Payments interoperability across communities and currencies
By Emmanuel de Bouard, Head of Cash Clearing Services for SG GTB, Jean-François Mazure, Head of Cash Clearing Services for SG GTB & Frantz Teissèdre, Head of Interbank Relationships for SG GTB - 2016
“In seeking interoperability between real time payments systems, the industry has to differentiate between what is achievable for all participants in the payments environment and the reality of the situation between banks in terms of liquidity and the systems and formats that are used.” Emmanuel de Bouard, Head of Cash Clearing Services
Domestic real-time retail payments systems are offering reach and ubiquity in many smaller communities through indirect memberships and service hubs. In larger communities, such as the U.S. and Euro-zone, multiple operators are positioning their solutions. But the desire (or obligation within a single currency zone) to interoperate comes with new challenges: how can operators guarantee finality to each other within seconds? Can instant payment confirmations be returned instantly through multiple players? What is the role banks can play in ensuring interoperability?
- The correspondent banking network is very complex and has been built up over a number of years. Agreements exist between banks globally in order to ensure that customers can be reached all over the world. It is a good infrastructure, but it is not very fast. In today’s world technology has created the expectation of immediacy; customers no longer understand why it is not possible to have fast and predictable payments transactions. Corporate customers want their payments to be predictable in terms of when the payment will arrive, fast, transparent (in terms of the cost of processing it) and secure. Meeting these requirements is complex and costly. Meeting these requirements in real time will be even more of a challenge. While corporates may not require immediate, cross-border payments at present it is only a matter of time before they request such services from their correspondent banks.
- As corporates seek to manage liquidity on a real time basis, there will be a requirement for interoperability between real time payments systems. Myriad real time payments systems are emerging globally and Fintechs are coming to the fore, providing fast solutions. However the Fintechs cannot match the robustness and security of the current correspondent banking model. Additionally, there is a question as to how such platforms will cope during times of scarce liquidity. The end customers of these solutions bear the foreign exchange and liquidity risk.
- The industry is responding to customers’ demands for predictability and speed, which is why interoperability between real time payment systems is being discussed. For interoperability to be achieved, however, there needs to be an understanding of exactly what real time means in different countries. To interoperate, formats have to be agreed for the transfer of payments between systems. SWIFT’s Global Payments Innovation Initiative (GPII) is a step towards harmonisation. By agreeing SLAs for dealing with local real time payment systems, the participant banks will help to ensure that payments will be credited to the account of the beneficiary in a speedy manner. This approach will also ensure continuing financial stability, resilience, and guarantee of payment within a few hours.
- In the first phase of interoperability there may be an increase in the number of payment systems in order to achieve greater reach. Existing real time payments systems are domestic in nature and have domestic membership. Indeed, these systems do not even cover all of the banks in a particular market. How these systems will interoperate is an open question because they all have different approaches.
- To interoperate, the domestic systems might have to connect to a central one, perhaps operated by a central bank. Additionally, all payments systems require a back up for contingency – interoperating with not one but two systems of course adds to complexity. At present, domestic systems serve most of the real-time needs of customers. In the best case scenario interoperability will eventually happen but it will be difficult to achieve.
- Interoperability between real-time payments systems may be possible but in order to achieve it, banks will have to make huge investments to serve only a small percentage of payments. It is likely that the industry may operate two systems – a net settlement system to manage issues of liquidity and a gross settlement system to achieve the requirements of regulators as they push for real time payments.
- Liquidity is an issue for real time payments interoperability. With real time systems, the industry has to move from net settlement systems to gross settlement where payments are pre-funded. But in times of scarce liquidity this will be difficult. The sensible option will be to operate both net and gross systems so that there is back up in the system.
- GPII is a strong initiative to help the industry move towards interoperability of real time systems. Around 80% of real time payments can be done through SWIFT as a book to book transfer, generating immediate acknowledgement and receipt. This creates an almost real time environment and removes the need to build a new system that will allow interoperability.
- Interoperability of real time systems is problematic when a FX transaction has to be made. FX settles on a T+2 basis and there is no clarity as yet on how real time systems will cover FX.
“There is a dichotomy of payments systems: on the one hand the correspondent banking model is stable and safe but not fast enough. On the other hand, new Fintech offerings are fast, simple and straightforward for users but they are far from being as robust, safe or resilient as today’s networks.” Frantz Teissèdre, Head of Interbank Relationships
“The idea of connecting domestic real-time payment systems with pan-European systems such as TARGET is problematic. TARGET is a pre-funded system that settles at the end of the day; achieving real-time payments within this will be difficult.” Jean-François Mazure, Head of Cash Clearing Services;