From SEPA to FAST and from gpi to Ripple, innovation in the payments landscape is occurring faster than ever before. Whilst this disruption makes the future of payments somewhat uncertain, ultimately the real winners will be corporates who can look forward to a faster, cheaper and more seamless payments experience. Treasury Today explores some of the latest developments.
At the end of last year, the first Amazon Go grocery store in Seattle opened its doors. Described as a “just walk out” shopping experience, the store is revolutionary because it enables customers to simply take what they want off the shelves and walk out of the store without the need to queue at a checkout and make a payment.
Amazon has not started providing free groceries – instead, it has created what might be the world’s first frictionless payments experience. This works by using various technologies that detect which products a customer has picked from the shelf. These are then registered to a digital cart (found on the Amazon Go app). Then, when the customer leaves the store, this is recognised in the app and the digital cart is turned into an invoice that triggers an instant payment across the Amazon Payments service.
It is a fascinating case study, and one that highlights not only how technology is changing the way everyday tasks are conducted, but also how seamless the payment experience can be.
Payments: in vogue
Amazon is by no means the only organisation to be focusing on payments. Indeed, the payments space has become saturated of late as an assortment of banks, credit card companies, fintechs, central banks and other industry players look to remove friction and make paying a more seamless experience.
This is hardly surprising: solving payment problems can be very rewarding. The Boston Consulting Group, for instance, predicts that payments revenues could grow to more than US$2trn a year by 2023. As a result, venture capital money has been ploughed into the industry.
The focus of these companies has so far been on the retail space and customer-facing businesses have been the first to feel the impact of these developments, especially the need to accommodate a plethora of new payment methods. But the rise of these alternative payment methods, whilst receiving a lot of the mainstream media coverage, is arguably just the tip of the iceberg when talking about the broader transformations happening in the space.
SEPA: looking back
Innovation in payments isn’t new, despite the recent popularity and the excitement drummed up by fintech. As Mark Evans, Global Head of Payments Advisory, Global Liquidity and Cash Management at HSBC highlights: “SEPA remains one of the biggest development in the payments space of recent times.”
Indeed, SEPA has been important for a whole host of reasons, but one of the most notable has been its role in establishing ISO 20022 XML as a payment messaging standard. “A common messaging infrastructure is important and the benefits of creating this have been highlighted by SEPA,” says Evans. “And as more and more domestic payment systems are built using similar XML standards, banks are able to standardise payments processing and focus on delivering more innovative experience to our clients.”
Aside from setting standards, SEPA helped get the banks (and corporates) thinking differently about payments. As Evans explains: “The execution of payments is now heavily commoditised and what corporates are really interested in is what value banks can add before and after payment execution.” Banks have been working on ‘additional optional services’, which can be developed in order to add value to clients’ payments processes.
Indeed, Evans notes that the success of SEPA has created challenges for corporates operating elsewhere in the world. “We often run into challenges, where our clients expect SEPA-like capabilities and are disappointed to find they are unable to routinely replicate this operating model elsewhere,” he says.
The evolution of SEPA doesn’t stop here, however, and Evans highlights how banks are increasing their focus on overlay services. He notes that HSBC is working to help its corporate clients further improve their payments efficiency, for instance. “We are working to develop solutions that help clients more efficiently manage accounts associated with payment execution, and remove the operational burden associated with so called, payments Master Data,” Evans explains.
Life in the fast lane
Away from SEPA, a more recent trend in the payments space has been the proliferation of faster payment systems. The UK was a first-mover in this instance when it launched its Faster Payments scheme in May 2008. Since then, over 30 similar systems have been developed or are under development around the world.
Faster payment schemes enable customers to make electronic payments almost instantaneously, seven days a week and 24 hours a day. Payments are typically made via a phone or internet-enabled device and involve the transfer of money between accounts – to pay other people, pay bills or make regular standing order payments.
Interestingly, while SEPA has set the standard for pan-regional payments, it is Asia Pacific that is arguably setting the standard for real-time domestic payment systems. Some notable solutions in the region include Fast and Secure Transfers (FAST) a real-time payments initiative from the Monetary Authority of Singapore, built using ISO 20022; India’s Immediate Payment Service (IMPS) and UPI; and the soon to launch New Payments Platform (NPP) in Australia.
These payment systems are the building blocks on which further payments innovation can be built – many of which the banks are just beginning to explore. Yet, it is important to note that whilst these are exciting developments, the impact of these systems in the corporate space remains limited. Many schemes, for instance, enforce maximum value limits (S$50,000 in Singapore, for example), reducing their usefulness to corporates making high-value payments.
It is also debatable whether corporates need the ability to make real-time payments at all. After all, in the B2B space companies typically have standard cycles for payments based on overnight settlement. Perhaps one of the most transformational effects of Faster payment schemes is their support for “Request for Payment” services using mobile phone numbers, emails or other aliass. Ironically, it could be that Faster payments make their biggest impact for corporates on the receivable side of their business.
SWIFT’s gpi initiative
Although domestic faster payment systems may only have a limited impact on corporate operations, the developments occurring in the cross-border space – where often the real challenges sit – may have a more immediate effect.
Indeed, the increase in the volume of cross-border payments, driven by globalisation, and the digitisation of commerce has only increased the volume of cross-border payments for corporates. When sending payments cross-border, corporates often struggle with transparency over the payments in terms of fees and credit confirmation. There is also limited remittance data that can be sent along with the payment, creating issues when it comes to reconciliation.
