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The introduction of virtual currencies and the underlying blockchain technology has challenged traditional payment systems in a very disruptive way. That’s prompted one so-called “legacy payment system” to respond.
Last month, SWIFT announced the Global Payments Innovation Initiative, which aims to initially address B2B cross-border payments through traditional corresponding banking, which can be burdensome for corporates. The new initiative features four key enhancements:
- Same day availability of funds: Cross-border payments will appear in the seller’s account the same day the payment is processed.
- A transparent and predictable fee structure: There will be no hidden fees that the treasurer does not know about. The amount transferred to the seller’s account should therefore be known and reconciled right away.
- End-to-end tracking of payments: Through this initiative, banks have agreed to send back a confirmation to the buyer that the seller’s account has been credited. This should lead of less friction between buyers and sellers.
- Enhanced remittance information capabilities: Extended remittance information will be sent unaltered to the receiver. There is no mention of a specific standard, but it will be very helpful if corporates can include all the necessary remittance data along with the payment messages.
How it would benefit treasurers
The increased speed may not be the most important issue for corporate treasurers; most of their transactions are payments for invoices that are scheduled ahead out of their ERP systems, and therefore don’t really need the speed. However, the transparent and predictable fees, particularly for cross-border payments, is of greater importance as it will address the pain point of not knowing what the exact payment amount will be ahead of time. Having this information available will be beneficial for treasurers, since they can facilitate a more efficient reconciliation of payments and invoices.
Also, being able to track payments and knowing when a payment is available to the counterpart can eliminate a cause of friction between business partners. “That’s the core of what we are addressing with this service-level agreement with those business rules, including an acknowledgement so that when the beneficiary or the seller gets the money on the account, that bank sends back a confirmation to the buyer. So they can do a tracking on the payment; then know when the seller has been paid,” said Wim Raymaekers, head of banking markets for SWIFT.
Having enhanced and unaltered remittance data following the payment is also part of the business agreement. “It’s really designed with the corporate treasurer in mind.” added Raymaekers.
The key to SWIFT’s approach is to deliver the new capabilities within a short timeframe, not in a couple of years. A pilot of the initiative is planned to start between March and June 2016, according to Stacy Rosenthal, senior business manager, initiatives for SWIFT Americas. This quick development is possible because the new initiative builds on existing infrastructures. Raymaekers noted that the SWIFT infrastructure is not only “integrated into banks’ applications, but also into their sanctions screening filters, their liquidity provision engines and their nostro/vostro accounts management and clearing systems.”
From a corporate perspective this approach should be a welcome development. One of the biggest challenges when trying to transform or update payments functions is the cost of phasing out older systems and implementing new processes. So if a corporate can maintain its current payments function and still receive the benefits, it could be a winning concept.
Aiming for a short timeframe for implementation of this new initiative is also positive. The payments industry is currently seeing dramatic changes that happen fast. Having a long timeframe for implementing the new system would risk it being outdated before it’s even operational.
Going forward, SWIFT is not only looking at enhancing existing systems; it is also investigating technologies like blockchain to see how they could be applied to the new system. “We don’t want to just stop at the existing technology; we want to evolve over time,” said Raymaekers.
Nevertheless, even with the use of new technologies, there would still need to be legacy business agreements regarding the processing of funds sent through a ledger. Raymaekers explained that SWIFT is looking at a strategic roadmap to and see what the benefit would be of bringing technology like blockchain in. “Also, what are the implications of doing so? You cannot just plug in a new technology just like that for payments; banks need to remain compliant. They have requirements in terms of liquidity, settlement, risk management… there are still some questions around blockchain,” he said.
As this is still early in the process, there are uncertainties. Although the fee structure will be transparent and predictable it is not clear how much these enhanced payments will cost. Also, it is unclear whether there be requirements for a certain standard regarding the enhanced remittance data. Nevertheless, this appears to be a step in the right direction—and corporate treasurers should take note.
Magnus Carlsson is AFP’s manager of treasury and payments.