ITRS
Fixing payment systems is tough, but the work needs to be done in the UK, says Guy Warren of ITRS, if banks are going to process transactions more quickly
What kind of snags are payment transactions getting caught on?
The problem in the payments world is the number of routes that a payment can take to clear and settle, from a high-value back-bone such as the UK’s Clearing House Automated Payment System (CHAPS)—a domestic system that’s bank-to-bank but cleared through the Bank of England—to schemes such as BACS for non real-time payments at a lower price point. Then there are faster payments, which means there are three payments mechanisms in one jurisdiction alone.
With international payments, there are networks such as SWIFT, which mean banks don’t have to have counterparty arrangements with every organisation around the world. In the end, there are seven or eight different ways that a payment can be made, all with different characteristics of performance, timeliness, cost and surety.
To an extent, the end-goal is different, too. An International Bank Account Number (IBAN) or SWIFT code means you can be sure that the money has arrived in the right bank account. If there are delays, for example, with BACS payments, which are batch-based, it could be the case that by the time the payment is ready to be deposited the bank account could be closed or the details changed.
Catering to multi-day clearing and confirmation is why we have the concept of un-cleared funds sitting in the banking system, and that’s why we’re seeing a move towards faster payments.
What can look like quite a straightforward payment from a corporate or retail point of view can end up being a relatively complex routing problem for the organisation to which they’re giving the task. First, they have to work out which route it’s going to take, maybe discussing it with the client, then they’re making sure they have all the right information to make sure the payment goes all the way through.
Often, the burden is on the person trying to make the transaction to provide the data of the recipient—it is assumed that they know all the correct banking details. If they don’t know them, or if they have some numbers the wrong way around, checking that at the point of origination isn’t always easy. If a bank accepts an instruction in good faith and realises later that a particular code is not correct, then it will run in to problems. This inability to validate data sufficiently at a point of origination is one of the main reasons payments get stuck.
In my experience, 10 to 12 percent of payments don’t go through without human intervention, and with the amount of payments worldwide, that adds up to a lot of cost. Banks often end up spending more on the payment than they charged to make it in the first place.
Another major problem is that often bank’s don’t know why a payment is stuck. They have to look in to multiple message queues, find which gateway it’s trying to go through and where it’s been routed. On a complex first-tier corporate, there isn’t enough visibility to all the routing options, or around the reasons a payment hasn’t been processed yet.
What can asset managers do to help make the process as smooth as possible?
Online validation is the key. Some of the bigger firms already have a direct connection through the portals that big banks offer, with ‘golden-source’ data. That validation needs to be as timely as possible, and the sender, the bank and the recipient have to stay in sync. It’s important to have quality data throughout the lifecycle, and that generally means computer to computer. Clients shouldn’t be faxing details or phoning them in, but having them immediately validated online. That way, if an IBAN is wrong then it will be rejected at the point of entry, and flagged up to the customer without going through a human. That’s a key starting point.
System-to-system doesn’t mean just producing a file and sending it on, it means a dialogue between asset managers’ and the banks’ systems to make sure the data is up to date. That increased straight-through processing (STP) means firms can drive down costs. If they make the investment in doing this, not only do they save money, but they will have fewer failed and late payments, and because of that they could get more volume.
It becomes a virtuous circle, not only does a firm pay less per transaction—it can end up with more transactions to process because it does it more effectively than the competition.
What are the implications of payment blockages for asset managers?
They can be as disastrous as missing a deadline—these companies are trying to manage liquidity so that they haven’t got too much money in their bank accounts, and they want to optimise the cash that is there. To not receive a payment when they’re expecting it, or for a payment not to go out to a counterparty, can make this difficult.
On the other hand, there is value in having a good STP rate. Customers will pay for it because in the case of a failure, the reputational damage is far greater than the additional transaction cost.
Some banks are making this investment and then trying to become a payments service provider. For example, one particular bank on the continent put a lot of effort in to getting European payments running smoothly in all countries and then offered this as a service to UK banks that couldn’t justify putting domestic clearing in place for those European countries. They can turn it in to a business stream in its own right, which opens up even more potential business.
Also, interest rates have been so low since 2007 that banks can’t really make much money on spread. They have moved towards transaction banking and transaction fees. Organisations have been trying to turn what was once just a basic infrastructure in to a revenue-gathering service, and therefore the investments in payments have been beneficial to both banks and asset managers. There is a return-on-investment in this, but not enough banks are getting it right yet. STP rates vary across the industry, but percentage-wise, none are in the high 90s yet.
Do the benefits of faster payments outweigh the risks?
I think they do. There aren’t actually many risks associated with faster payments—the infrastructure has proved pretty bulletproof, and we haven’t seen many outages on the system. Generally, it actually reduces financial risk because counterparties don’t have to wait to know if the funds have cleared, and payments are deducted instantly. The less time is involved, the less risky it is.
The only issue is that faster payments is the third payments mechanism we’ve got in the UK, after CHAPS and BACS, and that means that UK banks now have to support all three of them without getting jammed up. They’ll all have to go through different computers and different gateways to do that effectively.
It’s hard to say whether payments systems will consolidate and maybe faster payments will eventually replace the others. CHAPS provides a high degree of surety about the counterparty and therefore risk management. It’s administered through the Bank of England and it will only make a transaction if the funds are there. BACS is still used for the majority of end-of-month payments (standing orders and direct debits), but it would benefit from a faster processing window and any-time processing instead of being batch-based as it is today.
