By Elena Malykhina
McKinsey’s report projects an overall global payments industry average growth rate of 5 percent through 2020, when the industry is expected to generate an estimated $2.2 trillion in revenue (compared with $1.8 trillion in 2015). Economic factors diminished growth in 2015, compared to 2014 when the global payments industry experienced 9 percent revenue growth.
But cross-border payments are also dragging down growth: cross-border payments revenue growth has not exceeded 4 percent since 2011, with most of the impact felt in business-to-business (B2B) payments. McKinsey notes cross-border payments haven’t faced the same regulatory and competitive pressures as domestic payments, resulting in a lack of incentive to innovate.
Meanwhile, Accenture reports that digital commerce and growing international trade are contributing to rising demand for cross-border and multi-currency payment services. Not just large corporations, but also small and midsized enterprises (SMEs) are “likely to have significant numbers of international suppliers and/or customers” compared to a few years ago, according to the Accenture report on corporate payments in the digital age.2
Cross-border payments, however, remain relatively slow since it’s difficult to track them and there is often no confirmation of delivery by the recipient, Accenture said. Errors are likely when banks in different countries with their own regulations are added to the mix. For example, the major approach to international payments is through the Society for Worldwide Interbank Financial Telecommunication’s (SWIFT’s) messaging service, which involves international payments moving from bank to bank across a network of many correspondent banks, not all of which are members of SWIFT. Historically, it hasn’t been possible to track exactly where a payment is as it moved from bank to bank. Consequently, there was a lack of tracking transparency.
But in January 2016 the SWIFT global payments innovation (gpi) initiative was announced to address problems with B2B cross-border payments. SWIFT gpi improves the customer experience in cross-border payments by increasing their speed, transparency, and end-to-end tracking.3 SWIFT, which is a global member-owned cooperative, developed a cloud-based payments tracker, a member directory, and a service-level agreement (SLA) in order to meet transparency and traceability demands for cross-border payments.4
SWIFT’s new cross-border payments tracker enables international payments to be traced in real-time. The tracker is accessible via an open application programming interface (API), which means it is accessible by proprietary banking systems worldwide. Participating banks can provide their business customers with an end-to-end view of their payments, including a confirmation notice when the money reaches the recipient’s account.5
More than 110 financial institutions from Europe, Asia Pacific, Africa, and the Americas are part of the SWIFT gpi, and thousands of cross-border payments are being sent already using the “new standard,” according to SWIFT.6
Blockchain and its distributed ledger technology (DLT) also could potentially modernize cross-border payments tracking. International law firm Crowell & Moring defines a blockchain as a “database that tracks ownership of assets and exchanges of information” and says DLT “makes it possible to store this database among a distributed network of computers.”7
Among other things, DLT provides full traceability. For instance, participants or regulators can trace the flow of information through the entire chain. Entries can be added to, but not deleted from the distributed ledger, therefore making the information absolute. This information can include ownership, transaction history, and data stored on the shared ledger.8
As of 2016, over $1.1 billion of venture capital has been invested in DLT, a 60 percent increase from 2015, according to the Accenture report.9 There are more than 600 different DLT networks, including Ripple, a startup that launched in 2012. Ripple envisions DLT-based networks where “payments are immediate, 24x7, with real-time confirmation of receipt and with certainty and transparency of FX rates and fees disclosed before the transaction is originated.”10
SWIFT has been exploring possible uses of DLT, for example, to reconcile banks’ nostro accounts (which are held by banks, in a foreign currency, in other banks). However, while it is operating a nostro account proof-of-concept, SWIFT feels the technology is not yet mature enough for broad deployment in cross-border payments.11
There are several critical factors that need to be addressed before extensive adoption of DLT for cross-border payment tracking can take place, such as strong governance, data controls, compliance with regulatory requirements, standardization, identity framework, security and cyber defense, reliability, and scalability, according to a joint white paper by SWIFT and Accenture.12
“The financial services industry is moving from an educational phase, into an application phase when it comes to DLT,” said David Treat, a managing director and global head of Accenture’s Capital Markets Blockchain practice. “We now have a strong understanding of DLT and its benefits, but we need to identify which areas are best suited, as the technology will not be a silver bullet to solve all business issues.”13
Furthermore, when it comes to complex cross-border payments networks, interoperability issues must be resolved, according to the white paper. This includes interoperability between DLT systems and legacy infrastructures, interoperability between distributed ledgers across multiple counterparties, as well as the regulatory requirements for such networks.
The B2B cross-border payments segment is making important tracking and transparency improvements thanks to industry initiatives and emerging solutions like SWIFT gpi and blockchain/DLT. While DLT is not mature enough for widespread adoption in the financial industry, SWIFT is already enabling real-time payments tracking for international payments.
Elena Malykhina is professional writer who has covered science, technology and business for more than 10 years. Her work has appeared in InformationWeek, Scientific American, Newsday, The Wall Street Journal and Adweek, as well as through the Associated Press.
1.Global Payments 2016: Strong Fundamentals Despite Uncertain Times, McKinsey & Company; https://www.smefinanceforum.org/sites/default/files/post/files/McKinsey_Global_Payments_Report_2016.pdf
2.Transforming corporate payments for the digital age, Accenture; https://www.accenture.com/t20170130T001444__w__/us-en/_acnmedia/PDF-42/Accenture-Transforming-Corporate-Payments-Digital-Age.pdf
3.“SWIFT global payments innovation (gpi),” SWIFT; https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi
4.“2016 SWIFT Annual Review,” SWIFT; https://www.swift.com/about-us/financials
5.“SWIFT unveils industry’s first ever cross-border payments tracker,” SWIFT; https://www.swift.com/news-events/press-releases/swift-unveils-industry_s-first-ever-cross-border-payments-tracker
6.“Delivering the future of cross-border payments, today,” SWIFT; https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi
7.“Blockchain / Distributed Ledger Technology (DLT),” Crowell & Morning; https://www.crowell.com/Practices/Blockchain-Distributed-Ledger-Technology-DLT
8.“SWIFT on distributed ledger technologies,” SWIFT/Accenture; https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi/the-technological-transformation-of-cross-border-payments
9.“Real-time cross-border commercial payments using DLT,” Accenture; https://www.accenture.com/us-en/insight-real-time-cross-border-payments
10.The Journey to Real-Time Cross Border Commercial Payments using Distributed Ledger Technology, Ripple/Accenture; https://ripple.com/wp-content/uploads/2016/07/Accenture_Ripple_CrossBorderPayments.pdf
11.“Transforming cross-border payments with new technologies,” SWIFT; https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi/the-technological-transformation-of-cross-border-payments
12.“SWIFT on distributed ledger technologies,” SWIFT/Accenture; https://www.swift.com/our-solutions/global-financial-messaging/payments-cash-management/swift-gpi/the-technological-transformation-of-cross-border-payments
13. “SWIFT and Accenture outline path to Distributed Ledger Technology adoption within financial services,” SWIFT; https://www.swift.com/insights/press-releases/swift-and-accenture-outline-path-to-distributed-ledger-technology-adoption-within-financial-services