Even Erno Rubik would feel like Edward Scissorhands here. In the global-payments space
Putting everything on its right axis – speed, precision, real-time nuances, user-friendliness, global ease, reliability, availability and unrelenting security on top of all this – yes, easier said than done.
In the matrix of cross-border payments, some cube always gets left out. It never adds up – everything together.
SWIFT or the Society for Worldwide Interbank Financial Telecommunication – The banking cooperative’s services tracing as far back as 40 years ago that spread to around 200 countries by ironing out kinks in payments. Yes, the same SWIFT has new competitors to worry about, and from unexpected places – enterprise giants like IBM and countries like Russia and China that are exploring new networks for payment systems at full tilt now.
Near instant transactions and a new level of transparency – those are the chinks that contenders to SWIFT are aiming at though.
Swift or Slow?
Ashish Sharma, Partner, Deloitte notes how SWIFT is still not as pervasive as it is imagined to be. “There are smaller banks with parallel messaging systems working in the industry even now.”
It is a compelling leap from old-school payment silos for sure, but SWIFT still wrestles with some problems – internal as well as extended.
Estimates have indicated that six per cent transactions through SWIFT suffer errors or failures. To add to the hidden cost of error, there are also issues like cost of liquidity and increased working capital cycle that SWIFT if often fraught with.
Recall the recent penalty amount (roughly Rs. 40 crore) that 19 banks were slapped with for reconciliation mistakes in India. SWIFT did not take any blame and attributed the problems to automated payment areas of these banks.
The cube gets bigger as one looks for more gaps.
The payment space is not a picnic in the park, even now. A EuroFinance-SWIFT survey reveals that 47 percent of treasurers crave for visibility on the cost and deductions from a transaction. Businesses are hungry for control once a payment has failed. The time and cost that goes in pinpointing and fixing those problems are massive too. As many as 61 percent of treasurers find the length of time it takes for rejections and investigations, quite challenging.
Not to forget, data breaches and cyber-attacks – like a $14 million loss that a third breach caused the Indian operations of the State Bank of Mauritius to suffer, thanks to fraudulent SWIFT payments. City Union bank and Cosmos bank have been fresh victims of payment messaging system breaches this year too. The country is still reeling under the impact of the massive SWIFT fraud that led to the Punjab National Bank fiasco and shook the trust of millions of citizens in the banking system, per se. Memories and impact of $100 million that cybercriminals stole from the Bangladesh central bank two years back also remind us about the loopholes on access of Swift codes.
The answer lies in the question
The struggles that SWIFT is facing should feel like a paradox when the world has woken up to the radical potential that blockchain has ushered in. Why not use something really hot from the technology oven? Blockchain could be a great solution for the handicaps that haunt SWIFT.
Of course, rivals emerged. There is Ripple, with over 100 signed-up members testing its blockchain-inspired technology among financial institutions worldwide. And Ripple has not minced words when it has commenced in media that “it isn’t focused on putting band-aids on the current payments infrastructure.”
The likes of Western Union and MoneyGram too are leaning towards blockchain – at least fiddling with it.
Vivek Iyer, Partner, Financial Services, PwC hopes that blockchain can mitigate the aspect of cost of operations in the payments spaces when compared to SWIFT. While, in his reckoning, security issues are not as grave now after regulatory intervention to certain vulnerabilities observed some time back, there are still a lot of possibilities for fixing what is lacking in SWIFT. “A significant amount of time is spent in reconciliation, so blockchain can be quite an answer to address speed and cost factors around SWIFT.”
Like Iyer, Sharma, Partner, Deloitte seconds the use of blockchain infrastructure too but adds some caveat. “The infrastructure is technically feasible but practically the scenario could be not so easy. To really implement blockchain at the scale and nature of SWIFT – that is going to be a new challenge altogether.”
