On March 12th, the SWIFT board of directors quietly issued a huge announcement about the future direction of the business. An announcement that is probably the most significant since the business was formed back in the early 1970s.
This bold new vision for SWIFT shows real global ambition, but is it the timing wrong? Just as the world ducks away from globalization under the shock of COVID-19?
SWIFT have decided to take on the global card players, VISA and Mastercard, and have thrown their hats into the ring to become the global connector for account to account (A2A) payments. They announced: “SWIFT will enable instant and frictionless payments
from account-to-account anywhere in the world, with an end-to-end solution that combines international and domestic capabilities. This ambitious platform expansion means SWIFT will support financial institutions to strengthen their positions in B2B payments
and capture new volume in SME and consumer segments.”
For the first time they have declared their intention not only to strengthen their relationship with institutions and large corporations, but also to move into the SME and customer payments space. This changes the dynamic of the SWIFT network, adding transaction
volume in place of value as they include low value, relatively mundane payments alongside high value, systemically-important payments.
It is an understatement to say that this is a huge change of direction for SWIFT. Perhaps driven by the fact that as SWIFT is owned by the banks, the change of direction might enable the banks to take control of the interconnectivity of new instant payments
schemes which are either live or rolling out all over the world. Currently there are two other major players moving rapidly to try to own this market, the aforementioned VISA and Mastercard, which are interestingly now not owned by the banks!
Over the last 12 months, both VISA and Mastercard have made huge acquisitions in the payments market, from payment players already in the ACH and account to account market, to fraud and AML, as well as core systems and niche software development players,
all in the drive to extend their reach from card holder to account holder.
SWIFT has been planning to update its core engine and had already had a massive upgrade program underway with the move to ISO 20022. The board has quite rightly seen that the re-platforming of the core engine could deliver so much more than it does currently
and has smartly decided to go for the big initiative.
SWIFT needs to help accelerate the move to ISO 20022 despite the delayed implementation date, to enable many other data-driven solutions, such as providing end-to-end visibility of securities transactions to reduce settlement failures and fines. Indeed,
they go further in the announcement, saying that they will offer financial institutions the opportunity to leverage its capabilities through the use of APIs. They will also enable backward compatibility with the older SWIFT platforms – presumably through
some form of message translation.
Although the card schemes do have many pieces of the puzzle in place, as well as a truly global interconnected product suite, they too are struggling with one issue, namely ISO 20022. All card transactions are processed under the older, simpler, and more
limited message format, namely ISO 8583. And while this does a great job at a simple card transaction level, it will never allow more sophisticated products that rely on rich data sets enabled by ISO 20022 to be released.
The SWIFT announcement is very bold. It also opens the door for third parties to play a bigger role, by their announcement to enable the ability to link in additional services through the use of the API layer. At first, I expect many of these to be innovative
solutions to help protect the data, monitor and track fraud, prevent money laundering and enable better risk management. In addition, this could also support new data driven initiatives perhaps being delivered through fintechs and the new world players?
The announcement also goes on to explain that this will mean a delay of one year in the start of the migration of cross border payments to ISO 20022, but that the end date remains firm at November 2025.
SWIFT ended the announcement with another almost sales message to their shareholders, ultimately, the banks: “This exciting new vision will remove complexity, ensure transparency and allow compatibility. All on a trusted platform, with unmatched security
and resiliency, owned by a global, neutral cooperative with strong governance set up to enable the growth and success of the financial community — not to generate profits for itself.” Closing this paragraph off suggesting that they are the only global
player now owned by the banks that can keep control of the global interconnectivity of the instant payments schemes.
You can see why the banks are so keen to keep control of this global integration. In almost all programs to roll out instant payments schemes, the banks have had to invest heavily in their development and yet the solutions have led to a drop in revenue,
both from cash pooling and transaction fees. Therefore, it is important to grab control of the international integration, where no doubt transaction fees can be reintroduced, along with currency conversion, etc.
There are some big bets being placed in the payments market, and it makes sense for SWIFT play their cards (no pun intended). The real question I have, however, is “is it too late”? Will the cards schemes create traction in this market before SWIFT can
realize their vision? Has the global pandemic of slowed the globalization down sufficiently for SWIFT to catch up?
We know that consumers are easily led, and they always take the simplest journey when it comes to payments. Will that be through the bank account or a card or token? Only time will tell.