Swift's Plan to Build on Banks' Legacy Systems

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It can't be labeled simply as a faster payments initiative or even an attempt to rework cross-border payments rails, but Swift's Global Payments Innovation initiative is definitely on a fast track.

Swift has a simple motivation. Its participating banks want to make cross-border payments more transparent in a way that enables them to better communicate about what a payment is for, when it is expected in the hands of its recipient and when it will be settled. To do that, the initiative's focus has to be on messages, rules and procedures rather than a complete overhaul of technology.

In a lot of ways, Global Payments Innovation represents customer service on steroids for the 45 banks that have agreed to participate. With a clearer understanding of the cross-border payment trail, banks can deliver accurate information to customers sending and receiving funds.

The Society for Worldwide Interbank Financial Telecommunication, the global messaging network known as Swift, announced its plans for the Global Payments Innovation a month ago. Swift already has a framework in place and banks willing to test the common messaging, standards and business policies that will make cross-border payments seamless.

Swift remains involved and interested in faster payments initiatives in the U.S., Canada, Australia and other parts of the world, but those efforts center on domestic, real-time payments, said Stacy Rosenthal, Swift's head of payments initiatives.

With the Global Payments Innovation, Swift wants banks to focus on making the correspondent bank network and legacy systems already in place much better for business-to-business cross-border payments, Rosenthal said.

"We want to take what we do best in conjunction with the banking community to develop new market practices and service levels, with transparency around tracking of payments and fees," Rosenthal said.

The initiative is a response to the new market entrants seeking to change the banking landscape, with banks preferring a first-step approach of innovating within the framework they already have, Rosenthal added.

"I look at banks improving their systems from the same standpoint as moving from analog TV to digital TV," Rosenthal said. "One didn't necessarily have to change the TV, but just had a better picture with more capabilities."

The initiative will try to resolve issues that banks face regularly when a payment goes through various correspondent banks, but the sender doesn't know where the payment is in the process if communication drops at one of the banks.

"Why can't a bank track a cross-border payment like a FedEx shipment?" Rosenthal asks. "It sounds very simple, but it would be a huge accomplishment if we could get messaging and processes working in the same manner."

Ultimately, if the banks can improve the cross-border process from within, they may more easily adapt to new technology in other facets in the future, Rosenthal said.

That stance would fall in line with what Deutsche Bank recently stated about a growing trend in fintech innovators and banks working together to improve services.

"I don’t think Swift’s approach precludes making technology changes as they come along and prove useful," said Nancy Atkinson, wholesale banking expert and senior analyst with Aite Group.

Swift and participating banks are leveraging technology in the form of rules-based processing, Atkinson said.

"They are recognizing certain constraints that are unique to the financial services industry — regulatory compliance, security, bilateral agreements, among others — that contribute to the strengths of traditional players still being relevant," she added.

The benefits that Swift is seeking for businesses moving money, such as same-day use of funds, transparency and predictability of fees, end-to-end payment tracking and the transfer of rich payment information, will also benefit banks, Atkinson said.

"Each item is among the value-added services we tell banks they need to develop and offer to clients to generate new revenue or to offset some, or all, of the price compression banks face," Atkinson added.

JPMorgan Chase, Bank of America Merrill Lynch, RBC Royal Bank, Deutsche Bank, Barclays, Banco Santander, Lloyds Banking Group and Citibank are among the 45 banks participating in the initiative. Swift expects to add more banks in the coming months.

With banks acknowledging that the improvements from Global Payments Innovation need to be in place quickly, those signed on to participate have agreed to put all of their resources into it and continue the needed dialogue, said Emma Loftus, head of global payments and FX for JPMorgan Chase.

"I've been in the payments business a long time and this is one of the fastest initiatives that I have seen get off the ground," Loftus said.

But banks all have a significant interest at stake, and the initiative is addressing some key questions, Loftus said.

"Right now, when sending dollars overseas to a small bank in China, that is not necessarily the most visible, transparent and seamless process," Loftus said. "What can we do for the remitter to have more certainty upfront?"

When banks talk to clients, it's not only about the cost of sending cross-border payments, Loftus added. "It's also about them saying 'I sent money and you can't tell me with pinpoint accuracy when it is going to get there.'"

Rather than jump on board with separate projects that rebuild the payment rails from the ground up, Loftus said banks liked the idea of creating "an expectation of behavior" in the pursuit of a common goal.

"Swift is putting together a framework for the banks to discuss this in a non-competitive way and asking how we can make this happen," Loftus said. "They are saying to do it together, rather than on your own."

A few of the participating banks will operate as a test group through the start of the second quarter of 2016, sending the messages and following the agreed-upon rules to assure they work before all of the banks embrace the new process.

Those banks can test the process with limited impact to the current banking infrastructure, Swift's Rosenthal said.

The organization wants to reveal the results of its pilot at the Swift International Banking Operations Seminar [Sibos] 2016 conference in Geneva in September, with the goal of going live with the improvements in 2017.

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