Long reads

Shifting payments paradigms: Making instant cross border payments work for corporates

Jon Levine

Jon Levine

Co-Head of Institutional Banking, Banking Circle

Adoption of new instant payment schemes has so far been largely retail driven. But there are benefits on the horizon for corporates. 

This is an article from Finextra's Research report 'The Future of Payments 2021,' available for download here.

Most countries are developing or have already launched new schemes to provide real-time payments. For example, Faster Payments in the UK, SEPA Instant in the Eurozone, FedNow in the US (from 2023) and other programmes and solutions in India, Australia, Singapore and more. Those schemes that have yet to launch will be live within the next few years, meaning most banks and their customers will soon be addressable over these instant schemes. That will be revolutionary.

In addition, ISO 20022 is set to vastly improve the data exchange, reducing the requirement for manual review, creating higher straight-through-processing rates and fewer delays.

The significance of the change we will see in the next few years should not be under-estimated. It will be fast, it will be a paradigm shift, and afterwards we will wonder how we previously coped.

The revolution can be compared to the switch from ‘snail mail’ to email. Back in 1993, email existed but its potential was not yet unleashed. The use case of the day was largely personal in nature, rather than for business. The majority of people were not yet addressable, it was not widely adopted, the commercial benefits were not really understood, and spend on postage was still considerable. Just five years later the reverse was true. The shift was enormous, and it was rapid.

In terms of this analogy, real-time payments are currently in 1993. We are standing on the brink of a payments paradigm shift.

How do we get there?

Whilst many changes are happening and more are in the pipeline, there are still some significant roadblocks. Much still needs to change before real-time payments become more widely adopted for corporate use, especially for cross border business. For corporate customers to benefit from real-time payments in the way retail customers already do, every aspect of corporate payments routing must be optimised. Currently, the majority of retail payments qualify to go over instant schemes, where they exist. But not so in corporate payments.

The need is urgent

Businesses of every size need all the help they can get to bounce back from the impact of Covid-19 and acceleration of the real-time payments revolution is a crucial piece in the jigsaw. Corporates today have immense funds tied up in the payments system. Always. That is vast sums of cash that are inaccessible, unusable. For large companies that adversely impacts working capital metrics. For smaller companies the issue is much more critical. A delay in cash flow can have far more significant consequences.

Imagine how the payments landscape and business potential will change as real-time technology is applied. Suddenly a batch of corporate payments get parcelled out over the payment schemes to run disbursement in the fastest and most cost-effective way. Balances in the payment system effectively drop to zero, cash flow is maximised; businesses have the liquidity they need to flourish. Absolutely game-changing.

Re-engineering essential

But why isn’t this game-changer for businesses large and small already being delivered? For many banks, it comes down to the inherent legacy systems on which their operations are built.

Certainly some institutions are already leading the way, and those that can be at the start of this revolution are going to be winners. But for others, re-engineering is needed to take full advantage of instant payments for corporates. From the connections between banks’ payments engines and local schemes and intelligent routing to get payments to the lowest cost and fastest payment rail applicable, to the all-important KYC and AML processes. And that’s where the challenges arise.

For example, there are often issues connecting banks’ front end, what the customer sees, through to the instant payment schemes themselves. If a bank has recently signed up to Faster Payments, is the corporate banking ledger yet piped through to Faster Payments? And does intelligent routing exist to decide which payments go to Faster Payments, which go to CHAPS, which go to BACS, etc? There are other challenges too. Managing liquidity by bank treasuries outside of normal working hours. And the dreaded payment repair queue, where an issue in a payment prohibits straight-through-processing. These issues diminish the benefits of instant payments.

There’s also sanctions screening. Most banks have sanctions screening engines that cannot look into payments processed via the instant payment schemes. Instead the screening engine looks at the SWIFT message traffic. But instant payment schemes often don't integrate with banks’ SWIFT gateways.

Overcoming hurdles through collaboration

The legacy technology that underpins banks’ corporate services cannot be ignored. Research we commissioned last year amongst C-suite executives at banks across Europe found that technology causes significant challenges in achieving their business objectives. On average, 42% said that existing legacy IT infrastructure is one of their three biggest internal challenges.

The need is urgent to make instant payments for corporates – large and small - a top priority. But for some institutions – particularly the smaller, local banks – the cost and upheaval of re-engineering their underlying systems is too big a challenge. Finding a different route to achieving the same end goal of helping corporates benefit from instant payments is, therefore, crucial.

Working with alternative players that are able to help banks service the needs of their corporate clients could be the answer. For example, partnering with new cloud native specialist banks means financial institutions can use their infrastructure to join instant schemes that will deliver real-time payments for their corporates. And all the essential pipes and plumbing, connecting to the right payment rails and integrating the necessary sanctions screening can be part of the solution too.

The idea of collaboration to fix internal challenges is an idea that is already gaining considerable ground. Our research last year found that half of the C-suite bank executives we surveyed already have partnerships or planned to work with an external provider within the next month; another third have partnerships on the agenda for the next 12 months.

The expertise of specialist banks with niche expertise as well as a commitment to building the payment rails for instant payments, has a real appeal. It means banks can offer corporates access to affordable, friction-free, real-time cross border payments that will bolster international economies at a time when they are in great need, as we recover from the economic impact of Covid-19.

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