Redefining global payment systems

Correspondent banking, being a broad array of services through which one bank sub-contracts or sources from another, functions well. However, the payments component of it, though strong for high-value transactions, is less suitable for low-value international payments.

Payments is a multi-sided business problem. There is a first-mover disadvantage: the first investor depends on its adoption by many others before a return can be made. A solution to this challenge is to assemble existing components of the banking system in a different way to achieve a better outcome.


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The International Payments Framework Association is one example; it has established standards, based on industry-standard ISO 20022, which enables national automated clearing houses (ACHs) to interlink directly, so that users in one country can get the benefits of the economies of scale of the domestic clearing in another country.

Arthur Cousins, chief executive of the IPFA, agrees that correspondent banking is alive and well, but suggests: “We can see that the model is starting to fail to meet the needs of the newer generation of payments makers in the world today. They neither know the history behind the current model nor care about it. They live in a world when everything can, or at least should, be instant. They ask why this is not the case with cross-border payments — correspondent banking operates on a two-day basis. It is not an exaggeration to say that these days many people send payments internationally and simply hope that they get there.”

Senders and beneficiaries making international payments expect them to have the same characteristics as domestic payments. They need payments to be transparent, predictable and they want to know progress. Crucially, they need the process to incorporate information so that the recipient knows what the payment is for.

Corporates have become increasingly aware of the shortcomings of cross-border payments. Where action has been driven by regulators — be it directly or by just the threat of regulation, such as Single Euro Payments Area (Sepa) in Europe — service levels have been driven up and prices down. But in other respects, little has changed; the average fee to make a remittance has remained stubbornly close to 9 per cent, despite a G8 initiative to halve it.

A participant at a recent conference I attended described the payments industry as “some kind of forgotten, isolated island, not yet overtaken by the IT storm that has been blowing this last decade, with its new concepts and business models.”

Mr Cousins said: “New electronic message standards have emerged that should be adopted and the full functionality that they can permit should be explored in order to address the current service issues.

“Banks need to accept that they need to collaborate more closely to ensure that payments become more instant cross-border. There is little point in making payments faster within a country when it still takes too long to get the payment into that country.”

Mid last century, moving value from one place to another electronically was a suitable ambition. It is now outdated; after all, nobody wants to “buy” a payment, but they need payments to happen in order to satisfy some broader activity.