Emerging innovations that will define the future of payments
Michael Bellacosa, head of global payments product management, treasury services, and Vivek Kohli, emerging technology head, treasury services digital office, BNY Mellon, explore how the payments industry is moving towards a seamless, transparent and instant future.
Domestic and cross-border payments are becoming faster, more frictionless and cost-effective, with greater visibility of end-to-end processing and fees. And, with banks increasingly utilising new technology capabilities to best effect, a world where all have the ability to move money instantaneously, 24/7/365 and with full transparency is now firmly in sight. This future payment vision is being driven by an array of emerging industry initiatives, from real-time payments, Swift gpi and Swift’s Transaction Manager to artificial intelligence (AI), blockchain and digital currencies.
Crucially, the path forward does not involve just one of these solutions, but all of them. As payments evolve it remains critical that banks can cater to the full breadth of their clients’ needs. This means leveraging new capabilities and continuing to support traditional services by offering a comprehensive suite of solutions.
Exploring multiple paths
On the road to enhanced payments, there are multiple paths for banks to follow. One such path is the development of real-time payments capabilities, which enable payments to be cleared and settled instantly, facilitating the 24/7/365 business model and making cut-off times a thing of the past. This improved processing capability can also enable businesses to optimise their cash management, and support their liquidity needs through reliable and up-to-the-second data.
Developments introduced by Swift are also driving greater efficiency in payments. Swift gpi – the new standard for sending and receiving funds quickly and securely across the correspondent banking network – and the new Swift Transaction Manager – which enables account-to-account transfers with transparency, predictability and security – are both aiming to tackle the many frictions involved in cross-border payments. Already, Swift gpi has made significant inroads. As of September 2020, 41% of Swift gpi payments were with the end beneficiary within five minutes, with almost 100% crediting within 24 hours.
New technologies are also emerging to transform payments. For example, AI applications are increasingly being leveraged by banks for a host of use cases, including fraud monitoring, compliance and customer inquiries. In the years to come, it is expected they will also be applied to more complex projects, such as liquidity management and payment channel optimisation.
The much talked about distributed ledger technology (DLT) – often referred to as blockchain – could also bring huge advances to financial processes, not only through its ability to record and store data at a central location, but also because of the ground-breaking infrastructures that it can support, including digital currencies.
A spotlight on digital currencies
Digital currencies can be divided into three categories: cryptocurrencies, Central Bank Digital Currencies (CBDCs) and stablecoins payments. Like physical cash, digital currencies are token-based, meaning that they can be transferred directly – i.e. peer-to-peer (P2P) and instantly without the need for a third-party intermediary. This could translate into an entirely new processing model for some forms of payment and settlement – as well as having implications for risk mitigation, liquidity management and correspondent banking strategies.
The most compelling type of digital currency – and the one with the greatest potential for the payments industry – is stablecoins. Like cryptocurrencies (such as Bitcoin and Ethereum), stablecoins use encryption techniques to control the creation of monetary units. The big differentiator, however, is that the value of a stablecoin is pegged to an underlying asset, which helps them to avoid the high levels of volatility associated with cryptocurrencies. With such transformative potential, how could stablecoins be applied to payments?
Applying digital currencies
Today, cross-border FX payments are ruled by business cut-off times. For example, to carry out an FX swap from US dollars to pound sterling, a bank in New York would have to send the money as early as 5 a.m. for the trade to go through on the same day. By applying digital tokens to these transactions the payment could be made almost instantly, with complete synchronicity and finality. This new model would unlock a great many benefits for banks, including a longer window in which to transact, greater transparency over fees and a reduction in risk.
Further down the road, stablecoins could also impact how cross-border transactions are processed. Under the current system, these transactions use a correspondent banking model involving numerous parties and with multiple costs. A token-based model would enable banks to settle cross-border payments instantly, securely and on P2P basis. If achieved, the immediate nature of this model would help to reduce the high levels of counterparty and institutional risk traditionally associated with the current model.
The ability of digital currencies to conduct transactions on an instant basis could one day have huge ramifications for liquidity management. At the moment, securities and FX markets settle on a T+2 basis, giving treasurers time to ensure funds are available for the payment. If token-based instant payments became the norm, treasurers would need to fundamentally change their approach – ensuring their accounts are funded at the point of execution and not two days after.
Equally, banks may have to alter the way in which they manage their own intraday liquidity to enable clients to make T-instant payments. This could ultimately lead to the introduction of liquidity models and products that no one has even considered yet.
A suite of offerings for evolving needs
In the next five to ten years, the vision of consumers, businesses and institutions being able to send and receive domestic and cross-border payments instantly, 24/7/365, and with full transparency will likely have become a reality. While the destination seems clear, the exact route taken by the industry to reach this point is yet to be determined.
In fact, with an abundance of new initiatives and technologies rapidly developing, multiple paths are emerging. Whether it is real-time payments, blockchain, digital currencies or something else, banks should stay abreast of all payment developments, and be equipped with a toolkit of solutions that meet the diverse needs of clients. This will become increasingly important as it is expected that in the future landscape, digital tokens and fiat money will coexist, with different rails and channels – including traditional rails, more established emerging technologies and digital currencies – remaining relevant and even interacting in order to support varied payment requirements.
Only by offering a comprehensive suite of payment solutions – both new and old – will banks be able to meet the diverse and ever-changing needs of their clients.