It is these cross-border challenges that SWIFT’s global payments innovation (gpi) initiative is looking to solve for treasurers. Launched in early 2015, the gpi initiative is intended to improve corporate treasurers’ experiences when making cross-border payments by increasing speed, transparency and end-to-end tracking of transactions. The initiative aims to do this by establishing a service agreement for banks, which will then be responsible for turning this into a value proposition for their clients.
Despite the widespread focus on new technology, SWIFT has bucked the trend and designed the gpi initiative to work without significant changes to existing infrastructure. “This was a very deliberate action,” says Wim Raymaekers, Global Head of Banking Market at SWIFT. “We want to bring the benefits of gpi to treasurers as soon as possible and the existing technological infrastructure enables this.” To that point, SWIFT and the banks – perhaps rather uncharacteristically – have been rapid in pushing forward with gpi, which went live in February.
That isn’t to say that SWIFT hasn’t been innovating. “Providing same day value and transparency over fees is done by enforcing the new standards,” explains Raymaekers. “But we have introduced some new tools to enable the end-to-end payments tracking function and built a data layer that flows with the payment, enabling the transaction of rich remittance data. The aim of this technology is to enable the ‘DHL of payments’ – something that corporates have been requesting for some time.”
With over 90 banks already on board, gpi is an initiative that SWIFT is promising will further improve as time goes on. “We have already helped solve a number of challenges that corporates face when making cross-border payments,” says Raymaekers. “And we will continue to develop gpi utilising new technology as and when it comes available. Decoupling the business rules from the technology has enabled this and will mean that gpi will be able to stand the test of time.”
To provide just one example, Raymaekers says that SWIFT has launched a proof of concept (PoC) to explore whether distributed ledger technology (DLT) can be used by banks to improve the reconciliation of their nostro databases in real time, optimising their global liquidity.
Breaking the rules
There are those, however, that believe the existing payments ecosystem needs to be renewed for any true progress to be made. Ripple is probably the most vocal company in this space. Its vision is to create something that it calls the ‘Internet of Value’. As Daniel Aranda, Managing Director of Ripple Europe, explains: “We believe that value can be moved around the world the same way as data, seamlessly and instantly.”
For those at Ripple, the issue with the current payments ecosystem is that it relies on central master ledgers to track who owns what and who has paid who. “These ledgers sit within banks, broker-dealers, central banks, clearing systems – and when payments need to go cross-border, this system starts to break down because these ledgers don’t easily interoperate,” says Aranda. “As a result, international payments take from three to five days to settle and have an error rate of 5%. This means that making payments between countries is slow, unreliable and expensive.”
The result is a payments infrastructure that Aranda says is “woefully inadequate to meet the corporate treasurer’s needs – in particular, that of managing liquidity and foreign exchange risk and having real-time data to hand.”
“A common infrastructure is important and the benefits of creating this have been highlighted by SEPA. And as more and more domestic payment systems are built using XML standards, we as banks are able to standardise our payments offering in order to deliver a more consistent experience to our clients.”
Mark Evans, Global Head of Payments Advisory, Global Liquidity and Cash Management, HSBC
So how does Ripple and its ‘Internet of Value’ seek to change this? Its technology is built around an open neutral protocol called the Interledger Protocol (ILP), which standardises the process of settling transactions across different ledgers and networks. This offers cryptographically secure end-to-end payments flow with transaction immutability that allows companies on different networks to transact directly.
Contrary to some beliefs, Ripple is not looking to throw the baby out with the bathwater. Its technology is designed to fit within a bank’s existing infrastructure and complies with risk, privacy and compliance requirements.
“With the ability to transact directly, instantly and with certainty of settlement through Ripple’s distributed financial technology, corporate treasurers have much to gain,” says Aranda. This includes the ability to direct funds immediately as and when needed to support operations globally as well as support all currencies from centralised accounts. Treasurers will also be able to reduce counterparty risk and credit costs by having the option to request for immediate payments from customers and improve cash management and reduce working capital and liquidity costs. Finally, reconciliation errors can be minimalised through detailed invoice data.
“2016 was the year that banks began to accept distributed ledger technology to be used for commercial payment solutions, particularly in cross-border payments,” concludes Aranda. “2017 could be the year that financial institutions increase the adoption of digital assets like Ripple’s XRP to fund their payments in real time and, in the process, cut down their dependency on nostro accounts.”
Moving in the right direction
With so much innovation under way, and more still to come, it is extremely difficult to predict exactly what the payments ecosystem will look like in ten years’ time. Indeed, technology is moving so fast that ten years ago, the term ‘distributed ledger’ did not exist in conversations around payments.
SEPA and Faster Payments, as government-led initiatives, are clearly here to stay, and they should provide the underlying architecture for payments innovation to truly flourish. Exactly what rails cross-border payments will travel on is less certain.
For corporate treasurers, the new payments landscape might seem overly complex and uncertain. There are a lot of moving parts and a lot of players in the game. Consolidation is clearly needed: a situation with multiple systems at play is not the most efficient scenario.
But with a 2016 Saxo Payments study indicating that 63% of finance professionals were not satisfied with how long international transfers take to arrive in the recipient’s account, the good news is that all these developments aim to streamline the payments space, making it faster and cheaper for corporates to transact both domestically and cross-border.
Any diligent treasury professional will, therefore, be keeping well abreast of these changes and should be engaging with their banking partners closely. Treasurers should also talk to other industry players such as SWIFT and Ripple to see what is out there and the benefits these new systems can bring.