Why challenging times lie ahead for real-time cross-border payments

Harold Bosse, Global Head of Product and PMO at Earthport explains how far from straightforward the route to globally consistent real-time payments is…

Why challenging times lie ahead of real-time cross-border payments

Click your fingers. That’s how fast people expect real-time payments to become. That is the perception of what real-time should be. Execution in mere seconds. There was a time when the concept of ‘instant’ meant ‘tomorrow’ and that was largely acceptable. Not any more, for as life gets faster, business accelerates, our attention spans shrink and situations are vulnerable to change in incredibly short timeframes, real time can be faster than the blink of an eye or the flap of an insect’s wing. Unsurprisingly, some organisations struggle to keep pace. Welcome to the world of real time.

Real time can be faster than the blink of an eye or the flap of an insect’s wing. Unsurprisingly, some organisations struggle to keep pace…

With populations growing, markets becoming ever more global and business increasingly complex, the need for a faster payments routine has never been more crucial, undoubtedly needed or more appreciated. But it’s not so simple to implement and expectations may have to be tempered to some degree – or at the very least, patience will have to be exercised.

The introduction of real-time payments is inevitable and is being partially driven by customer demand for speed and convenience. Consumers have been given a taste of the real-time experience through point-of-sale debit and credit card transactions, as well as e-commerce purchases. Businesses are now asking for the same speed of service.

Cross-border potential

Faster payments are making old and slow processes redundant and uncompetitive, but the industry still lacks the standardisation or collaboration it needs to support instant payments across the globe at the pace global commerce is accelerating. In Europe, for instance, retail sales across borders are expected to reach EUR 40bn by 2018, so alignment between countries is very much a necessity – and that’s just one example.

In fact, one of the principal hurdles for real-time cross-border payments is the multitude of systems currently in operation. The success of an instant cross-border payment event depends on these various systems being at least fully automated and, if possible, synchronised with each other. The overall performance of any real-time payment process – which should involve data transfer, screening, validation, authorisation, posting, clearing, settlement and notification – is driven by the sequentiality, the pace and the effectiveness of the slowest links in the chain. A system that has multiple touch points involved will not only be more complex, it will also probably be slower and more vulnerable to problems.

Regulatory hurdles

ClauseMatch and JWG partner on RegTech prototype

There are also regulatory challenges with real-time cross border payments, for obvious reasons. The quicker the payment, the less time to screen a transaction and a lot of financial institutions are nervous about issues such as anti-money laundering. In some cases today, instant payments are restricted to domestic payments, which do not require the same level of intensive vigilance as international payments. Some more advanced instant payment schemes allow cross-border payments by making sure the right level of information is exchanged between partners. Instant payments should not necessarily mean an increase in fraudulent activity. Multi-bank collaboration can go some way towards enhancing the fight against criminal activity.

Liquidity is another aspect that will need to be addressed. Management of cash will be impacted and treasurers need to find ways to control and manage liquidity and FX to support instant cross-border payment possibly through pre-funded accounts in a 24/7/365 environment.

Bank adaptation

Banks […] are faced with the stark reality that undertaking such a project will become an imperative

Until now, there has been some reluctance to grasp a sense of urgency about making real-time cross-border payments part of the agenda. And while this is mainly due to costs, and to the burden of unpicking legacy systems and processes that have traditionally been unavailable at certain times of the day, banks, whose infrastructures are characterised by many different systems that have been bolted together over decades, are faced with the stark reality that undertaking such a project will become an imperative.

One of the consequences of PSD2’s open account access is that real-time payments may be offered by alternative providers and could potentially bypass the traditional banks. Indeed, new technologies and new shortened processes that can accommodate faster, more transparent and more cost-efficient payments are being developed by new providers such as financial technology companies.

Technological advancement in action

Technology will provide one of the key drivers for the growth of real-time payments. Already there are many schemes in progress and some countries have already pursued the real-time path for domestic payments – the UK, US, SEPA, Singapore, Denmark and Australia, for example.

Some have deployed ISO 20022 in their Automated Clearing House (ACH) and Real-Time Gross Settlement (RTGS) systems in order to develop their real-time offering. The adoption of ISO 20022 is seen as a key pillar for improving the speed, efficiency and security of any payment system. This can help banks and Payment Service Providers to rationalise their internal and external data standards. ISO 20022 has the flexibility that can position banks for a new real-time payment infrastructure without implementing a fresh data standard. Others are using enhanced legacy or historical national formats to achieve the same goal. Finally, some are thinking of completely redesigning the landscape by adopting distributed ledger technology or blockchain-type technologies.

Clearly, these new technical structures represent the future, and certainly aim to meet client demand. They can also be leveraged by the banks directly to deliver the instant cross-border payment service expected by their customers, as they are able to retain the origination of payments.

However, this heterogeneity of new highly efficient systems does not resolve the problem of the compatibility, interoperability and synchronisation of the systems in the chain. This macro complexity is best addressed by partnering with true cross-border specialists that can ensure real-time cross-border payments are delivered securely and compliantly.

Banks that do not move to adopt faster cross-border payments run the risk of losing out on a growing sphere of business

Banks that do not move to adopt faster cross-border payments run the risk of losing out on a growing sphere of business. Moreover, they will also miss the opportunity to add a very much anticipated value to their client relationships. Very soon, the ‘real-time’ attribute will be a business as usual fact of life. Just as ordinary as web access or intraday statements.

Real-time payments are here to stay, regardless of the challenges around their implementation, and market forces will drive their evolution – in an instant.

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