Catching up with the customer
Despite recent innovations, a more transparent, inclusive and reliable ecosystem is still a work in progress
Few sectors of the finance industry are undergoing more profound or rapid change than international payments.
Demand for cross-border retail payments is soaring, driven by demographic shifts, facilitated by super-apps and wallets. The wholesale payments sector is reinventing itself in response to heightened customer expectations, risks and costs, warding off the threat of disintermediation. Technology-based innovation is critical to survival as distinctions between low- and high-value channels fade. But other skills and assets will also be needed to keep up with demand and ahead of the competition. Sibos 2018’s payments sessions indicated the pace of change will not relax for some time.
In Monday’s Big Issue Debate, ‘Reengineering international payments for a fast, digital age’, panellists highlighted the importance of customer focus, collaboration in service development and delivery, and the potential for data analytics to enhance customer experience.
Philippe Henry, global head of corporate, financial and multinationals banking at HSBC, said banks must reimagine payments as a service, not a product. “Clients are facing up to the consequences of the fourth industrial revolution. They are revisiting how they work with customers and suppliers. If we understand these changes, we can offer more tailor-made services. Payments is a part of that challenge, if not necessarily at the centre,” he said.
The new business models of the digital age are also driving change at the retail level, observed Jennifer Boussuge, treasury fulfilment, service and operations executive at Bank of America Merrill Lynch. “The gig economy, the sharing economy is generating huge volumes of small-value payments, which require the development of cost-effective cross-border, cross-currency options,” she said, citing forecasts by Accenture that the value of cross-border payment volumes will rise by 5.6% per annum up to 2022.
To provide these options, neither banks nor their FinTech competitors are attempting to fly solo, instead partnering to meet specific customer needs with a tailored mix of capabilities.
China’s Ant Financial, for example, partners with local banks in nine countries to provide digital wallet and other smartphone-based services that bring payments and micro-credit to the previously unbanked. “We work with local partners to deliver wallets, but we work with banks on many other fronts. It’s a collaborative relationship,” explained Clara Shi, head of financial institution strategic partnerships in Ant Financial’s international business group. The firm develops partnerships with merchants across Asia in order to supply payment services to Chinese consumers abroad, she added.
In response to the burgeoning market for low-value cross-border payments, Western Union has invested heavily in digital transformation over the past decade. According to Molly Shea, global manager for global money transfer, Asia Pacific at Western Union, the firm is reaping the rewards with 40% annual growth in digital revenues, as mobile and wallet payment volumes multiply.
“Customer expectations are very advanced. As service providers, we have to keep catching up,” admitted Shea. “The future will be about collaboration and partnership. FinTechs are good at the customer experience, but more established providers really understand customer needs when moving cross-border payments securely and efficiently.”
In the corporate market, emerging business models not only require upgraded cross-border payment services but new information services. “Clients are more demanding today due to the pressure they face to revisit their business models. We now have solutions that utilise and share information across the ecosystem – partly driven by (EU Directive) PSD2 and the new service providers it brings in. Banks can offer new services by being better information providers,” said HSBC’s Henry
Acknowledging the role of APIs in facilitating the development of new value-added payment services and greater access to payment-related information, Henry also noted the security implications of open banking. “When banks offer open access to our systems, via mobile apps etc, we have to have appropriate security features too, including biometrics,” he observed.
BAML’s Boussuge said corporate customers were already beginning to benefit from new initiatives in cross-border payments – such as the greater speed and transparency being delivered via SWIFT gpi – but insisted more innovation was needed, citing the use of real-time data sets to develop self-service models. An increasing number of banks are already using AI to support customer service teams, for example, to reply to simple client queries or refer complex ones on to staff. Boussage suggested technology would help to offer greater flexibility to clients and efficiency to providers.
“Intelligent automation will empower clients to access services where, when and how they want,” she said.
Ant Financial’s Chi agreed that new use cases and customer experiences would continue to emerge. “The journey is just at the beginning,” she said. “We’ve completed 100 metres of a 10,000-metre run. We need contributions from all parties to build a more transparent, inclusive and reliable financial ecosystem.”
The twin needs to reduce costs and increase service levels to corporate and institutional customers is leading correspondent banks to rethink the mechanisms underpinning cross-border payments. The linear nature of the correspondent banking transaction chain has led to increased duplication and inefficiency in recent years, with KYC and other compliance checks being applied multiple times. Although SWIFT gpi now sheds greater light on a payment’s status, helping to identify bottlenecks and thus increase speeds, could a more radical shift also eliminate duplicated effort and cost?
Some have proposed solutions that leverage distributed ledger technology. But in ‘Cross-border payments over a virtual centralised ledger – future or utopia?’, panellists considered the merits of a cloud-based service layer across correspondent banking networks. In this model, banks and other service providers would use APIs to provide and/or access services via a central cloud utility, not only tracking transaction status, but applying KYC checks or other services.
“Instead of messages flowing back and forth between institutions for cross-border payments, banks could call into the cloud via API to determine transaction status. This approach solves some operational efficiency problems, but we can also overlay third-party solutions to address other pain points around sanction screening and account validation in a more comprehensive way than at present,” explained Ashish Sharma, chief operating officer for global payment services in the financial institutions group at Wells Fargo.
