Moderating the second panel of the day, Niamh Curran, senior reporter at Finextra, discussed real-time cross border payments with Patrik Havander, head of B2B Connect Europe at Visa, Christian Schwarz, director payments Europe at Finastra, Dr Hubertus von Poser, member of the management board at PPI, Colin Williams, global lead for clearing transformation at J.P. Morgan, and Jenny Winther, head of payment schemes at Svenska Handelsbanken.
Starting off the discussion, Curran asked how we have progressed with harmonisation and communication of cross-border payments in the last year. The answer across the panel was unanimous: while some progress has been made - with the upcoming EU instant payments regulation, the migration to ISO20022, as well as initiatives of the bank of international settlements - the speed of developments leaves much to be desired.
“We see progress and we see a lot of initiatives,” Schwarz summarised. “There is a lot of innovation ahead of us. Is the speed enough? I don’t think so. We’ve been taking about ISO since 2002. We’ve been taking about instant payments since 2010. And we’re still not there, but we’re moving in the right direction.”
According to Williams, ISO 20022 is the crux of cross-border payments, and where progress needs to be made in order to ensure standardisation and harmonisation. Yet again, the pace of change to ISO 20022 is the biggest problem. He cites that still, only about 20% of Swift cross-border traffic happens with ISO 20022 formatting. When prompted by Curran on where he sees the gaps that banks still need to fill when it comes to ISO 20022, Williams continued:
“With cross-border payments, it’s about the end-to-end processing of that payment instruction. So if we’re initiating that claim at JP Morgan, we’re end-to-end ISO. If another bank initiates it and is still in the old MT format, then we’ll translate that to ISO and pass that on. But until everyone starts to initiate and gets their channel to initiate to ISO, you’re going to struggle.”
Winther agreed, stating that especially the Nordic region is not quite there yet when it comes to the domestic systems. Yet the benefits for talking in a harmonised, standardised way are clearly there.
Adding to the discussion around barriers we’re still facing, von Poser commented: “There are two groups of barriers. One of them is in the back office or machine room. What we especially see now in the EU with the target migrations, is that banks notice that their systems have reached end-of-life cycle. And it doesn’t make sense to build the conversion on the conversion on the conversion. The other is that technology is now 24/7/365, which is a challenge when you have legacy systems. And it’s not just affecting the payment systems, it’s also affecting fraud, compliance, account system.”
Von Poser added that restricted budgets are only another challenge on top of this, and expects additional competition to complicate this scenario for banks as alternative players enter the market.
Responding to these comments, Williams challenged the panellists by contemplating the relationship between speed and security. While schemes such as the UK’s Faster Payments work well for low value customer to customer or business to business payments, yet there are fraud concerns. Yet what about high value transactions? And what defines real-time?
“Are you ever going to get an instant payment cross-border high value? Probably not,” Williams stated. “From a JP Morgan point of view, over 80% of our payments in dollars, euros and pounds get processed and cleared within 30 minutes. Is that enough real-time for most corporates and FIs? Probably. 95% of them get processed in six hours. Six hours is probably real-time enough for most corporates and treasurers.”
Shifting the topic of conversation to the B2B space, Curran then asked the panel where banks are missing out in the business to business cross-border payments space. Havander commented: “If we take a step back and look at retail payments and disruption in the banking industry, I read the McKinsey report that banks have been losing out 54% of the retail payments to digital attackers. The next stage in disruption is focusing on corporate payments. The interesting thing here is to understand how the banks are building up resilience towards the attackers and what is being done. 7 out of 10 banks are scouting for alternatives in the space. So that in itself is an interesting discussion. The other discussion that can be had is what is the existing infrastructure doing in order to speed things up. So there are a lot of things connected to the b2b payments space that needs to be addressed in in banking.”
Responding from a bank’s point of view, Winther stated that she agreed with Havander that reducing complexity is what is needed to address the challenges. She also reiterated that Williams’ earlier point on the definition of real-time is a crucial aspect in this scenario. “You need to look at what the real benefits are and what the real needs are,” she commented. “Faster payments as such might not be the sort of the things that we should be aiming for, but less complexity because that will also hinder the fraudulent transactions since you're more clear on who's the real originator and the real beneficiary. But then you also need to separate retail payments and the B2B and high value payments, which is a completely different ballgame. altogether.”
Picking up on these points, Schwarz asked a question he forewarned as potentially controversial: Looking at the speed of instant payments, whether domestic or cross-border, does correspondent banking even have a future?
The rest of the panellists were quick to jump in this question. Winther commented that indeed there has been a lot of discussion around this subject but according to her, it depends on wider scope. She assumed we will likely see at least some degree of consolidation. Von Poser commented that CBDCs add another layer of complexity and it will be interesting to see what this does to the correspondent banking system. He concluded that correspondent banking will remain, but not in the dominant role it has played previously.