As hyperWALLET’s Director of Treasury, I was delighted to attend this conference to learn from both peers and industry. Despite a rather small group just shy of 60 participants, the session leaders did not disappoint; they provided some excellent presentations with abundant food for thought.
The event understandably focused on international payments from a “US looking out” perspective and offered some unique insight into the issues faced by US based entities seeking to engage in international payments, whether for their customers or for themselves. I’d like to touch on some of the key trends brought up during this event, namely:
- Convergence
- Continued growth in worldwide remittance
- Increasing emergence of non-traditional players and payment channels
Convergence
Convergence is a recurring theme and can be witnessed in everything from payment networks, to the move towards standardization of messaging and file formats to convergence in Travel Rule-like regulatory requirements outside of the US.
The distinction between low value and high value payments systems is blurring with more and more low value payments being settled using traditionally high-value payment networks. Practitioners are now more likely to classify payments systems according to settlement time (urgent versus non-urgent) as opposed to value (low value versus high value).
A good example of convergence in payment systems is the UK’s Faster Payments Service (FPS). FPS is a low value (up to 10,000 GPB per item) settlement network for ACH type payments that utilizes the country’s existing ATM network (i.e. convergence between cards and ACH). Settlement is irrevocable and often same day and clearing is available 24/7. Hence FPS is ‘almost’ a RTGS for low value payments and has many wondering about the future of BACS (the UK’s non-urgent 3-day, with recourse, clearing system).
Corporates in the States and elsewhere are pressuring their banks to adapt the XML ISO 20022 standard as a messaging format. SWIFT is also utilizing ISO 20022 to gradually replace their existing MT messaging format. Adoption of this standard will reduce the complexity of corporate to bank communications and increase the straight through processing rates.
Regulatory requirements for cross-border payments is another area where convergence is becoming apparent. The essence of the USA’s BSA Travel Rule (requiring originator information to “travel” with a payment ) is spreading to other markets thanks to the FATF’s Special Recommendation VII (wire transfers) requiring all members countries to institute similar requirements. This recommendation, by the way, reads as follows:
http://www.fatf-gafi.org:
“Countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain. Countries should take measures to ensure that financial institutions, including money remitters, conduct enhanced scrutiny of and monitor for suspicious activity funds transfers which do not contain complete originator information (name, address and account number).”
Continued growth in worldwide remittance
The second trend emphasized during NACHA’s Institute of International Payments was continued strong growth in worldwide worker’s remittances. This market has increased 63% over the past 5 years. In 2008 recorded workers’ remittances totaled nearly $400 billion US. This amount is expected to decrease to $290 billion in 2009 due to the financial crisis and a big drop in remittances from US to Mexico and Latin America. Nevertheless, most agree that significant growth in this sector will resume again going forward.
The main sending countries are the US, Russia, Switzerland, Saudi Arabia, Germany and Spain. The top recipient countries are India, China, the Philippines, Mexico and Poland. Interestingly, banks service only about 10% of this market with the likes of Western Union, MoneyGram and others, dominating.
Increasing emergence of non-traditional players and payment channels
All banks and remittance providers, however, are facing increased competition from the emergence of non-traditional players and payment networks, which is the third trend I wanted to touch upon. Examples of some of these new providers include mobile operators, web-based electronic wallet providers, supermarket chains, and card-based remittance services.
The most fascinating example of non-traditional players I heard about during this event was the case of certain Latin American supermarket chains who accept cash from their customers to make bill payments, cross border remittances and grocery purchases for them.
Instead of utilizing a bank to settle each transaction separately, some of these chains are aggregating individual payments into one single payment per day per supplier, significantly reducing transaction costs (an example would be aggregating all customer payments to a local utility into one payment to that utility and then providing the utility with reams of remittance data for all of the individual entries that make up that particular aggregated payment).
Most of the non-traditional players still rely on the traditional financial service backbone for actual settlement and hence strong banking relationships are a must. However some new players are even breaking away from this by enabling customers to exchange a form of stored value that does not necessarily equate with ‘money’ in the traditional sense of the word. Some examples include remittances of mobile airtime minutes, electronic or mobile vouchers that may be transferred P2P and redeemed for actual goods or services, and Second Life’s Linden Dollars.
Looking Forward
It will be interesting to watch these and other developments going forward. Moreover, it will be great fun to participate in them. For an innovative payments technology provider such as hyperWALLET geared towards enabling low-cost payments to the far reaches of the globe, the trends in international payments outlined above are certainly good news.
Hi Gina,
Thank you for the very interesting post. Your prediction on the classification of payment systems to be based on urgency rather than value of payment is worth exploring further.
Is that development going against the traditionally held belief that SIPS should be treated with sanctity and the typical exclusion principle for participating in these systems happen to be the value of the payment? At least in India, the eligibility criterion for routing a retail payment on the RTGS system (the SIPS) is a minimum lower amount limit. Not just that, this limit is expected to go up in the near future! It’ll be interesting to notice how the central banks around the world would look at the success of UK’s Faster Payments.
Hi Subhash,
Thanks for your comment. This different way of classifying/distinguishing payment systems was what I was hearing from presenters and attendees of this event. So I guess it’s less of prediction than an expression of how people seem to be looking at some of these systems now. There’s talk that the FPS’s 10k GBP per item limit will also be raised, and I believe the limit for standing orders is already significantly higher (100k GBP). Perhaps this development has more to do with the technology available now.
What I was hearing was why settle for slower settlement times just because a payment is low value, when it is possible to utilize (in certain cases existing networks) or in other cases build new ones that permit faster and irrevocable payments? For instance a consultant from the Office of Technical Assistance from the US Department of Treasury was relating some of his experiences on a current assignment to assist the authorities in Uruguay (I may have this confused with Paraguay – so forgive me if this is the case) implement a RTGS for both low and high value domestic payments. Since they are starting from scratch almost, they will build the best and leapfrog older technology that some of the developed countries are using.
What you write about SIPS in India is interesting! It sounds as though the value of a payment grants the privilege of having it settle faster. It would be great to to hear more about this fascinating market from you.