Global Payments: Are we past the First Bad Pancake?

Or shall we make it plural? If everyone from SWIFT to Visa to Facebook to IBM to Unbounded to even JP Morgan is going after it in really disruptive ways, are we closer to the sweet and hot smell of a perfect and well-rounded answer now?

Facebook has just hit the headlines. Again. This time for consolidating payments across all its platforms with Facebook Pay. That is intriguingly close on the heels of Visa announcing the commercial launch of the Visa B2B Connect network. It wants to bring something that can help financial institutions to quickly and securely process high-value corporate cross-border payments – and globally. This B2B Connect launch is set to sprawl to 30 global trade corridors and expects to touch some 90 markets by the end of 2019.

We will talk about (in a bit) the other names (familiar and new) in the race for a good global payment solution for the current age. But this is 2019. Its tail-end to be precise. We are long past the arrival and excitement of blockchain too. The grill must have been heated well now. The kettle has been whistling already. Then why are we still hovering around the stove?

Truth is, we have been waiting for so long that it has become a well-worn habit by now.

Breakfast or The Last Supper

Sending and receiving payments across the globe was always full of friction, long wait-windows, iron-gut patience, bloated margins, intermediary processes (and consequent fees), and lots and lots of dots to hop over before the mellifluous sound of that beep sang somewhere.

In fact, all the new alternatives that are now in the batter are trying to fix one or all of these problems. The idea is to make payments fast, fluid, friction-less, party-less, margin-lean and not something that reminds you of the good old postman.

Because, in a post-blockchain world, it is hard to not groan and croak when something as simple as a payment still takes longer than the blink of an eye. The days of every bank and party delaying the payment process and extracting a fee could not last long.

Patience may be a virtue, but users across the globe are not going to spend it in this area – not when they hail cabs, order meals, pay bills and send home-made pickles at the snap of a finger.

Scratch that Itch

Thankfully, even SWIFT, or Society for Worldwide Interbank Financial Telecommunication, which reigned this empire of global payments for many happy, un-interrupted years, started to realize that the word ‘swift’ was gaining new proportions in the digital age. Users wanted a new definition of adjectives like ‘fast’, ‘transparent’ and ‘frictionless’. Someone had to massage this big emerging need.

A lot of ‘someones’ started arriving, including an awakened SWIFT, with its own GPI (Global Payment Initiative).

At the last count, 50 per cent of GPI payments were credited to end beneficiaries within 30 minutes, 40 per cent in under five minutes, many in seconds – as claimed by SWIFT.

This May, it joined hands with the European Central Bank (ECB) for an initiative to extend the reach of instant cross-border payments deeper into the European market by enabling the SWIFT GPI in the TIPS system. The idea was to get rid of the final-leg delays and friction.

Ask Dharmaraj Ramakrishnan, Sr. Director- Banking & Payments, FIS about how this gpi is impacting the speed and security part of international payment landscape, and he lets on that SWIFT, with its GPI initiative, has responded creatively and proficiently to consumers demand and expectations.

“With the current pace of technological advancements, consumers expect to access money anytime and anywhere. With the introduction of SWIFT – GPI one can meet the consumer demands of today to a larger extent. The SWIFT – GPI has the well-orchestrated architecture for cross-border payments covering faster delivery, transparency on cost and charges, traceability of payments, security and compliant with regulations. SWIFT – GPI ensures that payments are fast, traceable across the multiple banks in real-time and delivers confirmation when the beneficiary account is credited. It brings in monitoring capability and gets adherence to service level agreement (SLAs) as well as easy identification of counterparties.”

SWIFT was not the only one to hear the bugle. There was Ripple. There was IBM. And Moneygram. There was JPMorgan as well, armed with the Interbank Information Network (IIN) that is quickly gaining interesting names like Deutsche Bank and 356 such banks signing up on the platform since its launch in 2017. When it comes to cross-border transactions, players like Mastercard have also partnered with blockchain firms like R3 and biggies like Walmart are jumping on the wagon as fast as they can. Word on the street tells that a strong SWIFT alternative is being baked in China, Russia and India, to connect as many as 3 billion people in the three BRICS emerging economies.

Look at Visa’s attempt. The network, as it stated in the announcement, is using a unique digital identity feature and tokenization as it leverages open-source Hyperledger Fabric framework from the Linux Foundation, with IBM. A scalable, permissioned network is being explored for achieving that velocity that has been evasive and elusive so far.

