Last year, SWIFT reported an increase in real-time retail payments. What has happened since then?
The trend towards real-time payments is still clearly there, in fact since we spoke last year, this trend is gaining traction; it’s not just hype. But what we are starting to see that is slightly different from a year ago is that real-time payments are being looked at in a more global way. What I mean by that is that institutions are looking at how they implement real-time in a more holistic way, as part of the whole payments ecosystem.
A good example is what is happening in Canada. The Canadian authorities have provided a vision of a new payments infrastructure for the entire country that will encompass retail payments, high-value transactions, and more. They’re looking at how they can fundamentally change the way they make payments, and they’re seeing the changes in technology as an opportunity for them to rethink the way they do things, rather than just patching up old systems.
The move to real-time payments is also an opportunity to bring in more standardisation, and changing standards is also quite a fundamental change. It’s an opportunity to think about how you do business; which flows need to be settled line by line or netted, which ones need to be fast and which don’t—and this could make a big difference to the way banks’ back offices operate going forward.
Is there scope for cross-border real-time payments?
SWIFT recently won the mandate to build a real-time payment system in Australia, and now we are working to see how we can re-deploy the technology we have built in Australia into other markets. By reusing components that we’ve already built, banks will be able to do things in one way across more than one country, and that will bring down part of their implementation costs.
We’re looking at software to help banks to ‘hook’ on to more than one system, because in Europe, for example, there are going to be several market infrastructures offering services in the market, both pan-European and domestic, and they will all have to work together to achieve ubiquity. This might sound fairly simple, but actually it can be quite complicated when you look at the detail and you need to get them all to interoperate.
If a customer in France wants to make an instant payment to a customer in Spain, that payment instruction has to go through the French and Spanish systems in a matter of seconds—all the rules and access agreements, standards and messages will have to be very harmonised in order for this to work effectively. SWIFT has expertise in standardisation and in enabling interoperability, and we think we have a role to play to help banks and market infrastructures to be as harmonised as possible. The banks in France and Spain will have to be able—even if they are only connected to one system—to do cross-border payments anywhere in Europe.
What about more internationally, say, between Europe and North America?
Currently, real-time payments are primarily domestic. And, in Europe, that means within the eurozone. It’s currency-wide at the moment.
Making real-time payments happen cross-currency is less obvious. In addition to solving the issues around time difference, because we are talking about different currencies, there will also be a need to do foreign exchange and an exchange of assets at two central banks. Cross-currency real-time is a bit more complex than just hooking up infrastructures across borders. I don’t think the market is there yet. I’m not saying the industry won’t find solutions, but in reality, it’s further down the line.
How is SWIFT making the transition easier for banks?
Our focus is on doing whatever we can do to make what is quite a heavy investment easier for banks. We can build an infrastructure that works in real time, but that is just one part of the story. The bank has to be able to process the information it receives in real time 24/7—and most banks’ operations do not run 24/7. So even if the central infrastructure works perfectly, if the back office of the bank can’t handle the information, nothing is going to happen.
We are very cognisant of the fact that building and deploying infrastructure is just the tip of the iceberg when it comes to building a real-time payments solution that works across Europe. The hard work is something that the banks have to do internally—getting their own systems up and running, getting their processes ready to cope with real-time. We can provide the networking and the messaging, but we know the banks will have quite a lot of costs beyond that.
What we try to do is bring those costs down as much as possible and make things simpler and more standardised. Not easy—but easier.
Are banks willing to collaborate to make real-time payments happen?
Yes. In some markets, such as the US or Europe, there will be banks that want to move fast on this, because they have the customer demand, and it’s a part of their strategy. Then there are other banks that may not have a business case for it—perhaps they haven’t got customers asking for it or they have done the math and the business case does not add up. There is a market need to enable some banks that are not up and running 24/7 to be able to connect to others that will act as service providers.
And we are seeing concrete use cases of this in the market and in the requests for proposals that we receive. There are a lot of models coming about whereby smaller banks that aren’t quite ready yet are using other institutions to shield them from the impact of real-time payments, so there are different levels of participation.
To make real-time payments work, we really need everybody on board to achieve ubiquity, but it’s important to have models that allow some firms to be more on board than others. This can be achieved through the use of business user groups and through institutions that are part of these groups being open and clear about the rules they’re following. To make this work, rules and standards are going to be paramount, and here SWIFT has a clear role to play through our standards and products teams.
Where does the SWIFT ISO 20022 messaging standard come in to it?
In real-time payments, almost all of the new systems that are going live are using the ISO 20022 standard, so it really is becoming a standard, and the de facto for real-time payments.
One of the main advantages of ISO 20022, over some other standards, is that it can carry non-Latin characters—Chinese character sets, for example—and clearly this is very important in the new financial world, in particular one that touches end-consumers. It can also carry richer data, and therefore more information, such as extended remittance information or tracking data.