By Bill Camarda
A recent report by the Bank for International Settlements (BIS) observed that progress has been fastest on the “front-end” elements of international money transfer systems, i.e., elements that face the end user. For example, more payment service providers are entering the marketplace, and providers of all types are offering innovative tools such as easy-to-use mobile apps. According to BIS, progress has been slower in back-end infrastructure associated with messaging, clearing, and settlement.5 Even at the back end, however, there have been significant advances.
The back-end of traditional cross-border transactions is based on correspondent banking relationships and sometimes takes multiple days, with little transparency of costs or payment status.5 As one observer notes, the correspondent banking system’s roots go back 600 years, and transactions require the alignment of six players: the payer, the payer’s bank, the payer’s bank’s correspondent, beneficiary bank’s correspondent, beneficiary bank, and the beneficiary.6
The Society for Worldwide Interbank Financial Telecommunication’s (SWIFT’s) global payments innovation (gpi) initiative aims to dramatically improve the way correspondent banking operates, enabling same-day use of funds, transparent fees, and end-to-end tracking of cross-border wire transfers.7 As part of gpi, SWIFT introduced the gpi Tracker in May 2017, providing real-time tracking of gpi payments to banks that participate in the gpi service.
In May 2018, SWIFT reported that over 160 banks have signed onto gpi, and 53 have gone live, including 29 of the world’s top 50 banks. More than $100 billion in gpi payments are being processed daily, and nearly half are being credited to beneficiaries within 30 minutes.8By March 2018, over 25 percent of SWIFT transactions between the U.S. and China were running through gpi.9
Starting in November 2018, SWIFT will include a unique end-to-end transaction reference in all cross-border wire transfers carried by SWIFT worldwide, including non-gpi payments. All 11,000 banks that use SWIFT will need to include this reference number in payment instructions, even banks that don’t yet subscribe to gpi.10This should make it easier to track a far wider cross-section of corporate cross-border payments, and help ameliorate long-standing transparency challenges.
Some believe that more radical change is necessary, and look to blockchain-based technologies for a fundamentally different cross-border payments experience. For example, Ripple aims to create an “Internet of Value,” where value can be transferred much as the conventional distributed Internet transfers information. 11
In Ripple’s vision, banks and payment providers play a role analogous to the Internet’s web servers, communicating through Ripple’s public Interledger Protocol (ILP), much as computers now communicate worldwide via IP protocols. In such a system, Ripple says, value only leaves the paying institution when it’s been confirmed by the receiving institution, and cross-border, cross-currency transactions can happen in seconds.12
If institutions choose, they can also use Ripple’s XRP cryptocurrency in payment flows to improve liquidity in cross-border payments. Six major payment providers are already piloting this approach.13In Ripple’s vision, XRP could radically simplify currency exchange for both businesses and individuals, making currency “move as freely as email and convert into local currency just as emails convert into words on a page.”14
Eleven of the world’s top 100 banks have joined Ripple’s network.15 The coming months and years may bring greater clarity on how they intend to use its technologies. Many large financial institutions may ultimately use a mix of solutions from SWIFT, Ripple, and other sources, creating hybrid environments to address different cross-border payment requirements.16
As regional trade grows, many financial institutions want to integrate payment infrastructures with their regional neighbors. In November 2017, major payment systems operators in Malaysia, Thailand, Vietnam, Singapore, and Indonesia agreed to connect their real-time payment systems. So, too, several leading Swedish, Danish, Norwegian, and Finnish banks have agreed to work towards establishing a pan-Nordic payment infrastructure that would stimulate trade and employment across the region, supporting all four of the region’s currencies, including the euro. Their cross-border infrastructure could eventually integrate with Europe’s SCT Inst faster payment system.18
SCT Inst, intended to handle both domestic and cross-border euro payments across Europe, went live in November 2017. By February 2018, support for SCT Inst had widened from 15 percent to 25 percent of Europe’s payment service providers, and from eight to 13 countries. 19,20 Ultimately, coverage is expected to encompass 34 countries, with many coming aboard in the next 18 months. 21
Meanwhile, European regulators are attempting to clear away cost obstacles to cross-border payments within the continent. Euro-based transactions made across borders within the euro area – for example, from France to Portugal – already have the same low costs as domestic transactions. But even small euro transactions crossing into non-euro states such as Bulgaria can easily cost 20 euros, even though the entire transaction takes place within the European Single Market. A new European Commission regulation will level the playing field, so euro-based cross-border transactions benefit from the same low costs, even if one or both partners are in states with a different official currency, such as Iceland and Poland.22,23
A key obstacle to linking domestic payment systems for international transactions has been incompatible messaging systems. However, as domestic payment systems modernize, many are adopting the same messaging standard: ISO 20022. This alone doesn’t guarantee interoperability, since there’s significant room for variance amongst ISO 20022 implementations.24 The ISO Real-Time Payments Group, representing 70+ stakeholders throughout Europe, the U.K., the U.S., and Australia, has been working to harmonize ISO 20022. business processes, message components, elements, and data content worldwide, so the standard can actually meet its potential. 25
In the coming months and years, cross-border payments will become faster, more transparent, and easier to track, promoting international commerce and remittances for enterprises, SME businesses, and individuals alike.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1.Cross-border retail payments, Committee on Payments and Market Infrastructures, Bank for International Settlements; https://www.bis.org/cpmi/publ/d173.pdf.
