Thesixth in a series ofExpert ViewsfromSociete Generale Global Transaction Servicesin the run up toSibos 2016,Emmanuel de Bouard, Global Head of Cash Clearing Services, Jean-François Mazure, Global Head of Cash Clearing Services, and Frantz Teissèdre, Head of Interbank Relationships, at SG GTB,discuss:
“Payments interoperability across communities and currencies”
Domestic real-time retail payments systemsare offering reach and ubiquity in many smaller communitiesthrough indirect memberships and service hubs.In larger communities, such as the U.S. and Euro-zone,multiple operators are positioning their solutions. Butthe desire(or obligation within a single currency zone)to interoperate comes with new challenges:how can operators guarantee finalityto each otherwithin seconds? Can instantpayment confirmationsbereturned instantly through multiple players?What is the role banks can playin ensuring interoperability?
Thecorrespondent banking network is very complexand has beenbuilt up over a number of years. Agreements exist between banks globally in order to ensure that customers can be reached all over the world. It isa good infrastructure, but it isnot very fast. In today’s world,technology has created the expectation of immediacy; customers no longer understand why it is not possible to have fast and predictable payments transactions.Corporate customers wanttheirpayments to be predictable in terms of when the payment will arrive, fast, transparent (in terms of the cost of processing it) and secure. Meeting these requirements iscomplex and costly. Meeting these requirements in real time will be even more of a challenge. While corporates may not require immediate, cross-border payments at presentit is only a matter of time before they request such services from their correspondent banks.
As corporates seek tomanage liquidity on a real time basis, there will bea requirement for interoperability between real time payments systems. Myriadreal time payments systems are emerging globallyandFintechs are coming to the fore, providing fast solutions. However the Fintechs cannot match the robustness and security of the current correspondent banking model. Additionally,there is a question as to how such platforms will cope during times of scarce liquidity. Theend customersof these solutionsbear the foreign exchange and liquidity risk.
Theindustry is responding to customers’ demands for predictability and speed, which is why interoperability between real time payment systems is being discussed.For interoperability to be achieved, however, thereneeds to be an understanding of exactly what real time meansin different countries.To interoperate, formats have to be agreed for the transfer of payments between systems.SWIFT’s Global Payments Innovation Initiative (GPII) is a step towards harmonisation.By agreeing SLAs for dealing with local real time payment systems, the participant banks will help to ensure that payments will be credited to the account of the beneficiary in a speedy manner. This approach will also ensure continuing financial stability, resilience, and guarantee of payment within a few hours.
In the first phase of interoperabilitythere may bean increase in the number of payment systems in order to achieve greater reach. Existing real time payments systems are domestic in nature and have domestic membership. Indeed, these systems do not even cover all of the banks in a particular market.How these systems will interoperate is an open questionbecause they all have different approaches.
To interoperate, thedomestic systems might have to connect to a central one, perhaps operated by a central bank. Additionally, allpayments systems require a back up for contingency–interoperating with not one but two systems of course adds to complexity. At present, domestic systems serve most of the real-time needs of customers. In the best case scenariointeroperability will eventually happen but it will be difficult to achieve.
Interoperability between real-time payments systems may be possiblebut in order to achieve it,banks will have to make huge investments to serve only a small percentage of payments. It islikely that the industry may operate two systems– anet settlement systemto manage issues of liquidity and agross settlement systemto achieve the requirements of regulators as they push for real time payments.
Liquidity is an issuefor real time payments interoperability. With real time systems,the industry has to move from net settlement systems to gross settlement where payments are pre-funded. Butin times of scarce liquidity this will be difficult. The sensible option will be to operate both net and gross systems so that there is back up in the system.
GPII is a strong initiativeto help the industry move towards interoperability of real time systems.Around 80% of real time payments can be done through SWIFTas a book to book transfer, generating immediate acknowledgement and receipt.This creates an almost real time environmentand removes the need to build a new system that will allow interoperability.
Interoperability of real time systems isproblematic when a FX transaction has to be made. FX settles on a T+2 basis and there is no clarity as yet on how real time systems will cover FX.
“In seeking interoperability between real time payments systems, the industry has to differentiate between what is achievable for all participants in the payments environment and the reality of the situation between banks in terms of liquidity and the systems and formats that are used.” Emmanuel de Bouard
“There is a dichotomy of payments systems: on the one hand the correspondent banking model is stable and safe but not fast enough. On the other hand, new Fintech offerings are fast, simple and straightforward for users but they are far from being as robust, safe or resilient as today’s networks.” Frantz Teissèdre
“The idea of connecting domestic real-time payment systems with pan-European systems such as TARGET is problematic. TARGET is a pre-funded system that settles at the end of the day; achieving real-time payments within this will be difficult.” Jean-François Mazure