The correspondent banking model for cross-border payments has been under pressure for some time now.
Clients have long complained that international payments can be slow, taking days or even weeks to clear and that fees are high and non-transparent across the payments chain. Corporate clients are still struggling to get a current status overview of their payments and easily import payment status data to their systems for reconciliation purposes.
With clients looking for faster, less costly, and more transparent payment processes – and with the example of such levels of service in other industries before their eyes (think parcel tracking) – the door has been open wide to outsiders. As the Fintech revolution picked up steam over the last few years, it’s hardly surprising that disrupting the payments landscape was high on the list of use cases.
Yet while new entrants have worked to offer low cost/low margin solutions based on new models and new technologies, including distributed ledgers – and while some Fintechs have managed to carve out niches for themselves – the truth is no one has yet been able to offer a real alternative to the good old correspondent banking model with its inclusive reach.
At the same time, banks have not been deaf to the needs of their clients, and have looked to introduce more modern, integrated approaches to the current fragmented, aged model.
With SWIFT’s new global payments initiative (gpi) they have managed to deliver. A significant upgrade of the correspondent banking system, gpi will give both corporate and retail clients the benefits of modern practices and technologies coupled with the reach and security of the traditional system.
A new deal
The gpi works on both an organizational and technological level, introducing a new set of service level agreements (SLAs) among banks, as well as a cloud-based infrastructure that can provide end-to-end transparency to all parties to a transaction.
This has advantages for banks. It allows them to offer their clients simpler, faster, and more transparent payments, which should attract more business to those banks who offer gpi payment solutions. Innovative banks will be able to build on top of gpi, differentiating themselves with new and enhanced products and services.
The new system should also make life easier for banks. Powered by gpi’s increased transparency and tracking capabilities, error rates can be reduced and the cost of investigations lowered. With the Stop&Recall service launching in November 2018 under gpi, banks will also be able to better curb erroneous or fraudulent payments from reaching unintended beneficiaries, limiting financial losses for their clients or themselves.
Corporate clients can derive immediate benefits from the new system as well. These include same-day availability of funds (if received before the bank’s cut-off time) for all gpi payments, higher transparency on interbank fees, end-to-end payment tracking in real time and final credit confirmation, as well as the transmission of full and unaltered remittance information, easing payments reconciliation.
Looking forward, we can imagine many new and improved services based on this infrastructure. Banks could proactively manage delayed or failed payments, dealing with exceptions before clients are affected. Corporate clients could tailor gpi’s tracking capabilities to their own needs, creating custom applications and increasing internal efficiencies. We can imagine new services for retail clients on the back of gpi as well, including for example credit confirmation over electronic channels.
No need to rush
Before rushing into implementing any expensive new solutions, banks will however need to better understand their own clients, whose needs can vary greatly. For example, larger corporates serviced by several banks across countries and currencies crave standardized information on the status of their payments across providers, while SMEs often rely on the customizable solutions offered by their house bank, and so will look for integration with their local environment.
There is no doubt that gpi has gotten off to a great start. As of August 2018 72 banks were already live while 142 banks had committed to gpi. Almost every day it seems a new bank announces it is going live or banks which are live announce that they have added new currencies and/or are bringing new branches and subsidiaries into gpi.
This trend is set to increase. We can expect a large number of banks to go live by the end of the year among other things because SWIFT Standard Release 2018 mandates the use of the unique end-to-end tracking reference (UETR), a key gpi feature, for all payment messages.
For our part, UBS plans to be live very soon, activating all tradable currencies and major UBS locations by the end of this year. We will also be able to pass UETR via the local Swiss payment system (SIC) to a gpi bank, and so look forward to being able to deliver gpi services to all our clients.
More to do
The journey however has only begun. It will not be complete until banks find a way to increase the reach of gpi, and ensure that every credit is confirmed to the tracker by the beneficiary bank.
To this end, in 2019-2020 SWIFT and gpi banks will work together to bring gpi closer to every bank, ideally with solutions that are easy to implement for smaller banks with limited cross-border payments flow and perhaps limited budgets.
As the next logical step banks are looking into how the new system can be leveraged to deliver new value adding services, and there are many ideas being considered in gpi working groups. These include bank-to-corporate tracking via standardization of information, pre-validation service to support STP processing by introducing verification at payment origin, case resolution service aiming to increase efficiency for inquiries and investigations related to gpi payments. There are many other possibilities as well, illustrating the innovative thinking and readiness of banks to continue to collaborate on making the existing model more efficient.
Banks are not the only ones with some work to do. While for years corporates demanded gpi-like services from their banks, now that it is here we have yet to see a rush to embrace gpi and allocate the investment needed to incorporate information available through gpi into back office processes.
But this is probably just a matter of time – many companies, for instance, simply need more experience with gpi to understand how it works and get a sense of its benefits. As corporates continue to digitize their own back office treasury processes, we are sure to see gpi becoming the new normal not only in correspondent banking but also in the payment value chain.
That will be a benefit to all.