Transaction speeds are increasing. Faster payments rails and instant transaction policies are being rolled out across the world, particularly so in Europe. Key to this change in the payments landscape is the change in consumer behaviour, driven by mobile
and digital channels and the growth of e-commerce. Consumer demand for instant accessible payments has also had a domino effect, as corporates and SMEs start to want the banking functionality they enjoy in their free time to be replicated once they are in
the office.
Cross-border faster payment services at a regional level, such as the Eurosystem’s TIPS and EBA Clearing’s RT1, and linkages between domestic systems, are responding to this change in consumer behaviour. As a result, the overall payments landscape now looks
dramatically different to times gone by.
"If you compare this to 30 years ago, it took five days to move the payment from A to B," said Mark Buitenhek, head of transaction services, wholesale banking at ING, in conversation with Finextra. "Today, it takes five seconds. That's in the domestic European
market, and we're going to do the same in the Swift environment.
Buitenhek, together with Fabrice Denèle, senior vice president, strategy & partnerships at Natixis Payments, and Axel Weiss, head of payments, German Savings Bank Association, took part in a session at the Swift Community Update - Focus on Europe virtual
event recently that covered the different paths countries within Europe have taken to get to digital payments.
In Germany, for example, use of physical cash has been an extremely popular payment method. "Cash will remain one pillar of payments in Germany - everyone trusts cash and it is anonymous," noted Weiss. In France, Denèle reported, cards are now seen as a
preferred means of payment, having overtaken paper cheques in the past decade or so.
In the Netherlands, however, instant payments are thought of as the new normal. Buitenhek commented that his country had taken the approach that the world is becoming digital, and in a digital world everything is online in real-time. "If you're not able
to follow that line of thinking with your payments infrastructure and payment rails, then you will be shortly out of business," he said.
All three panellists did note that a vital short-term driver of digitisation this year, across all countries, has been the Covid-19 global pandemic. This triggered a huge digitalisation wave, and what normally would have taken the financial services industry
three to five years to achieve has happened in three to five months. The power of the players who are focused on the digital space has grown, and so has the demands of customers. The pressure is on to provide real-time payments services 24 hours a day, seven
days a week, and to come up with easier, simpler transacting.
Another key trend in the evolution of payments is competition, which is coming at the incumbent banks from big techs and fintechs. These threats of encroachment on the traditional banking space also point the way for the sector to evolve, through the use
of new technology and a data-driven approach to enable a smarter yet simpler payments landscape
"To understand the needs of your customer, you must enhance yourself with data," Buitenhek said. "That starts with having the right quality of data, the right access to data, right availability of that data, and then the tools to act on this, such as artificial
intelligence, data analytics and more. We cannot live without thinking along those lines today."
Use of data and new technologies can not only help provide an intuitive customer experience, but also solidify security around transactions to help prevent fraud and financial crime.
One of the main boundaries to real-time payments is that the beneficiary bank needs to be able to process payments 24/7. Where Europe has an advantage on the rest of the world is that it has the instant payments rails to enable this 24/7 execution. This
has enabled European banks to process outside of the normal business hours more than anywhere else in the world.
"Nearly 70% of all European banks have extended operating hours compared to only 61% globally," commented Saskia Devolder, head of Europe North at Swift. "This also means that crediting to the beneficiary is faster, currently six minutes outside of the eurozone
and nine minutes in the eurozone, compared to the average globally of 1 hour 38 minutes. Europe is set up to succeed in a real-time payments world."
Community response
As a global member-owned cooperative for financial services, Swift has also been evolving in order to satisfy the desire for instant payments. A key step on this road to evolution was when Swift and its member banks launched the Global Payments Innovation
(gpi), whereby gpi payments deliver same-day use of funds, end-to-end tracking and final confirmation of credit, as well as full transparency on fees charged.
By introducing the unique end-to-end transaction identifier (UETR) in the message header, every gpi payment can be traced from sender through correspondents to the ultimate beneficiary account with no loss of data. The gpi Tracker reports the status of messages
on demand and can be easily integrated into customer channels using APIs.