Niall Cameron, global head of corporate and institutional digital, HSBC, added that a virtual ledger could help correspondent banks to meet their compliance obligations in the era of instant payments. “When payments become instant, our approach to screening and compliance has to change, in concert with regulators,” he said. “With this model, all messages could go up to the cloud layer where the sanction screening process is executed at a higher standard, with more information.”
“Visibility and speed”
Two further sessions – both focused on the needs of corporates – suggested transparency is one of several cross-border payments needs not being met satisfactorily.
In ‘Service matters – how can banks better serve corporates on the seller side?’, delegates heard how a payment from a Swedish subsidiary to an Australian parent could take up to seven days. Dan Birdseye, group treasury manager at Cochlear, said the firm had started to take a highly conservative approach to month-end reconciliation. “Visibility and speed are what we’re after. I will only rely on what I can see in my account, rather than including expected in-bound payments,” said Birdseye. “We don’t need payments sent in a matter of seconds: same-day value would be good.”
In this context, panellists welcomed the greater transparency on cross-border payments offered by SWIFT gpi, noting that gpi tracking for multi-banked corporates went live in October. In a subsequent session, centred on the potential benefits of open banking to corporates, Mark McNulty, global head of clearing and FI payments at Citi, said the combination of open banking and instant payments could yield new collection opportunities for firms switching to direct-to-consumer sales models in the digital age, especially in Asian markets where card penetration is less comprehensive. “You can request a payment through open banking, then get the payment by immediate return in a country that has implemented instant payments,” he said, adding that Citi is working with various bodies to define a new API standard that enables payment requests and micro-credit.
George Zinn, corporate vice president and treasurer at Microsoft, said this kind of service could help address a common fraud tactic whereby a supplier is sent an email claiming to confirm new payment instructions. “Many treasurers struggle to achieve daily visibility. If you reconcile at month-end, it can be hard to identify a fraudulent payment that took place earlier in the month,” he noted
Cross-border payment volumes might be surging, but the outlook for trade finance transactions – and the commercial flows they support – is clouded by geo-political tensions. Introducing ‘Trade wars and technology – A new era for trade finance’, Coriolis Technologies CEO Rebecca Harding said US-China disagreements were just the most prominent example of trade becoming “weaponised”.
Panellists noted the challenges of financing global supply chains in an uncertain political climate. Rajkiran Rai, CEO, Union Bank of India, said the 180-day trade cycle left banks highly susceptible to interest rate and currency movements. “Banks are exposed to huge risks, due to a lack of confidence in the system,” he said.
But they welcomed the potential for smarter use of data to increase credit risk appetite, by enhancing visibility across counterparties and intermediaries. In particular, this could accelerate international expansion by SMEs.
“If we can change the way we share data, and permission others to see that data, we can begin to change where the risk sits,” said Jason Kelley, general manager at IBM Blockchain Services. Not only can innovation improve credit access, it has significant governance implications. “The system is the challenge. How do we get beyond the system that is keeping us anchored in yesterday’s capabilities?” he added.
The multilateral institutions of trade’s established governance framework had failed to resolve bilateral disagreements, panellists agreed. Further, the US dollar’s role as dominant settlement currency brought global trade within oversight of a jurisdiction with increasingly unpredictable trade policies.
Could the World Trade Organisation and the US$ be replaced by a new trade paradigm, based on the blockchain and a country-neutral crypto-currency? Daniel Schmand, global head of trade finance at Deutsche Bank and chairman of the International Chamber of Commerce’s (ICC) banking commission, said it was possible to make trade governance more independent from geo-politics. The ICC is already exploring the potential of technology to reform world trade, but Schmand acknowledged the need for support from other bodies to raise the subject at a G-20 summit.
“First, we need to create an ecosystem in which technology is able to come to its full fruition, perhaps starting with a closed loop, and then branch out. It may be possible also to agree on a new currency and settlement system outside of the traditional currencies. But we need to start with baby steps,” he said.
On the same morning, an optimistic view of the global trading environment was offered by Parag Khanna, a renowned author and advisor on international relations. In his breakfast keynote, Khanna argued that accelerating investment in cross-border infrastructure and connectivity – digital and physical – would ensure governmental disagreements did not lead to open conflict or outright isolation. “The more the world becomes an integrated marketplace, the more we compete over supply chains,” he observed.
Rather than a war, Khanna characterised current struggles as a tug-of-war in which nations compete for influence over the binds that connect their economies. Further, he explained that the rise of China had been achieved by a well-established template that was increasingly being pursued by other countries in Asia and beyond. This approach relies on the development of an increasing number and complexity of interactions with trading counterparties to bring an economy and its workers up the value chain.
“The import-displacement industrial policy is how America became a super-power in the 19th century. China is no different and now India is doing it too,” he observed.
Whilst these policies are pursued for self-interest, they also strengthen the broader ecosystem for the benefit of all, added Khanna, citing China’s One Belt, One Road initiative, which is creating much-needed physical trading infrastructure across Asia and into Europe. From energy to finance to the internet, the connectivity between domestic capabilities through globalisation bolstered overall system resilience, he said.
“Being big doesn’t make you important, being connected makes you important,” he concluded. “All countries are realising that connectivity is how you enhance your influence."