Editor’s Note: Consumers have quickly become accustomed to the power and freedom that real-time electronic payments enable. This service has now expanded to banks internationally, and financial services organizations are working to solve the problem of delays in cross-border wire transfers. These types of transactions can also reduce inconsistencies for consumers and small businesses that make payments between countries where card payment penetration differs.
With instant settlement starting to gain steam in the U.S., The Clearing House says it’s time to take the process overseas.
“As much as we see use cases developing from real-time pay in the U.S. and Europe in their own countries, you’ll see the same kind of innovation in cross-border payments,” said Russ Waterhouse, the executive vice president of product development and strategy for The Clearing House, which is launching a project with a European real-time payments initiative to support international transactions.
The collaboration is between the Paris-based EBA Clearing, which supports a pan European payment structure; and TCH, the New York-based U.S. bank-supported U.S. clearing network. Both organizations have been recruiting banks to participate in real-time payment schemes—the RTP rail in the U.S. and the RT1 system in the Single Euro Payments Area, which includes 34 countries in the European Union and surrounding nations such as the U.K. A pilot will launch this year.
The project comes as real-time settlement starts to take hold as a way to speed B2B transactions for supply chain finance, and as a means for consumers to reduce overdrafts and execute faster e-commerce payments. By crossing international boundaries, TCH and EBA hope to add scale to these and new use cases. “These initiatives will bring their domestic experience to the international stage,” Waterhouse said.
Banks at launch will include Bank of America, ABN Amro Bank, BBVA Group, HSBC and JPMorgan Chase. The service initially will support instant payments in the U.S. dollar and euro currency corridor, but it is intended to expand to other currency channels and payment systems.
The RTP/EBA initiative uses ISO 20022 message standards for digital payments. ISO 20022 is seen as a key step toward real-time international payments for numerous use cases because it allows for the inclusion of remittance documents with cash, card, securities, trade and foreign exchange international payments in a shared protocol. The TCH/EBA rail also uses the SWIFT Go international payment service, which includes recently developed SWIFT technology that speeds transaction processing across the SWIFT network. EBA, TCH and SWIFT have already produced a proof-of-concept for settling real-time payments between two different countries.
Under the prevailing wire transfer system for international payments, most cross-border transactions do clear within minutes, but there are transactions that lag because of local requirements that govern liquidity and risk management.
“Some payments can get stuck in a time lapse. That can lead to the perception that cross-border payments are disjoined,” said Hays Littlejohn, EBA Clearing’s chief executive. The real-time rails provide more transparency and remove settlement risk because the parties will know immediately if a transaction has settled. “It takes a lot of the guesswork out, as well as delays or friction,” Littlejohn said.
TCH and EBA hope to add more banks and countries over time.
“We’ll start with a small but important group of banks that cover a lot of accounts in these markets,” Littlejohn said. “That will get it going and we can bring other banks in.”
Cross-border real-time payments arguably represent the most important use case for building instant transaction networks, said Sarah Grotta, director of the debit and alternative products advisory service at Mercator Advisory Group.
“There are meaningful efficiencies to be gained that can reduce the cost of a transaction and reduce the number of participants in the processing stream,” Grotta said. “This will deliver the payment to the recipient/beneficiary in seconds, not multiple days as happens in some circumstances, and eliminate some of the points of potential operational failure.”
The biggest wins are for B2B invoiced transactions—particularly when the network permits large transactions—and consumer remittances, according to Grotta.
More than four dozen countries have a domestic real-time payment system, creating a large addressable market for an international standardized connection.
“Interoperability may develop with a patchwork of bilateral bridges, but I think longer-term, logically, real-time payments will be served by global payment hubs,” said Eric Grover, a principal at Intrepid Ventures in Minden, Nevada. The SWIFT/TCH/EBA real-time payments pilot should be viewed in that context, he said.
Other efforts to create a hub include India’s United Payments Interface and the Singapore Monetary Authority, which are developing a bridge to support real-time payments across India, Singapore and other countries. Mastercard and Visa have also built real-time rails to support international cross-border payments across their respective networks, covering hundreds of nations and dozens of currencies.
SWIFT’s network is also vast, covering 11,000 financial institutions in more than 200 nations.
“SWIFT is an obvious global payment hub/partner for supporting interoperability between national real-time payment systems,” Grover said. “Mastercard and Visa are the other two best-positioned players to support cross-border real-time payments interoperability planetwide.”
A real-time account-to-account option can reduce inconsistencies for consumers and small businesses that make payments between nations where card payment penetration differs.
“Down-market retail payments are often handled through card rails, but credit cards are more popular in some countries,” Littlejohn said. “An account-to-account real-time transaction would create an alternative to cards.”
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