By Frances Coppola
According to the U.S. Census Bureau,1 the U.S’s top five trading partners are:
How well prepared are these countries for the real-time payments revolution, and what could this mean for international business?
Mexico was one of the first countries to introduce real-time payments. The Bank of Mexico’s Real Time Gross Settlement (RTGS) system, known as Sistema de Pagos Sistemica Interbancarios (SPEI), was introduced in 2004. In November 2016 its hours were extended to 24/7/365, though currently this is limited to mobile payments only: online payments from a commercial bank account can only be made during the bank’s open hours. Payments typically reach their destination within 30 seconds.2 SPEI is Mexico’s main payments system, handling both large and small payments—85 percent of payments via SPEI are for less than 100,000 Mexican pesos (about $5,160).3
However, making payments via SPEI requires access to a bank account, and an estimated 42 percent of Mexicans don’t have bank accounts. Mexico averages only 14 bank branches per 100,000 residents, and some rural areas have no bank. Consequently, cash remains by far the most frequent method of payment: some 90 percent of business payments are in cash. An estimated 57 percent of Mexicans work “off the books.”
Even for people with bank accounts, making payments with SPEI can be less attractive than paying cash. The user interface for SPEI requires input of significant amounts of information, which slows down the process and can put people off using it. However, the growing ubiquity of smartphones and internet access is creating an opportunity to bring real-time digital payment services to a much wider audience. The Bank of Mexico has launched a new mobile application for retail payments, known as CoDi (Cobro Digital), which makes access to SPEI considerably easier and could encourage people to use digital payments instead of cash. However, adoption has been slow: one month after its launch, a study showed there was widespread ignorance of CoDi and few merchants were accepting it.4
Canadian consumers have for some years been able to make mobile and online payments using the digital payments service Interac.5 These payments settle fast, though as yet not instantaneously. Interac payments are widely used: in 2016, Canadian consumers and businesses sent 158 million money transfers via Interac, totaling over CAD $63 billion in value.6
In 2016, Canada embarked on an ambitious project to replace its principal payments architecture with three new systems:
The RTR provides a real-time payments infrastructure to which banks, payment service providers, e-commerce websites and other companies and organizations involved in payments can connect using APIs. Canada plans to adopt the ISO 20022 global messaging standard so that banks and other companies can easily layer their own payment applications on top of the RTR infrastructure. This will also make the RTR infrastructure compatible with the international messaging service SWIFT, potentially opening the door to international payments.11
In the last decade, there has been a payments revolution in China. Mobile payments now total over $41 trillion annually, with 92 percent going through two giant digital platforms, WeChat and Alipay. WeChat is a social media and messaging service created by the Chinese corporation Tencent, while Alipay is part of the Chinese online marketplace Alibaba. These two platforms dominate the Chinese payments landscape, with over 1 billion users each and 90 percent of people in China’s largest cities using them as their primary payment method.12
WeChat and Alipay work differently from most Western real-time payments systems. Instead of transferring funds between banks, customers upload funds from their bank accounts into digital wallets on the platforms. They can then use QR codes to make instantaneous wallet-to-wallet payments from their smartphones.13
QR codes are a type of two-dimensional bar code. They have a large data capacity and can serve multiple uses such as storing contact details or digital payments. On Alipay and WeChat, individuals, merchants, and payment points such as parking garages are all assigned unique QR codes.14
Because they are part of large global corporations, Alipay and WeChat can be used for payments outside China. Many U.S. businesses have Alipay and WeChat accounts for their Chinese customers, and some retail stores in the U.S. now accept payment by Alipay and WeChat. As trade with China grows, WeChat and Alipay may become ubiquitous for international payments between U.S. businesses and their Chinese customers and suppliers.15
Japan has the oldest real-time payments system in the world. The Zengin system, introduced in 1973, links almost all commercial banks in Japan. Individual payments over 100 million yen are cleared in real time: smaller payments are batched and cleared in bulk. However, Zengin is only open until 3 pm on weekdays, which means funds can take a day or more to arrive in customers’ bank accounts. The cost is also quite high at about $3 per transaction.16 For most domestic transactions, therefore, the Japanese prefer cash.
Japan’s Foreign Exchange Yen Clearing System (FXYCS) settles international payments on a real-time basis.
The digital payments revolution has been slow to take off in Japan. However, this could be about to change. In September 2018, a consortium of Japanese banks launched MoneyTap, an instantaneous blockchain-based payments system accessed via a smartphone app.17 MoneyTap payments can be made using a bank account number, a phone number, or a QR code.18 At present, MoneyTap payments can only made in yen. But the technology underlying MoneyTap can handle many currencies, so it may be that MoneyTap or another digital payments service will, in the not too distant future, bring about international real-time payments for U.S. businesses trading with Japan.
