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Instant – the new normal

Instant – the new normal

8 November 2017

Carlo Palmers, Head of Market Infrastructures at SWIFT, talks to Daily News at Sibos editor Heather McKenzie about Instant Payments

Carlo Palmers quote

Heather McKenzie: Why is SWIFT taking such a strong stand in instant payments?

CP: There is a clear demand from our customer community for us to become involved in instant payments [IP] and offer a solution. The payments industry globally is becoming very focused on IP and in some countries, many consider it to be the ‘new normal’. SWIFT certainly believes that IP is the way forward for payments.

HM: Tell us about the agreement you have just signed with EBA CLEARING

CP: SWIFT has a long-standing relationship with EBA CLEARING, providing the messaging and technology infrastructure of the Euro1 high-value payments system and the STEP2 low-value payments system. Now that EBA CLEARING is entering the IP world with its RT1 system, we felt it was appropriate that SWIFT should provide a connectivity solution to RT1 for our members. EBA CLEARING’s customers want to use SWIFT as a channel for connecting to RT1. 

HM: SWIFT is also involved in other IP projects, in Europe as well as further afield. Can you outline those projects?

CP: Europe is a very important market for SWIFT and now that the European banking community is making moves into IP, it makes sense for us to be involved with EBA CLEARING. But we are also developing a connectivity solution for the European Central Bank’s TARGET Instant Payments Settlement Service [TIPS] that is scheduled to go live in 2018.

Multiple clearing and settlement mechanisms  (CSMs) will provide IP solutions across Europe and SWIFT believes it is important that we offer a multi-CSM solution to our member banks that will enable them to connect into any IP system. We will provide a single interface to connect over SWIFT channels to IP systems – whether the IP operator is EBA, the ECB or any other domestic market infrastructure.

This is however not a solution that will be limited to Europe; the interface will be applicable anywhere. Many of SWIFT’s member banks, particularly the large global institutions, will want to use the same gateway to connect to IP systems anywhere. Many countries are in the early stages of developing IP solutions; some are already thinking about renewing.

The work we did with the Australian community on their New Payments Platform (NPP) forms the basis of our IP solutions going forward. We are using the same basic components to ensure the required  24x7, instant, high-volume, low latency expectations.

In the US and Hong Kong, we are developing a slightly different approach, using Alliance Messaging Hub Instant to provide to our member banks a connectivity solution into the IP systems of The Clearing House and the Hong Kong Monetary Authority respectively. This also gives our members the flexibility to connect to an IP provider that is not using the SWIFT network. A bank in the US, for example, can install AMH Instant and handle IP processes, integration and payments orchestration via a SWIFT interface that will link to the other SWIFT elements within the institution.

HM: What about cross-border transactions – will they become instant payments?

CP: This is an interesting challenge and really should be described as cross-currency, rather than cross-border, as the Eurozone has established cross-border payments through SEPA. Even so, cross-border IP in Europe will still be difficult because the different IP platforms must now interoperate in seconds. The technical solution for this will be much more complex than for a purely domestic system, such as that developed in Australia.

Cross-currency, there are equally formidable obstacles, including the FX element and finality guarantees. On the FX side there are plenty of organisations that can handle conversion – but none can do it within the five seconds required for some IP systems. Guarantees are more challenging because they require the agreement of a central bank and in a cross-currency transaction it may not be clear which central bank needs to provide the guarantee.  This might be solved via a pre-funded liquidity pool to ensure finality, but it is not yet clear how these issues can be overcome.

HM: Can SWIFT help the industry to overcome these challenges?

CP: We think so! Cross-currency IP will not happen on day one of any new IP system. But SWIFT’s expertise in standards such as ISO 20022 will help. If you talk the same language, it is of enormous advantage and makes interoperation between systems much easier. Connectivity and standardization are at the heart of what we do. Furthermore, our GPI project already today supports the correspondent banking community to increase the execution speed of cross-currency transactions.

In addition to the challenges on the technical and operational levels, there are also business challenges. Banks and central banks will have to agree how cross-currency instant payments can be done. But again, SWIFT can help to facilitate discussions between these banks. We are a community and we bring people together.

Putting aside the cross-currency question, there are still challenges with instant payments and interoperability that are related to market practice and how different countries do things. Once we hook up systems, those differences will have to be considered. For example, currently, there isn’t a standard definition of how instant an Instant Payments system will be; it ranges from five to 20 seconds. If you hook a five-second system up to one that clears in 20 seconds, there will be payment fails. There are some tough decisions for different payments communities and part of SWIFT’s core mission is to help communities come together to define these market practices.

HM: Going forward, what will you define as success for SWIFT and for the industry?

CP: A big part of what SWIFT wants to do is to help the industry realise its instant payments ambitions. In the EU, we are working to support member countries prepare for the ECB’s Vision 2020, whereby it will consolidate all its market infrastructures – T2, T2S and TIPS – on to a single platform with a single interface that will rely on a single liquidity pool. That will make liquidity management very efficient for member banks. Our intent at SWIFT is to extend our Instant gateway to become this single gateway, which will give members access to Eurosystem’s single platform but also to other CSMs across Europe and beyond.

For the industry, successful IP solutions require ease of use, ubiquity and reach. Sweden’s mobile payment system, Swish, is a good example; it provided a great user interface that was easy to use and consumers picked it up very quickly. All the banks participated in it from day one, providing the required ubiquity and reach and helping to drive uptake.  Also Denmark is a good example, where the mobile app has become the second most popular smartphone app behind Facebook.

Clearly there are challenges ahead, but IP is the future for payments. SWIFT’s expertise in standards, combined with our success in developing Australia’s NPP, stand us in good stead to develop a multi-CSM connectivity solution that will help our members successfully participate in the new normal of instant payments.