Complementary or competitive? The role of payments market infrastructures and correspondent banks in instant international payments
Instant payment services are being developed by payment market infrastructures (PMIs) all over the world. Banks also see real-time services from PMIs as an opportunity to develop new products. The benefits these domestic instant payments systems bring will also be felt in cross-border payments once the systems start to inter-operate.
But the barriers to achieve this goal are not only technological. They also lie in the need to incorporate the foreign exchange component, comply with Know Your Client (KYC), anti-money laundering (AML) and sanctions screening obligations, offer settlement finality outside a currency zone, and respect local market practices.
Domestic instant payments (IP) systems have been around the world, including schemes in Switzerland, Japan, the Nordic countries and the UK. The European Union will also soon implement several instant payments systems, the SEPAinst credit transfer scheme being one of them. The first level of improvement for existing IP schemes would be to ensure that within a single currency, the various instant payment market infrastructures (PMIs) can interoperate. In the EU, it is likely that the European Central Bank will ask the different stakeholders to achieve this. Interoperability presents a few technical challenges, but it seems achievable.
The next challenge should be to set up IP schemes from a geography/currency to another. Such a goal brings heavy technical challenges because of the different time zones, especially for liquidity management and investigations linked to compliance hits. This would create an end-to-end, cross-border IP system.
In the future, correspondent banks may more distinctly separate international instant payments flows into high-volume, low-value and low-volume, high-value types. In the former space, customers are looking for fast, low-cost payments. In the high-value space, clients would benefit from added value services such as additional information attached to payments. The two types of payments flows may co-exist and banks may even consider different IP schemes for different payments flows. For example, if a trade corridor to a country that operates an IP scheme generates many transactions, it may be worthwhile for a bank to set up a bilateral arrangement with a bank in that country, thus enabling instant, cross-border payments.
We are seeking inspiration from banks operating in countries where IP schemes are live. The next steps of the IP evolution will be to consider how we can send some types of IP to those banks to achieve cross-border IP. When banks have sufficient payments traffic for certain flows, investment in end-to-end IP could be justified.”
Head of Cash Clearing Services
There are challenges in achieving cross-border IP, both technological and regulatory. Maintaining regulatory compliance in the IP field is difficult; customer expectations are that payments will be received within a very short time, but they rarely consider the banks’ obligations to filter and screen all payment flows. In addition to that, most banks are continuously adding scenarios to their monitoring tools to detect as many ‘true’cases of a potential AML-FT problem as possible. Much of the work behind being manual, the industry is experiencing heavy and constantly increasing costs. In the future, however, it should be possible to apply artificial intelligence to the challenge. By identifying suspect patterns, more scenarios can be added and processed very rapidly. It is hoped that technology such as AI will help banks to combine the necessity to have safe and secure cross-border, IP payments at a low cost. Banks’ compliance obligations are a challenge in the desire to accelerate transactions.