Cross-Border Payments: The Next Big Frontier
It is no secret that the majority of European banks and financial institutions are currently faced with making big and strategic decisions: The pan-European instant payment initiative is due to go live in 2017, new regulations such as PSD2 will come into effect soon and the digitalisation of the sector is well under way, with customers demanding new services and payments methods.
IT departments and bank executives need to make difficult choices: Do they try and adapt their current IT infrastructure to accommodate instant and mobile payments solutions as well as new European regulations OR do they completely replace their current platforms with new ones, designed to follow strict PSD2 requirements and to accommodate new payments solutions?
If this weren’t enough, the worldwide payment scenario offers an even more fragmented landscape, characterised by a lack of interoperability between immediate payments schemes. The result is that, today, cross-border payments reach their final recipients only with difficulty. For example, ‘one leg payments’ coming from across the world are being treated only in the EBA Step1 Service or in the European RTGS Target2 system, but not in SEPA because of their incompatibility with the PSD.
In my view, the Step1 service is no longer competitive and is losing participants due to its restrictive and uncompetitive rules. The Target2 system is more efficient, but it hasn’t been designed to treat retail payments. It is also expensive and only runs during business days from 7:00 to 17:00. There are plans to make the EU RTGS system more competitive and available 24/7 following positive experiences with RTGS in the UK, but the roadmap is long and still under consultation. An RTGS Target3 system would therefore not be in place before 2018.
Some banks receive cross border payments in one system and later divert them to their final destination through another regional or domestic system, which, in most cases, means changing the message format (from FIN to ISO). However, this will often cause problems for the simple reason that different systems use different rules. Required procedures such as sanction screening means cross-border payments often have to be treated manually. And while the new ISO2002 standard is becoming the worldwide payment code, regional schemes using different rules and messaging continue to coexist all over the world.
What this situation calls for is integration and interoperability; new regulation should allow procedures like section screening to work smoothly and fast. Cross-border payments HUBs should become global and integrated with CUGs, clearing systems and RTGS systems.
A number of global initiatives are working to resolve these issues and have already made considerable progress. Last month, the International Payments Framework Association (IPFA) announced the first global scheme to transact real-time payments as cross-border and cross-currency credit transfers. Last year, an international project to develop a set of harmonised standards for cross-border real-time payments published a first draft of ISO20022 messages for review. The draft was the result of work by the ISO Real-Time Payments Group (RTPG), made up of over 50 global experts brought together by Payments UK. ACI is at the forefront of both initiatives.
To be competitive in this market, financial institutions will have to make big and bold decisions. Many banks are frightened by the size and risk of the task of updating their entire IT infrastructure, but solutions exist. So the question they need to ask themselves is: Will they continue with the ‘make do and mend’ mentality or will they update their payments systems in order to be ready for the next frontier?
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