While instant payments are fast becoming the norm, processing payments can sometimes take longer than expected. So how does the payments process work? Where can friction arise? And where do opportunities for improvement lie?
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How does the payments process work?
When a domestic payment is made, the initiating institution sends a message to the receiving institution, after which the transfer is settled electronically. As such, domestic payments can often be settled instantly or within 24 hours.
Cross-border payments are typically made using the correspondent banking model, in which payments pass along a payment chain that often spans three to four banks. After being initiated by the customer, a payment is sent by the debtor agent to one or more intermediary banks. It is then sent to the creditor agent.
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Why can payments sometimes take longer to process?
Delays can arise at a number of different points in the cross-border payments process, with common causes of friction including:
- Incorrect beneficiary information entered – 34% of exceptions on Swift are the result of formatting errors such as incorrect account numbers or routing codes.
- Beneficiary account has closed
- Payment must be checked because of a sanctions screening hit
- One leg of the payment happens outside of rails with embedded checking, meaning visibility over the payment is lost
- Creditor struggles to reconcile the payment in their back office as the payment does not include an invoice number
Learn more about how long wire transfers take.
Straight-through processing
Straight-through processing (STP) is the term used to describe an automated payments process that can take place without the need for manual intervention. This eliminates the operational burden that can arise when banks need to repair payments, manually add data or adopt workarounds.
STP is supported by greater automation, as well as the use of cleaner, richer data. As the industry transitions to ISO 20022, it’s likely that STP rates will continue to increase and that payments will become even more efficient.
Remittance information
Another component of the payments process is the remittance information that accompanies a payment. Accurate remittance data is important because it enables the payment beneficiary to reconcile the payment with outstanding invoices, resulting in a more efficient reconciliation process.
In practice, reconciliation information may be truncated during the payment process due to inconsistencies between different systems. This can mean that key information is lost along the way and manual interventions are needed. By supporting rich, structured remittance information, ISO 20022 enables that information to be transmitted without truncation, thereby supporting straight-through reconciliation.
Visibility over fees
Payments may also be subject to various types of transaction fees, including FX conversion costs and payment processing fees. However, where cross-border payments are concerned there is often a lack of transparency over the fees and deductions charged for different payments. This can make it difficult for users to make informed decisions about their payments, as well as presenting further reconciliation challenges.
How is Swift helping?
Alongside our instant and frictionless payments strategy, a number of Swift initiatives are helping to streamline the payments process. SWIFT gpi enables banks to pass on remittance information with no loss of data, making it easy for end users to reconcile incoming payments with outstanding invoices. It also provides full end-to-end visibility over processing fees and FX rates, meaning that customers can make informed decisions.
Also notable is SWIFT gpi Instant, which connects SWIFT gpi with real-time domestic infrastructure, meaning that payments can arrive in seconds with full transparency over fees. And Swift Go enables small businesses and retail customers to send low-value cross-border payments quickly and easily, with full visibility over fees and FX rates.
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