Germany is a member of the EU and a euro user. Although the majority of Germans have bank accounts and smartphones, cash remains the most popular means of payment for domestic transactions. However, electronic payments are growing: in 2017, electronic payments by German consumers amounted to some 17 billion euros.19
Germany is part of the EU’s single payments area (SEPA). SEPA covers not only the 28 EU members but also Norway, Iceland, and Liechtenstein, which are part of the wider European Economic Area, and Switzerland, San Marino, and Monaco. It enables people to make card and online payments in euros to people and businesses in other SEPA European countries as easily as they can within those countries.20
Final settlement of euro payments is via the European Central Bank’s RTGS system, Target2. In November 2018, the EU introduced its Target Instant Payment Settlement (TIPS) system, enabling euro payments to be settled in real time anywhere in the euro area.21 However, real-time cross-border payments involving more than one currency are not as yet available.
The U.S.’s five largest trading partners already have real-time payments for domestic payments in their own currencies, though some are in the process of upgrading their systems. In Europe, 34 countries also have real-time cross-border payments in euros. So, the U.S. is lagging behind on the real-time payments infrastructure front. However, when the Fed introduces its new real-time dollar payments system, U.S. businesses may find that dollar payments become faster and simpler both domestically and internationally. As more countries join the digital revolution, cross-currency international payments may also become faster and cheaper, to the benefit of international businesses.
With 17 years experience in the financial industry, Frances is a highly regarded writer and speaker on banking, finance and economics. She writes regularly for the Financial Times, Forbes and a range of financial industry publications. Her writing has featured in The Economist, the New York Times and the Wall Street Journal. She is a frequent commentator on TV, radio and online news media including the BBC and RT TV.
1. “Top Trading Partners Year-To-Date, September 2019,” U.S. Census Bureau; https://www.census.gov/foreign-trade/statistics/highlights/top/top1909yr.html
2. “SPEI, information,” Bank of Mexico; https://www.banxico.org.mx/servicios/sistema-pagos-electronicos-in.html
3. “Country profile: Mexico,” Instapay; https://www.instapay.today/country-profile-mexico/
4. “Cinemas, restaurants and department stores…no sign of CoDi,” Mexicanist; https://www.mexicanist.com/l/banxico-codi-mobile-payments-platform/
5. “Our Company,” Interac; https://www.interac.ca/en/about/our-company.html
6. “Canada’s Real-time Payment Rail (RTR),” Instapay; https://www.instapay.today/insight/canadas-real-time-payment-rail-rtr/
7. “Modernization Target State Companion Reader,” Payments Canada; https://modernization.payments.ca/wp-content/uploads/2018/05/modernization_target_state_companion_reader_en_final.pdf
9. “U.S. Dollar Bulk Exchange,” Payments Canada; https://www.payments.ca/about-us/our-systems-and-rules/us-dollar-bulk-exchange
10. “Modernization Target State Companion Reader,” Payments Canada; https://modernization.payments.ca/wp-content/uploads/2018/05/modernization_target_state_companion_reader_en_final.pdf
11. “Canada’s Real-time Payment Rail (RTR),” Instapay; https://www.instapay.today/insight/canadas-real-time-payment-rail-rtr/
12. “Is China’s New Payments System the Future?” Brookings; https://www.brookings.edu/wp-content/uploads/2019/05/ES_20190617_Klein_ChinaPayments.pdf
16. “Zengin System,” Zengin; https://www.zengin-net.jp/en/zengin_net/pdf/pamphlet_e.pdf
17. “Japanese banks to offer instant money transfers using blockchain,” Financial Times; https://www.ft.com/content/1a632afc-c35d-11e8-95b1-d36dfef1b89a
18. “SBI Holdings, Ripple fronted MoneyTap app goes live in Japan,” CoinRivet; https://coinrivet.com/sbi-holdings-ripple-fronted-moneytap-app-goes-live-in-japan/
19. “Cash, electronic or online: how do Germans pay?” Deutsche Bank; https://www.dbresearch.com/PROD/RPS_EN-PROD/PROD0000000000484483/Cash%2C_electronic_or_online%3A_How_do_Germans_pay%3F.pdf
20. SEPA, European Commission; https://ec.europa.eu/info/business-economy-euro/banking-and-finance/consumer-finance-and-payments/payment-services/single-euro-payments-area-sepa_en
21. “What is TARGET Instant Payment Settlement (TIPS)?” European Central Bank; https://www.ecb.europa.eu/paym/target/tips/html/index.en.html