Industry collaboration is the key to unlocking a new global payments ecosystem
By BNY Mellon’s Anthony Brady, Global Head of Business Strategy and Market Solutions, Treasury Services and Christopher Mager, Head of Global Innovation.
New technology developments are heralding a new financial era, creating capabilities that could reinvent the way in which transactions are undertaken. Already the retail sector has undergone significant digitally-driven change, with new payment methods emerging, such as mobile and real-time, round-the-clock processing – and a host of new non-bank providers entering the market. With such change already afoot, the corporate space is poised for new developments that could deliver a new generation of payments.
A number of catalysts and forces – including innovative FinTech concepts and FinTech companies’ potential competitive threat, evolving technology, increasing levels of regulation and compliance, globalisation, and the growing presence and influence of the millennial generation – are converging to create a newfound urgency for banks to modernise corporate payments.
Certainly, with very few substantial changes to core payments systems over the last few decades (in the US, for example, there hasn’t been much change to the core platforms since the Automated Clearing House – ACH – was launched in the 1970s), now is the time for the industry to take action. Technology is putting the building blocks in place, and it is up to banks to leverage this in order to update legacy payment systems and dramatically improve the client experience.
Banks are grasping the opportunities generated by technology to be able to accomplish this with both hands. And the top of the priority list in this respect is to ultimately develop a global, real or near real-time payment experience.
A global challenge
Of course, making such significant changes to global payment systems is no easy task; a huge number of players from all over the world need to be on board, and each financial institution will have their own legacy technology to take into account. It is also paramount that payment infrastructures continue to be rock solid in terms of privacy, security and resilience.
With this in mind, for any chance of real transformational change to take place, three key markers of traction need to be evident:
1. The network effect – involvement and buy-in from a critical mass of payment system players;
2. Standards (such as ISO 20022) – which create opportunities for interoperability and the network effect to be achieved;
3. Regulatory engagement – regulators must be comfortable with new proposals before any new concept can become mainstream, and regulatory participation will help to ensure new systems are strengthened and optimised from a risk and regulatory perspective.
While overhauling old systems is certainly a challenge, banks are committed to delivering a new global payments experience that, importantly, is focused on putting client needs first. There are a number of approaches that banks are adopting to achieve this, but what is clear is that collaboration is key to driving forward future change – a collective “plan of attack” that uses the skillsets and backing of multiple parties, will be key to success.
Collaborating for success
In recognition of the size, scale and complexity involved in introducing real-time global payments – and the real need to accomplish this – banks are increasingly working together through collaborative initiatives to modernise payments in order to generate the network effect and maximise the potential for standardisation and interoperability.
The SWIFT global payments innovation (gpi) initiative is a key example of industry collaboration, and one that holds a huge amount of promise in being able to bring about cross-border payment enhancements. This solution aims to leverage SWIFT’s proven messaging platform and global reach to enable faster, more predictable and transparent global payments. With all banks – as well as many corporations – already connected to SWIFT, using this existing infrastructure provides the significant advantage of having an already-established network effect, with agreed standards in place. Indeed, over 70 banks have signed up to the initiative (as at August 2016), representing approximately three quarters of all cross-border traffic on SWIFT’s network. Furthermore, SWIFT has considerable experience working with regulatory bodies and already enjoys significant credibility with global regulators. SWIFT gpi therefore already has a sound base upon which to cultivate new global payments solutions.
Elsewhere, banks are also collaborating with FinTechs. Certainly, FinTech companies, with their digital proficiency, have been pivotal in helping to kick-start the payments revolution, and both banks and FinTechs are increasingly appreciating the value of such partnerships. Indeed, this trend has even coined a new phrase: “fintegration”.
Both banks and FinTechs have complementary strengths when it comes to delivering the next generation of payments. FinTechs are creative, tech savvy and in touch with the needs of millennials; while banks have unrivalled industry expertise, capital, and established trust, safety, stability, long-tenured client relationships and close awareness of the regulatory environment. By combining these qualities, new initiatives have a far greater chance of gaining traction and becoming viable solutions.
Take blockchain, for instance. Due to its huge potential, there is a substantial number of projects underway exploring the possibilities of distributed ledger technology. Collaboration between new and established players is growing, and various consortiums and work groups have been created to examine how blockchain could be applied to the world of finance, including in a global payment capacity.
These are still very early days in the exploration of the development of blockchain-based cross-border payments, and there are uncertainties in relation to exactly how the concept can be taken forward, including with regard to a regulatory perspective, integration efforts, a timetable for developing a network effect, the potential for cost savings – and even whether blockchain is the best solution to address present day global payment challenges.
What is clear is that the advent of technology is a game-changer. New FinTech advances are presenting the opportunity for banks to completely transform the global payments ecosystem to meet evolving client and market demands. And it is by working together as an industry that we can bring about this transformational change – leveraging the strengths of multiple parties and collectively striving to effectuate new capabilities that can ultimately enhance the transaction experience for all.