in the case of instant transfers in euros, since compliance rules offer no harmonised standards for filtering payments across countries in SEPA and the Eurozone. As a result, between 5% and 10% of instant cross-border payments in euros are not executed today.

... but also solutions

Harmonising and strengthening controls at global level, establishing a single language, and having enough teams to adopt a “Follow the Sun” model are among the solutions to these obstacles. Filtering a cross-border payment only once using harmonised rules would greatly reduce costs. This would be more efficient, as it would avoid any weak links in the payment chain. Similarly, to get around the difficulties linked to exchange rates, there are two solutions: banks can either use the currency of the destination country directly, or they can hope to one day use digital currencies supported by central banks with an official value like a bank note, which would eliminate foreign exchange difficulties. One challenge here will be making these digital currencies compatible with each other (technical underpinnings, holding rules, anonymity and privacy, etc.) in order to be able to exchange them. Additionally, in order to meet demand for 24/7/365 service and adopt a “Follow the Sun” model, capacity outside the home market will be needed. For example, Societe Generale has operations teams based in Paris and Chennai, which take over from one another when the other’s market is closed. The bank has also long been active in the development of a common global exchange format with recognised experts working with the authorities. This is the purpose of the single ISO 20022 standard, which by the end of 2025 will be used by the main market firms and banks. Societe Generale has also invested in SWIFT gpi from the outset, and has been applying it to its institutional clients since 2017. It also intends to bring this solution to its private and SME customers in the future. Finally, the bank is looking closely at the possibility of mixing SWIFT gpi with local instant payment systems that are continuously open, potentially allowing access to many more players.

Although many cross-border payment systems will still coexist for some years to come due to the obstacles in the way, the pressure brought by numerous players has initiated an irreversible movement towards a single global model that may eventually benefit all participants in the payment ecosystem.