2. Remittance Flows Worldwide in 2016,” Pew Research Center; http://www.pewglobal.org/interactives/remittance-map/.
3. Cross-border retail payments,” Committee on Payments and Market Infrastructures, Bank for International Settlements; https://www.bis.org/cpmi/publ/d173.pdf 4. Ibid.
5. SWIFT gpi overview, May 2018,” SWIFT; https://www.swift.com/file/49166/download?token=PT-7wVrP.
6. Ripple vs SWIFT: payment (r)evolution,” Treasury Today;http://treasurytoday.com/2017/07/ripple-vs-swift-payment-r-evolution-ttpv
8. SWIFT gpi overview, May 2018,” SWIFT; https://www.swift.com/file/49166/download?token=PT-7wVrP .
9. SWIFT introduces universal real-time payment tracking,” SWIFT; https://www.swift.com/file/49386/download?token=HlZXcdmP
11. How Santander will use Ripple to execute cross-border payments | Analysis of the deal,” BobsGuide; http://www.bobsguide.com/guide/news/2018/Jan/16/how-santander-will-use-ripple-to-execute-cross-border-payments-analysis-of-the-deal/
13. Top 9 Frequently Asked Questions About Ripple and XRP,” Ripple; https://ripple.com/insights/top-9-frequently-asked-questions-ripple-xrp/
14. Data Sheet—How Ripple Wants to Enhance, Not Kill, the Global Payments System,” Fortune;http://fortune.com/2018/03/07/data-sheet-ripple-xrp-money-transfer/
15. The World’s Biggest Banks Lead the Blockchain Charge,” Ripple;https://ripple.com/insights/the-worlds-biggest-banks-lead-the-blockchain-charge/
16. Is Ripple a threat to SWIFT gpi's monopoly on cross-border payments?” Global Treasurer;https://www.theglobaltreasurer.com/2018/03/26/is-ripple-a-threat-to-swift-gpis-monopoly-on-cross-border-payments/
17. Payment tie-ups between ASEAN nations are up for discussions,” ASEAN Today;https://www.aseantoday.com/2018/01/payment-tie-ups-between-asean-nations-are-up-for-discussions/
18. Nordea confirm Pan-Nordic payment infrastructure instant in nature,” InstaPay;https://www.instapay.today/article/nordea-confirm-pan-nordic-payment-infrastructure-instant-in-nature/
19. SEPA Instant Credit Transfer (SCT Inst) payment scheme goes live,” InstaPay; https://www.instapay.today/article/sepa-instant-credit-transfer-sct-inst-payment-scheme-goes-live/
20. SCT Inst uptake surpasses 1,000 PSPs, 25% of European total,” InstaPay; https://www.instapay.today/article/sct-inst-uptake-surpasses-1000-psps-25-european-total/
21. Instant credit transfers are now a reality in eight European countries,” European Payments Council;https://www.europeanpaymentscouncil.eu/news-insights/news/instant-credit-transfers-are-now-reality-eight-european-countries
22. Commission to propose cheaper cross-border payments for consumers,” Politico.eu; https://www.politico.eu/article/european-commission-to-propose-cheaper-euro-cross-border-payments-for-consumers-eurozone/
23. The EU Single Market: Single Market Scorecard,” European Commission; http://ec.europa.eu/internal_market/scoreboard/performance_by_member_state/index_en.htm
24. Cross-border retail payments,” Committee on Payments and Market Infrastructures, Bank for International Settlements;https://www.bis.org/cpmi/publ/d173.pdf
25. Real Time Payments & ISO20022: Global Cooperation for Interoperability and Alignment,” ISO;https://www.iso20022.org/sites/default/files/documents/general/ISO20022_RTPG.pdf