Friction is the big nail that these hammers are after. As Kevin Phalen, SVP, global head of Visa Business Solutions explained in the announcement. “By creating a solution that facilitates direct, bank to bank transactions, we are eliminating friction associated with key industry pain points. With Visa B2B Connect, we are making payments quicker and simpler, while enhancing transparency and consistency of data.”

Simplicity, transparency and consistency of data – just the very words that remind you of blockchain. A power whose force has not been missed by other hammers too.

Especially the digital natives. Platforms like Hyperledger Fabric, Hyperledger Sawtooth, R3 Corda, EEA Quorum and Stellar and unifying answers like Unbounded are making sure that cross-border payments get more than just a micro-wave toss as the hunger-growls for something really spot-on build up.

Frankly, it would have been a surprise if fewer names had joined the pool party. The market is just too big a splash to ignore or postpone.

Pooh’s Pot of Honey

Comb through a McKinsey report on global payments in 2018, and it is hard to miss that an 11 percent growth generated by payments (that topped $1.9 trillion in global revenue) was the largest annual jump measured in the past five years.

In a previous year report it was estimated that payments would become a $2 trillion business by 2020. We are talking trillions here.

Money that is certainly all tucked in for a new haircut. The word ‘real-time’ is the sharp pair of scissors that this space needed so much.

India, incidentally, grabbed the only 5+ rating and came up as the global leader in real-time payments usage as per a recent FIS survey on the ‘Faster Payments Innovation Index.’ Australia, Denmark, Poland, Romania, Singapore and Sweden received a 4+ rating and the U.S. and U.K. got a 4 rating for their faster payments schemes.

The FIS research observed that the number of real-time payment systems in use around the world has increased 35 percent over the past year and nearly fourfold since 2014. It attributes this spike to use of chat-based services, retail apps, instant loans and open APIs, as well as the migration toward the ISO 20022 global payments standard.

The space of payments is unmistakably asking for bold shifts. And it promises bold paybacks too.

In McKinsey’s report, even the slower growth categories like higher-ticket account-based remittances (for affluent consumers and small and medium-sized enterprises) and cross-border disbursements to micro-enterprises (driven by the growing prominence of online marketplaces) were identified as pockets of opportunity.

So whipping out a sloppy pancake again, is not a luxury that players and disruptors can afford now.

“The SWIFT GPI allows for faster transactions, increased transparency on payments delivery status, and improved fee clarity compared to traditional correspondent payments.” The McKinsey report assessed. But as it pertinently added, ‘while the GPI stands to help banks address many pain points associated with cross-border payments, it still operates within the established correspondent banking frame and requires adjustments of processes and systems, which create hurdles for some players in the industry.”

No time for bubbles

Complexity, limited infrastructure and lack of transparency on foreign exchange fees haunt the legacy space while what innovators bring continue to bump their heads against walls of scale, scalability and incumbency advantage of existing biggies.

Can the old brigade, with their new bank consortiums, fight with the platform fragmentation of different banks that will play out sooner or later?

The McKinsey report picked up the integration of open banking/PSD2 with real-time payments and blockchain as answers worth a mention. But can the new breed fight closed-data ecosystems, make some newly-relevant room for bank collaboration, and find something that builds end-to-end transparency and integrity?

The time and difficulty needed to integrate blockchain in current business set-ups – they cannot be glossed over too. A report by Ripple ‘Blockchain in Payments’ shows that 35 per cent of respondents are concerned about this problem.

Surveying over 1,000 industry leaders in the payments industry, the report found that interest in cross-border payments is increasing. It also showed that 31 percent look at the cross-border payments market as a way to expand services to new market.

When there were as many as 75 percent that were ‘extremely interested in digital assets for cross-border payments’ and 87 percent who were considering implementing blockchain technology, then it is about time the solutions being devised iron out the issues that hold the excitement back from spreading its yummy smell beyond the kitchen windows.

Because it is okay to experiment and evolve, but not endlessly fiddle with when it comes to something as hot and as staple as global payments. The atlas has shrugged. To the size of a thumb waiting to tap on a button. The payment space will have to embrace this morning and get up on a different side of the bed.

One Gordon Ramsay Please!

Among other good points of SWIFT gpi that Ramakrishnan points out, what really lingers on is the part about it being ‘Open, inclusive and collaborative with global reach along with a great reduction in operational cost’.

That’s fresh. If that change continues, whether with SWIFT or Ripple or IBM or Unbounded or anyone else, the users as well players of the cross-border landscape can finally bring their hungry plates to the table.

But for that to happen, a lot (friction, delay, intermediary burden, closed-loops, complexity etc.) that still sticks stubbornly around, will have to be, well, flipped over.