FX International Payments
By Mike Faden
Several factors are propelling the trend toward faster payments, including rising consumer expectations, competition from new online financial technology (fintech) providers and national regulatory initiatives. For domestic payments, the changes have been significant: at least 18 countries have already implemented national real-time or near-real-time payments systems, according to a detailed Accenture blog post, and many more are at various stages of planning or development.1
Those countries do not yet include the U.S. However, 2016 saw the introduction of same-day domestic ACH payments, and the U.S. Federal Reserve (Fed) is leading a broad initiative to spur development of faster payment services. The Fed requested industry proposals for faster payment systems in 2016; it is expected to publish its assessment of those proposals by early 2017. One of those proposals was from The Clearing House (TCH), the bank-owned operator of ACH and wire payments infrastructure, in conjunction with FIS. TCH is developing a real-time payments system due for pilot deployment in the U.S. in early 2017.2,3
However, while national payments systems have improved, global payments generally have not. As McKinsey & Co. observed in its 2016 global payments report, the contrast is frustrating many businesses. Companies “are increasingly aware of overall changes in commerce platforms and now expect the same upgrades to cross-border payments,” the report notes. “[They] increasingly question why a domestic payment can be executed in real time at very low cost, while it can take two or three days for a higher-priced cross-border transaction to be executed.” 4
As the McKinsey report notes, B2B transactions account for the vast majority of international payments value: an estimated $135 trillion in 2015 (in comparison, consumer-to-consumer (C2C) global payments totaled just $405 billion that year.) The report estimates typical fees of U.S. $30 to $40 per B2B cross-border transaction.
McKinsey expects that banks’ margins will come under pressure as fintechs offer new global payment services and gain market share. An additional trend affecting banks’ ability to offer B2B global payments is the decline in the correspondent banking networks that are involved in most international transactions, due largely to the cost of complying with know-your-customer (KYC) and anti-money-laundering (AML) regulations.5
Finally, there are signs that the B2B international payments situation is changing, with new global payments offerings underway from banks as well as fintechs. One key initiative comes from the Society for Worldwide Interbank Financial Telecommunication (SWIFT), the global bank-owned messaging network that handles most international interbank payments. In September 2016, SWIFT said it had successfully completed a pilot of its global payments innovation (GPI) initiative.6 As a result, the service is expected to go live in early 2017, offering several improvements for cross-border B2B payments. For example, recipients should have same-day access to payments rather than waiting several days for funds to clear, and there will be new capabilities for tracking payments and confirming receipt.
In Europe, the Single Euro Payment Area (SEPA) Instant Credit Transfer Scheme is expected to start providing instant cross-border interbank payments in Euros in November 2017. The system will initially enable transfers of up to 15,000 euros between accounts in less than 10 seconds at any time. That compares with current transfer times of up to a day, or sometimes longer. The service is planned to progressively expand to cover the 34 European Countries within SEPA.7
Fintechs and other non-bank payment providers also are changing the international B2B payments landscape in several ways. Some operate closed-loop money-transfer networks that avoid the complexity of correspondent banking networks, enabling faster, cheaper and more transparent payments, according to the McKinsey report.
Many 2016 announcements focused on the use of blockchain technology to enable faster international payments; banks and other established financial-services providers showed keen interest in the technology, and many are working with fintechs on services that are due to start appearing in 2017. As an example, more than 40 Japanese banks joined a regional consortium focused on cross-border payments, aiming for a proof-of-concept in March 2017 ahead of commercial deployment.8 Multiple initiatives are seeking to use blockchain to accelerate and reduce the cost of trade finance, which some consider ripe for disruption because it involves costly, time-consuming manual processes.9
McKinsey forecasts that “the digital revolution will dramatically change international payments over the next five years, as customers demand a more compelling user experience: transparent, real-time, data-rich and easy to use.” Many initiatives announced in 2016 focused on taking steps toward achieving those goals. In 2017, at least some of those initiatives are expected to start delivering results.
Mike Faden has covered business and technology issues for more than 30 years as a writer, consultant and analyst for media brands, market-research firms, startups and established corporations. Mike also is a principal at Content Marketing Partners.
1. "Smarter bank payments—part 3: Real-Time Payments and APIs", Accenture Banking Blog; http://fsblog.accenture.com/banking/smarter-bank-payments-part-3-real-time-payments-and-apis/
2. "FIS and The Clearing House Prepare Real-Time Payments to Go Nationwide", FIS; http://www.fisglobal.com/About-Us/Media-Room/News-Releases/2016/FIS-and-The-Clearing-House-Prepare-RealTime-Payments-to-Go-Nationwide
3. "VocaLink and The Clearing House sign a groundbreaking deal to deliver national real-time payment services in the U.S.", The Clearing House; http://www.theclearinghouse.org/press-room/in-the-news/2015/12/vocalink-and-the-clearing-house-sign-deal-to-deliver-realtime-payment-services-in-the-us
4. Global payments 2016: Strong fundamentals despite uncertain times, McKinsey & Company; http://www.mckinsey.com/industries/financial-services/our-insights/global-payments-2016-strong-fundamentals-despite-uncertain-times
5. Correspondence Course: charting a course for US dollar clearing and correspondent banking through data analytics, Price Waterhouse Coopers; https://www.pwc.com/us/en/risk-assurance-services/publications/assets/pwc-correspondent-banking-whitepaper.pdf
6. "SWIFT successfully completes first phase of global payments innovation initiative pilot", SWIFT; https://www.swift.com/insights/press-releases/swift-successfully-completes-first-phase-of-global-payments-innovation-initiative-pilot
7. "The SEPA Instant Credit Transfer Scheme Rulebook is Published!", European Payments Council; https://www.europeanpaymentscouncil.eu/index.cfm/about-epc/epc-news/the-sepa-instant-credit-transfer-scheme-rulebook-is-published/
8. "Japanese banks flock to blockchain consortium", Finextra; https://www.finextra.com/newsarticle/29683/japanese-banks-flock-to-blockchain-consortium
9. "Microsoft-BAML Blockchain Partnership Aims to Improve Trade Finance", Fortune.com; http://fortune.com/2016/09/27/microsoft-teams-with-baml-on-blockchain-based-trade-finance/