Insight & Analysis

Why, in a time of instant communication, does it still take days for a payment to be remitted across borders?

Published: Apr 2020

With over a decade of experience in the profession, Zarine Swamy, Head of Treasury at SOTC Travel, fully understands the frustrations that can make handling cross-border payments a painful experience for treasurers. But, she tells Treasury Today, this might all be about to change…

Male employee sitting at laptop with a calculator

Any corporate treasurer who has been on the receiving or paying end of foreign remittances will, without exception, have tales of woe to relate. They will tell of the longhaul wait to get sight of the funds; they will talk of the incessant reminders from irate vendors; they will all have known the ensuing disagreements concerning the splitting of associated charges.

I know corporates are keen to ensure that remittances arrive in time to be accounted for in that month’s ledger. But as treasurers, we understand that such targets can be ‘stretched’ in the ensuing bank-to-bank and bank-to-customer tussles.

Lack of process awareness by colleagues in other functions can add to the pressure. The individual within the organisation who has made the sale and is awaiting their remittance – who is also in correspondence with the customer – may not fully understand the current nature of international remittance flows. They may not have a grasp of SWIFT codes, and that time is inevitably lost in the ensuing seesaw of communication, with the gaps and the delays widening until the beneficiary and the initiator finally realise the need for the remitting bank’s SWIFT code.

Likewise, incomplete beneficiary details and erroneous beneficiary account numbers communicated at the time of remittance, can also delay settlement. This can be especially notable in the case of small organisations that are still evolving their systems and procedures. But, in fairness, a lack of awareness is not an inherent drawback of SWIFT itself; we have to acknowledge that the wider cross-border transactional system can become complicated, even for those of us who regularly navigate it.

And then there are correspondent bank delays, which are legendary. Banks notoriously hold onto funds, post receipt, and they are often opaque when communicating SWIFT charges to their customers. Regulatory delays exacerbate this. Statistics indicate that one in every 200 international payments is subject to interbank investigation and exception handling. It’s no wonder that corporate treasurers often feel that they need extra manpower just to pursue banks and clients for funds legitimately owed to them.

While each correspondent in the network likes to have its ‘cake’ (in the form of charges) and eat it, for the corporate, it is more than a little arduous to calculate cross-border charges in advance, or to reconcile them at settlement.

Remittances between countries in differing time zones can further delay sighting of funds, routinely resulting in the remittance becoming difficult to trace in transit. The end is no more in sight when the remittance reaches the Nostro account of the recipient’s bank, with the beneficiary possibly needing to take credit in their local currency. Meanwhile, the banker can legitimately cite ‘market hours’ as a way of delaying the conversion process.

Possible solution

The existing remittance system may be accurately described as ‘slow and a bit cumbersome’. However, a metamorphosis could be forthcoming in the shape of SWIFT’s gpi, which has been rolling out for some while.

Although it is now set for direct corporate access, banks still needs to be participants in this initiative to take advantage of its benefits. More than 3,700 banks worldwide are already a part of the gpi universe, with all financial institutions being required to participate by the end of 2020. In conjunction with these banks, SWIFT has created a new service level agreement (SLA) rulebook for mutual interaction.

Gpi is currently being deployed on existing MT103 messaging technology and banks’ existing payment engines and compliance filters. I envisage a few benefits from this ambitious project:

Same-day fund use: A participant bank will be able to generate a unique transaction reference for gpi-qualified payments and process these payments as a matter of priority. Payment information will be provided immediately to the beneficiary, which can then reuse the funds even if the actual transfer is made end-of-day. Thus, transfer of information regarding the transaction will be sufficient, resulting in time efficiency in cross-border cash movements.

Fee transparency: A customer pays a bank anywhere between US$5 to US$50 for a cross-border remittance, but a SWIFT message costs only about US$0.04. This reveals what we might be paying as banking charges. While gpi-participating banks may not lower their charges, gpi promises transparency, which I think will ultimately facilitate charge renegotiations, due to the ensuing competition among banks. In addition, automation and process improvements that gpi necessitates could also result in lower fees.

Payments tracking: SWIFT is developing a ‘cloud’ database, which will be maintained using blockchain technology. The technology will track the status of a payment transaction in real-time, from origination to the point where the funds are credited to the beneficiary’s bank account. Gpi requires that all participating banks in the network confirm to each other, in real-time, the status of each transaction, as well as its associated fees. This status report, which will reach the originating bank, will then be delivered back to customers. Transferring all remittance information to the beneficiary is the aim of gpi-participating banks, improving transaction traceability.

In addition, I believe that there will be some intangible, yet substantial, benefits for corporates. Armed with remittance information and the payments tracking mechanism, corporates could improve their supplier relationships. There is also likely to be a direct positive impact on treasury efficiency, as tracking effort is substantially reduced.

Unanswered questions

While all of the above have indisputably established SWIFT gpi as superior to existing international remittance platforms, I do feel that there are several unanswered questions.

The gpi-only club: Increasing the number of correspondent banks in the remittance usually makes the overall journey of the payment more prone to errors, delays and costs. This will be exacerbated if one of the banks in the value chain is not a gpi participant. Some of the larger participating banks are of the view that this may not be a blocking factor, as gpi banks can offer gpi access to non- participating banks. However, the modus operandi for the implementation and the agreement between banks needs to be studied. Questions should also extend to fees that will be charged in the gpi universe; if one of the banks in the value chain is not a member, transparency in fees may not be achieved. Remittance fees may need to be standardised across banks for the initiative to succeed.

Time zone issues: Real-time use of funds by corporates could result in banks across the gpi network bearing the resulting costs due to time-zone differences. The liquidity and credit risks of the customer will therefore have to be distributed across the remittance network. Again, whether or not non-gpi participant banks will bear these risks remains to be answered.

Real-time remittances: Remittances in real-time (ie same-day use of funds for corporates) can succeed only if the fees are standardised. In the event that fees, and thus the distribution of fees across the remittance network, remain inconclusive, I do not believe that the corporate will be able to enjoy the benefits of real-time fund usage.

Gpi currently does not operate in all countries: A bank, though a member, may not therefore be able to offer the full benefit of gpi to its customers in countries which have not signed up.

All things considered, gpi remains an ambitious initiative which, if successful, could change the face of international remittances. It could certainly help remove some the frustrations currently being felt by treasurers when handling cross-border payments.

Zarine Swamy is Head of Treasury at SOTC Travel. She is an Association for Financial Professionals Certified Treasury Professional. She also has a Masters in Finance from Mumbai University, and a Post Graduate Diploma in Computer Science & Applications from that city’s SNDT University.

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