Payments are becoming more and more seamless, with customers being given more options than ever to complete a purchase. In-store customers can use cash, cards, watches, and phones to pay; online journeys bring even more choice with the increasing flexibility Open Banking offers. It has never been easier for a consumer to pay.
This story is most true domestically, and increasingly becoming a reality for international payments too. Payment methods abroad have become cheaper for customers, with many challenger banks offering minimal or no fees when using their products overseas, drawing a clear distinction with some of the traditional banks. Sending money overseas has become easier and faster too, with new fintechs offering improved user interfaces and seamless processing.
However, cross border payments still have a lot of room for improvement. Once the funds leave the payer’s account they can take a very complicated route via multiple banks, and delays can be experienced frequently due to different factors. Customers are often expected to have an encyclopaedic knowledge of how to format a payment, which BIC code goes where, what does “For Further Credit” mean, not to forget to include the reason for the payment (that often doesn’t even get included in the message that is sent). Then there is the complexity of the pricing options (OUR/SHA/BEN) as well as the higher cost of sending money abroad with fees up to £25 often charged by banks in the UK. Add in the complexity around financial crime and sanction screening, and the delays that can be associated with it, and it’s easy to see how customers can get frustrated with the processes involved when dealing with certain providers.
Removing the barriers to cross border payments
Taking all these challenges into account, it’s no wonder that efforts are being made by banks, financial market infrastructures, and regulators to help remove the barriers to cross border transactions and reduce the friction present. The commercial benefits of becoming the method of choice for these payments are great with the Bank of England estimating the value of cross border payments to be $250 trillion by 2027 (Cross-border payments | Bank of England). There is a variety of efforts underway looking to make cross border payments easier for customers.
SWIFT brought out its Global Payments Innovation (GPI) product a few years ago, with a leap forward in transparency of payments with banks able to utilise a tracker and identify where a transaction is up to in its journey – subject to the banks in the chain being part of the GPI network. This allows customers to self-serve with enquiries and could reduce efforts required in back-office functions. The use of APIs to implement GPI helps organisations take advantage, with potentially reduced impacts to their infrastructures. SWIFT isn’t stopping there with service enhancement releases being discussed with its customers. One example is providing its real-time payment status tracking to corporates. SWIFT is also exploring the possible application of blockchain technology. By adding in new functionality around financial crime compliance SWIFT is demonstrating that their target is to enable instant, frictionless cross-border movements.
Speed is important
The European Commission is also committed to improving the speed of cross border Euro payments. It is mandating the implementation of the SEPA Instant Payment scheme by all banks in the SEPA region. The timeline has yet to be agreed for this but is expected to happen by the end of 2023. Challenges exist with the current level of take up, with only 61 per cent of BICs supporting SEPA Credit Transfer reachable on SEPA Instant (Feb 2023 routing table information from EPC). There is also a high number of exceptions with current transactions, almost 1 in 10 fails today due to inefficient sanctions screening. Greater adoption by banks and improved operational processing will provide a significant boost to customers as transactions move within seconds and are cheaper.
Outside of the EU, we are seeing progress and steps in the right direction. India’s United Payments Interface (UPI) system is a strong example of where a domestic payments system takes a winning formula and applies it to cross border payments. Customers benefit from no transaction fee and real time movement of funds. Its success is demonstrated by the fact that in 2022 it processed 74 billion payments (UPI dominated digital transactions in 2022, payments worth Rs 126 lakh crore recorded, says report - BusinessToday) and in November 2022 had 300 million unique users (Here's a Look at the Growth of the UPI Ecosystem Over the Years in India (paytm.com)). The opportunities outside of India are now starting to be realised too, with Singapore linking its own PayNow real time system to UPI, speeding up payments in a corridor that sees more than $1 billion moving annually between the two nations (Is India’s UPI Real-Time Payments System Ready To Go Global? (forbes.com)). India is targeting the UAE and USA next, which are its two highest remittance corridors, in a move that could see UPI start to become a tangible SWIFT alternative.
There is a huge global focus on improving cross border payments following agreement by G20 leaders in the Financial Stability Boards’ (FSB) Roadmap for Enhancing Cross-Broder Payments document from 2020. The FSB has published quantitative targets for addressing four key challenges in cross border payments: cost, speed, access, and transparency (Targets for Addressing the Four Challenges of Cross-Border Payments: Final Report (fsb.org)). The targets are ambitious and to be delivered by the end of 2027, but if successful will give consumers, corporates, and banks a more consistent, faster, and easier payments experience when sending money around the world.
The role of technology – ISO20022
As we see more work being done to improve cross border payments, it is important that firms invest in their technologies to be ready for the changes ahead. Banks and corporates need to have ISO 20022 fully integrated and be able to support cross border real time payments. The benefits of improving cross border payments are immense due to the high volume in question, with a potential saving of $13 billion in Africa alone if transactions costs on international trade were cut by just one percentage point (Global action to enhance cross-border payments).
Banks in particular must do more to remain competitive, as new entrants come on to the field of international payments. One advantage banks have is the existing relationships with their customers. Developing existing channels into a more customer friendly experience when sending money abroad will allow them to retain their existing base as well as attract new customers.
Banks are also well placed to meet financial inclusion requirements with many products and processes already set up to support customers across its base. Financial inclusion is going to be a huge challenge that private and public entities need to consider as transaction volume moves further away from cash to electronic. Making cross border payments available for everyone is important in ensuring fair access is enabled and all customers can benefit from cheaper faster transactions.
Technology has brought the world closer together, and banks and payment providers are following suit as customer demand increased flexibility, lower costs and a fast reliable service. The preparation for ISO 20022 over the past few years has set payments on a path with expanded potential, but this is just a first step on a journey to bring cross border transactions into a service that continues to draw customers in and offer the positive experience they are after.
If you would like to discuss any of the topics covered in this blog or how KPMG can support your organisation with them, please get in touch.