The shift toward instant payments will undoubtedly provide benefits for consumers, but it is the benefits for institutions and corporates that are likely to revolutionise financial services. However, to reap these benefits financial institutions must navigate the maze of deadlines and coinciding schemes in a proactive manner.
Sindhu Vadakath, executive manager, head of global digital channels and Asia payments product management, BNY Mellon, states that traditional banks have been working actively with the clearing infrastructures and regulators to significantly improve the payment experience through the upgrade and implementation of real-time payments / instant payment networks.
“These networks are being developed and matured domestically, and providers who can ultimately add to the traditional correspondent banking models by speeding up settlement and boosting the end-to-end experience would succeed in the next era of correspondent banking if they can do so effectively, quickly, and holistically.
“By improving speed of payments and incorporating open banking concepts, it allows the proliferation of access to clients’ data with their consent, enabling a comprehensive view to seamlessly perform insightful investment or financial decisions.”
The traditional approach to correspondent banking is poised to evolve beyond its traditional roles, Vadakath furthers. She expects that the role of correspondent banks will therefore be redefined, with a select group of strong correspondent banking enablers to emerge as providers of the marketplace.
The sentiment is echoed by Société Générale. The bank argues that the ultimate objective of correspondent banking must be to engineer a solution or system that can seamlessly connect to all domestic instant payment schemes. At the most basic level, providers are leveraging SWIFT’s global payments innovation (gpi) allowing them to support faster transactions on behalf of customers. The SWIFT gpi scheme is a good starting point for any correspondent bank looking to augment customers experiences, both in terms of speed and transparency.
The anticipated enhancements to existing liquidity and cash management processes are core to this brave new world of instant payments, and Société Générale notes that only leading correspondent banks which have the resources to invest will be able to thrive “as they look to respond to these wholesale changes and contribute to invent the business model of tomorrow.”
Given the web of upcoming initiatives and scheme changes on the close horizon, this may be easier said than done.
In a recent LinkedIn post, Akhil Rao, payments specialist and director at Nth Exception, exclaimed that the cross-border payments industry has never been busier. “Industry initiatives from industry organisations and several global payments markets are underway, and they all have major deliverables over the next 2 to 5 years.”
He listed a number of upcoming SWIFT deadlines which appear to coincide to varying degrees:
- On-going development of SWIFT’s Customer Security Program (CSP).
- Enhancements and broader adoption of gpi.
- ISO 20022 Market Practice Guidance from SWIFT’s Payments Market Practice Group, as well as from the HVPS+ and CBPR+ industry groups.
- ISO 20022 migration in the payments ecosystem by the SWIFT community and by the payments markets in Hong Kong, the EU, the UK and the US.
Additionally, EBA CLEARING recently issued user specifications for new functionality that will help its RT1 Participants manage instant payment flows across the RT1 and TIPS payment systems, as part of wider Eurosystem changes set to be introduced in December. From late 2021, payment service providers adhering to the SEPA Instant Credit Transfer (SCT Inst) Scheme of the European Payments Council must be reachable via TIPS for SCT Inst transactions. Also, they must ensure that they can fund and defund the positions they hold across the clearing and settlement mechanisms they participate in.
Industry engagement in managing these initiatives is key to success, Rao furthered in his post. “This engagement starts with education and awareness - on a global scale. When considered in their entirety, these are transformational changes that will significantly improve the global payments ecosystem.”
While it may be difficult to imagine that the industry will move to a situation where all respondent banks will have access to all markets and currencies, Vadakath adds that ensuring banks are compliant with local country regulatory bodies will require increased investments and broadened regulatory burdens.
“Banks need to recognise that they cannot be good at every single thing, but if they play up their strengths and core competencies, they can be mutually successful when collaborating on strategic correspondent bank partnerships.”
Also concluding on a note of advice for how firms should respond to increased competition, compliance requirements and new technologies, Rao urged firms to consider a few salient questions: Is your firm aware of all these initiatives? How do the initiatives impact your firm? Do you have the right teams from your firm involved - in both the industry dialogue and in the internal work? Will your firm be ready when the industry is ready?
Instant payments and correspondent banking will be core topics discussed at the Euro Banking Association and Finextra’s EBAday 2021. Running in digital format on 28-30 June for its sixteenth year, the event will welcome a host of board directors, chief executive officers and payments and technology heads from Europe’s leading banks, as well as selected fintechs and registration is now open.