When it comes to making international payments, today’s corporate treasurers can be forgiven for feeling a bit frustrated. Compared to what they are seeing in their private lives, where innovation has been dramatically improving the client experience in retail payments, corporate cross-border transactions remain slow, expensive, unpredictable, and intransparent. Many of the services treasurers would like are still missing, from end-to-end tracking of payments to the ability to include additional information of their choosing with the instructions. From a client perspective not much has changed in correspondent banking in over a decade. We think it is time it did.
The new global payments innovation initiative announced by SWIFT in January is a timely and well-considered effort to rejuvenate correspondent banking by making it more client-centric. As a member of the Initiative Group, we join the over 45 major transaction banks and others who are already on board in supporting this change.
There is much to like here. First of all, this initiative is not primarily a technological response to the problem, but rather a change in mindset. Instead of investing in new technology it relies on upgrades to the existing infrastructure as well as agreements between banks on a standard and improved service level. As innovation goes, this makes it (relatively) inexpensive to implement.
Second, the new rulebook as proposed under the initiative could dramatically improve the end-client experience. If it is successful, corporates can look forward to same day use of funds on international payments, greater predictability on fees, end-to-end tracking of payments, and the ability to send and receive additional payment information. That should lead to greater efficiencies in liquidity management, improved reconciliation processes, smoother relationships with suppliers, a better experience for end-customers and, through all this, more opportunities for corporate clients to grow their international business.
Thirdly, we think the initiative could be good for us as banks. By improving the end-client experience, we will have more satisfied customers – which should always be our first priority. The initiative may also reduce certain operational costs, for example by limiting the number of investigations or searches for funds. Since it builds on existing infrastructure, it will allow us to meet all local regulatory and international AML/KYC obligations using current processes. It could also be an interesting opportunity for its members to introduce new products, both for end-clients as well as other banks.
Finally – and perhaps most importantly – SWIFT’s global payments innovation initiative puts the innovation momentum in correspondent banking squarely back with us incumbents. This is essential in today’s environment. Not only are our clients clamoring for change. Regulators want to see improvements too, and the fintech community sees opportunities for disruption. Underestimating these pressures strikes us as unwise. Responding to them using our strengths as incumbents, as this initiative does, seems on the other hand to make a lot of sense.
That isn’t to say implementing the initiative is going to be easy. It will necessitate new thinking, may mean some short-term sacrifice and adjustment of existing business models, and will require closer cooperation among banks even while we continue to compete with each other.
There are also a host of open questions: While this is not primarily a technical exercise, we may find the technical requirements more costly than originally thought. As currently conceived, the new rules will result in the generation of additional information along the payments chain. At the moment it is unclear how banks will digest this information and pass it on to end-clients. It is also unclear how compatible the rulebook will be with local clearing infrastructures. And the timeline as announced by SWIFT, with a functioning pilot this year and live services in 2017, is nothing if not aggressive.
The success of the initiative will ultimately depend on how the above questions are answered as well as on getting as many banks as possible to join the effort and push it forward. The benefits, we think, speak for themselves. We therefore encourage all interested parties to learn more. As part of the Initiative Group, we at UBS are closely following and helping to shape the initiative’s development. If you are interested, we would be happy to discuss it in detail with you – and explore its pros and cons for your business.