The pain points in cross-border payments are acute.
The various payment systems that are domiciled in one country or another traditionally don’t overlap in their operating hours.
ACH payments have been done in batches, across multiple sites and across multiple windows in time. Fees are high and transactions are less than transparent, as cross-border messages tied to the correspondent banking system are anything but standardized.
But as Russ Waterhouse, EVP at The Clearing House (TCH), told Karen Webster, we’re headed toward the day that reimagines how cross-border payments are made, bringing increased transparency and efficiency, toward an age when real-time cross-border payments are the norm.
The conversation came against the backdrop where TCH, EBA Clearing and SWIFT said earlier in the month that they had completed a proof of concept in which several banks demonstrated the ability to synchronize settlement across instant payment schemes, sending and receiving messages in real time using ISO 2022 messaging. The initiative has the support of 11 banks, and Waterhouse said it has the potential to “change correspondent banking.”
Waterhouse said the push to shift cross-border payments to instant is one that “has long been talked about. But everybody was focused on domestic [real-time payments] first. It was kind of getting pushed off. And then we finally said, ‘Listen, we’ve got to take this seriously.’”
Part of the tailwind has been stirred by TCH’s participating banks, which Waterhouse said initiated conversations about faster cross-border payments a year ago. And, as he told Webster, the initial forays will be in cross-border retail payments – a key area where banks are feeling the pinch of competitive pressures from FinTechs.
“This will really help them competitively,” said Waterhouse, adding that initial B2B adoption would be seen with middle-market enterprises.
Early use cases might be tied to A2A, P2P, small to medium-sized business (SMB) payments, or eCommerce activities. Within eCommerce, he said, requests for payment fit into those cross-border flows quite well.
Room for Several Approaches
Asked by Webster if the collaboration on cross-border payments places TCH and others in competition with the likes of J.P. Morgan Chase, its JPM Coin and others driving to digitize and streamline international payments, Waterhouse maintained that there’s room for a wealth of approaches to cross-border innovation. “We’ll see which ones rise to the top,” he said.
But there are some technical developments that are encouraging for the drive to build instant real-time payments, ones that are international in scope and don’t require banks to build, maintain and operate their own cross-border networks.
Waterhouse noted that many payment systems operate 24/7 — and standardization, through the data-rich ISO 20022, can lend a wealth of information to real-time payments, spanning the confirmation of receipts, settlement details and other data. Initial uptake should be seen with countries and regions that have well-established real-time payment systems in place or in development, he said, including the Eurozone, Australia, the U.K. and Canada.
Looking ahead, Waterhouse said that beyond the early success with the proof of concept, “we’ve got to build this out, scale it and implement it. That will take a little bit of time.”
The Crypto Question
As to whether cryptocurrencies have a place within the collaboration or within cross-border commerce at all, Waterhouse admitted to being a bit dubious. Blockchain (and, by extension, crypto) must be integrated into the banks’ payment initiation systems and into apps – and those integrations can be challenging.
“It would have to be an incredibly valuable proposition for the banks, in terms of efficiency, for them to say it's worth the effort to go ‘replumb’ all of their systems to do it,” he said.
The regulatory picture is still unclear, and stablecoins are still evolving (with questions about how those coins are “backed” by commercial paper, or other liquid assets). The jury is still out as to whether stablecoins are securities deposits, or something else entirely. Ultimately, the firms and financial institutions (FIs) issuing the stablecoins must convince consumers and enterprises that the digital offerings are in fact a better option to use in everyday commerce.
Looking ahead, in order for faster cross-border transactions to scale, Waterhouse noted that there must be some changes: Most real-time payment systems do not allow for inbound foreign transactions, so that hurdle needs to be removed. And scale should be achieved in the next few years.
To eliminate the pain points of cross-border transactions, “you've got to actually break some things that may be considered sacrosanct by some of the industry,” Waterhouse told Webster. “We're on a little bit of a mission and we might break a few things, but at the end of the day, I think the industry is better for it.”
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