Sharma reminds about the need for wider industry adoption, perhaps, backed by regulatory mandates here. “Unless every bank is connected and until core-banking muscle is also pervasively and deeply connected under the contours of a unified payment system, expected results will stay far away. That said – there is a lot of information that is sitting in core-banking and whether banks would be able to put that on stake, even for something as supposedly-and-relatively secure as blockchain – that’s a different question again.”
Interestingly, SWIFT CEO has been heard saying in media reports that while blockchain is something they are looking at, they are still waiting for that killer app that would make a massive investment seem worthwhile. Gottfried Leibbrandt pegs the burden of blockchain as an expensive solution on to its mining cost (average bitcoin transactions cost up to 50 euros).
SWIFT also tried blockchain in its own backyards and came up with a conclusion that the technology is still not ready for mainstream yet, citing scalability as an issue, specially for mission-critical and production-grade applications. The proof-of-concept (PoC) test for reconciling international payments between the accounts of 34 banks also tossed another thorn – the need for sub-ledgers – unwieldy and high-maintenance to say the least.
Yet, a report by SWIFT about the PoC also pointed that – DLT could deliver the business functionalities and data richness required to support automated real-time liquidity monitoring and reconciliation. It enabled real-time event handling, transaction status updates, full audit trails and visibility of expected and available balances.
Damien Vanderveken, Head of Research and Development, SWIFT had said – “The PoC went extremely well, proving the fantastic progress that has been made with DLT and the Hyperledger Fabric 1.0 in particular.”
A SWIFT gpi for necessary improvements in the Nostro process and migration towards real-time liquidity reporting and processing was dwelled upon. To make these ideas really deliver down to the trenches of reconciliation, unique identification of each entry and enough muscle for production-ready applications is required.
Sounds good on paper, but will these ideas ever transpire?
A post-SWIFT world, anyone?
A EuroFinance-SWIFT survey has peeled off the frustration that businesses face with a combination of policies and processes at correspondent banks and architecture limitations of the global payments system. What really jumps out here is that large companies don’t see their cross-border payment security needs being met by fintech companies.
A different report from McKinsey & Company also shows that business-to-business (B2B) cross-border payments make up almost 80 percent of all cross-border payments revenues, and SME boost is about to juice this up more. But, there is a need to overhaul core banking platforms so they can be updated in real-time.
Sharma dismisses the idea that responsibility for making payments areas robust and secure rests only on the technology component. He strongly recommends the responsibility for end-to-end security to be assumed by the bank or financial entity as well. “Both SWIFT and the bank need to be alert and diligent about security. Regular assessments of security levels and patch-update hygiene have to be undertaken by banks in equally serious ways.
Legacy or old-school correspondent banking would not make up the future of cross-border payments. What would matter then is use of future-proof digital technologies and industry standards that promote cross-country integration and greater transaction efficiency – as the report underlines and then cites use of blockchain as efficient networking technology by banks.
Like the Global Payments Innovation (GPI) service that SWIFT itself has brought in?
The form may vary. But in whatever way it happens, the future will have to figure out the need for speed, changing air-gapped networks to seamless connections and applications, new consumer behaviours, transparency, compliance and data-management pressure ( PSD2 and GDPR) and, of course, more confidence on security and curbing financial-crime.
And entry of players like IBM (with a lot of the world’s largest banks as its clients and with a big chunk of credit-card payments processed on its own mainframes) is not a small blip in the radar. Especially when these offerings are explained as ways to facilitate fungibility of digital assets – an area that SWIFT has often used as a criticism of rival Ripple’s technology. Plus, new alternatives also close the gap on bank API integration that will make switching to a non-SWIFT option more easy and less discouraging than how it was so far.
The future may or may not have SWIFT. It may or may not have blockchain. It may have both or neither or something else altogether.
But it will have to have added up every cube deftly and confidently. The twists are still on.
As Erno Rubik has already hinted- “ ..with the cube there are many flashes, there are many aha’s.”