Steve Percy
President, Diolkos Commerce Solutions
March 2021
Statistically, international payments were calculated to be approx. $29T in 2019, growing tremendously to $39T by 2022 (FED reported estimate). Of this, 95% is B2B Commercial Payment (Wire Payments) with only 2.5% being Consumer (Credit Cards) and another 2.5% in P2P Remittances (sending funds home – Wire Payments). The large majority of these payments have been supported through the S.W.I.F.T. infrastructure since the 1970’s…
Well, the experts agree. There is consensus. Cross-border payments will make little improvement through to 2025 and possibly beyond for the next 10 years. Why is this ? Isn’t Fintech going to solve all the issues eminently ?
Well it is true that there is a flurry of activity and a lot of tech out there making promises. Very much like the vendor booth area of any industry convention. All of them focusing on a portion or niche area of the issue, but none of them solving it end-to-end, cradle-to-grave. “Paytech” solutions from companies like Apple, Samsung and Google are using innovative cross-border transfer pricing/currency swap methods to leverage their currently strong global cash positions. Other Fintechs are developing digital cryptocurrencies “xCoins” to manage exchange involving all kinds of Fiat Currency FX schemes. To integrate into the current commercial market. But can the world or any jurisdiction rely on solutions offered without highly regulated oversight and guaranteed robustness ? Will the world ever trust Social Networks or solutions outside the banking sector for significant payment provision ?
Do a little research and dig up papers, webinar’s, and panel sessions done by any of the following organizations including BIS, FED, IMF, FSB, SIBOS, BCBS and FATF, Central Banks (BOE, BOC, ECB, et al.), S.W.I.F.T., MC/Visa (et.al.) and many others. You will find some consistencies that I will outline below. The two July 2020 papers issued by BIS – Committee on Payments and Market Infrastructures provide an excellent summary on the roadmap the G20 is recommending for the next 10 to 15 years.
What is wrong with cross-border payments ? There is general agreement that the following items remain a challenge from a consumer/user perspective:
1. Access and Convenience (Online vs. Branch)
2. Currency of Payment (FX requirements)
3. Wire instructions and rules, forms, errors – RISK !
4. Operating Hours – Time Zone issues
5. Transparency – What’s happening ? Did it make it ?
And lastly,
6. Fees – How much ? Paid how ? Who pays ?
From a delivery perspective, there are layers upon layers of both technology and businesses engaged in routing and reconciling the payment. Solutions with multiple touch points make the payment a challenge to trace if there are issues, and funds get trapped and possibly lost if sent to the wrong account. Finger pointing occurs and relationships become severely strained.
Historically, cross-border payments have routed through Correspondent Banks, banks that provide in-country services for other foreign banks. This segment has provided services for more than a century in linking businesses with customers. However, it has recently seen contraction and consolidation due to increasing requirements from regulatory bodies. The costs to manage AML/CTF and Sanctions Screening risks are too high for smaller players and they have tapped out.
So what are Financial Services organizations and Fintech offering to make this world a better place? Here is a short summary.
Online Banking - Wire Payments Services (longstanding - use templates to reduce errors and simplify repeating payments)
2. 3rd Party Online Wire Payment Services (integrated layer on top of the banks infrastructure)
3. Card Companies – Virtual Account Solutions – Complex
4. Digital Crypto Currency platforms (proposing global clearinghouse’s but there are Fiat Currency F/X issues still to be sorted out as well as any arbitration/jurisdictional controls)
The payment landscape is a multi-layer cake of solutions sitting on top of existing clearing and settlement systems. Every new mobile payment method is just a layer on top of the existing card or debit payment backbone. Even the card payment processors are a layer as they must rely on the existing low-value clearing and settlement systems to pay off card balances. Layer-layer-layer…
And how do all the other recent domestic payment initiatives fold into the cross-border challenge ? Front-and-center are Real-Time Payment Initiatives (FedNow, TCH-RTP, RTR, et. al.), PSD2 – Payment Service Directive 2, Open Banking, domestic ISO20022 roll out, Digital Identity (Tokens), Cybersecurity, IOT – Internet of Things, and yes, the GIG Economy. All of these initiatives are challenging enough for the current domestic infrastructure providers hence crossing borders remains as a lower priority item. And the experts have verbally communicated this fact.
Lastly, lets add to the pile, achieving agreement amongst the G20 plus the addition of the BRIC, and subsequently the agreement of any underdeveloped countries. The level of difficulty is huge and growing in this list. ISO20022 is verbalized as the one item they all agree upon as a panacea to achieving cross-border around the G20 but it is well acknowledged that the different implementations of this standard remains a roadblock. Conference panelists exude blank stares when confronted and more and more we hear verbal and written commentary about how the varying 2022 implementations are going to create challenges to its ultimate success in interconnecting international systems (refer to Item 14 in the diagram below).
Last summer the BIS convened a committee to summarize issues and lay out a recommended roadmap. The following diagram copied from their final report lists the 19 items in 5 general areas. This is an excellent and comprehensive list.
Source: Enhancing cross-border payments: building blocks of a global roadmap – Stage 2 report to the G20, Committee on Payments and Market Infrastructures, Bank for International Settlements, July 2020.
So what are the key challenging items in the BIS Committee list of 19 ?
1. Application of AML/CTF consistently
2. KYC Sharing (Sanctions Screening)
3. Global Security (Cyber-Security)
4. Straight-through PvP (clean FX at settlement)
5. Operating Hours (Global challenges)
6. Customer Access and Convenience
7. End-to-End Payment Reconciliation (Information)
If you’re a banking executive, can your whole industry get together and budget for adding all of these items to your cross-border payment improvement strategy in the next 10 years ? What percentage of your overall revenues come from this ? Tough decision.
But what is clearly missing from the list of 19 is the requirement for “Real-Time”. Item 13 is the closest but it is very light on identifying any specific payment systems.
Folks, don’t lose hope for a more accelerated solution to cross-border payments. There is an up-and-coming solution by Diolkos Commerce Solutions that addresses all of these “challenging” issues and provides real-time cross-border payment execution for the GIG Economy (and more…)
Stay tuned…
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