In order to support fast transaction speeds, participating banks that use gpi commit to processing payments in tight timeframes. These are tracked and visible to correspondents and respondents, while remittance data is passed on with no loss of information.
Just a few years since its inception, gpi has seen rapid acceptance, with almost 4,000 financial institutions, and 80 market infrastructures currently enabled. In 2019 gpi payments worth US$77 trillion were processed, representing 65% of all cross-border
(MT 103) messages sent over Swift.
Crucially, gpi payments are living up to their promise to be fast. An impressive 92% of cross-border payments are credited to the beneficiary’s account within 24 hours, and 40% within just 30 minutes. When payments are made between mature markets without
currency controls, compliance stops or legacy systems, performance is comparable to many domestic payment systems. For example, 72% of payments from the UK to the US arrive within 30 minutes, and 95% within six hours.
While the high value payments market of big ticket transactions was an obvious early use case for gpi payments, they are increasingly being adopted for domestic and retail payments, and retail and low value payments are the fastest growing segment on gpi.
An example of this can be seen in China, where several of the country's banks have used gpi to build a service offering fast and confirmed payment of US college fees. Building on the strength of gpi, Swift has announced that it is currently piloting a new
service to help financial institutions improve the experience for small and medium-sized enterprises (SMEs) and consumers who send low-value cross-border payments.
The new service will enable these bank customers to make faster, easier, predictable and competitively priced payments all around the world.
Building on gpi for instant, frictionless transactions
The success of gpi is an important step in Swift's strategy to enable instant and frictionless cross-border transactions. It is the foundation for the cooperative's move to fully-orchestrated payments processing through its forthcoming transaction management
platform that is being developed over the next two years. As well as gpi, the platform will use many of the other building blocks already in place, including Swift’s API capability and Customer Security Programme. The goal, when the platform comes online,
is that it will enable instant, frictionless and transparent flows, account-to-account, anywhere in the world.
"With so much data flowing and so much information, you can start building all kinds of value-added services on top of the platform that Swift is offering," said Buitenhek. "It always starts with banks or bank owned companies, starting to look at security
and fraud prevention. But there is also the developer portal of Swift and the API strategy that is built on top of that. Today we're doing billions of calls in APIs, having started from scratch in 2018. This is the way forward and this is exactly what Swift
is aiming for."
The move to ISO 20022 also benefits instant and frictionless transactions, as it enables richer data to be sent. The Swift platform will ensure that rich data remains unaltered in the transaction lifecycle as it preserves an immutable copy of the transaction
throughout.
End-to-end processing using a centralised solution enables the Swift platform to offer orchestrated mutualised processing services. Release 1 of the platform is due to be completed in November 2022, bringing with it the support for multi-channel/format,
transaction orchestration and tracking, transaction enrichment, pre-validation and tighter SLAs for low value payments. Other functionality with be evolved from existing solutions, including transaction screening and payment controls, case management and stop
and recall, gpi customer and FI transfers.
"Through the evolution of the tracker, you can now see the payment coming in," Buitenhek explained. "If you're a receiving bank, you can see the exact time a payment is coming in, the €X million value of the transaction, and you can pass that on to your
customer. It's relevant for your liquidity management as a bank, knowing precisely when you will receive billions of euros."
Phases two and three of Swift's transaction management platform are also being mapped out, bringing in third party solutions and innovations.
Time to capitalise on innovation
The evolution of the payments landscape in Europe has been good news for the region's banks, something reflected in the extra functionality offered in Europe compared to the rest of the world that was touched upon earlier. However, that does not mean that
the work is complete. To maintain their position in a highly competitive world, European banks have to keep up the momentum of innovation. Understanding and acting upon what the consumer really wants and taking advantage of the real-time rails and platforms
that enable this, are key.
"The new Swift platform, the integration of Target2 and Target2-Securities, the change to ISO - this is all going to play in the coming three years," concluded Buitenhek. "As a financial services community, we have to be ready."