Payments Vision 2025: The Inside Track

Developments such as instant payments, digital currencies, and enriched data services are poised to shake up treasury management. In a recent podcast, TMI spoke to three experts to understand how, by working together, corporates and financial institutions are set to usher in new value-added services that benefit all parties. But treasurers are warned, don’t try to implement all these innovations at once!

The pace of change in payments can be daunting for corporate treasurers looking to improve their internal processes. Among the variety of trends that will dominate the next few years, some of the most critical are instant payments, central bank digital currencies (CBDCs) and enriched services from payment services providers (PSPs). They all offer the potential for treasurers to enhance their cash management processes yet present specific challenges and risks.

On-demand treasury

Instant is becoming the ‘new normal’, particularly in the 56 countries that are already live with real-time payments, according to the FIS Flavors of Fast 2020 report. Faster access to cash and richer data to analyse is an appealing prospect for treasurers, but moving away from the end-of-day and intraday liquidity statements to a 24/7 ‘on demand’ treasury is perhaps an intimidating prospect.

Wim Grosemans, Head of Product Management, Payments and Receivables, Cash Management, BNP Paribas, comments that treasurers engaging with instant payments are doing so on a use case basis. “Where corporates and institutions are actively adopting instant payments is where they see a direct integration with their business processes,” he says. “This could be claims handling for insurance, for example, or as an alternative to B2C [business to consumer] acquiring payment service providers. This touches both payables and receivables.”

While domestic instant payments schemes are flourishing, repeating this experience with cross-border payments has thrown up several pain points to challenge payments providers. For example, capital markets are not open 24/7, which means instant foreign exchange conversions on cross-border payments are not guaranteed. Additionally, delays can be caused by inaccurate or incomplete data, currency controls and legacy systems that are not designed for the real-time. The range of different local regulations also makes for a complex compliance picture for cross-border payments, adding a further source of friction in the process.

SWIFT launched its Global Payments Innovation (gpi) initiative in 2017 to improve the speed of international payments and has already seen significant progress. Nearly 50% of gpi payments are credited to end beneficiaries within 30 minutes, and 40% in under five minutes. Today, more than $300bn is sent every day via gpi, with payments made in more than 150 countries across more than 2,000 country corridors.

Wim Raymaekers, Global Head of Corporate Strategy, SWIFT, explains that gpi is an excellent example of the financial services industry coming together to address a challenge. “It is possible to see global adoption through cooperation when people see a benefit in the processes,” he says. “SWIFT gpi has set several service-level agreements between banks so that everybody knows what rules to play by. This helped increase the speed of processing. Now, more than 95% are processed and credited on the account within the day, if not within half an hour. There are some cases where regulatory requirements still exist on the beneficiary side, which is nothing to do with technology or the beneficiary bank, which can slow things up. However, of course, we still need the regulatory environment because of fraud and compliance.”

With developments such as gpi and the more recent gpi Instant, which connects the SWIFT network and local real-time payment systems through integration with banks, corporates are increasingly moving towards a real-time, on-demand treasury. This requires as much instant information as they can gather in order to obtain an accurate picture of their cash positions. Application programming interfaces (APIs) are critical to facilitating this transformation, as they can enable different systems to ‘talk’ to one another.

Steven Lenaerts, Head of Global Channels and Digital Onboarding, BNP Paribas Cash Management, says that APIs allow for embedding seamless, frictionless exchanges between banks to corporate treasuries, and that demand is growing for this type of service. “Possibly fuelled by the pandemic, we have recently seen much interest in up-to-date access to liquidity positions to optimise liquidity management,” he says. “The challenge is that, despite the overall readiness of the different actors in terms of API usage, uptake has been held back by a lack of standardisation.”

Standardisation is vital to enable interoperability between multitudes of corporates, banks, and vendors that all want to talk and transact with each other. Given SWIFT’s history of enabling efficient communication for the financial world through its payment standards, it is not surprising that the cooperative is also addressing API standards.

“We are very pleased to see that SWIFT has taken up the challenge for API standardisation and is currently driving the instant cash reporting in collaboration with many corporates, vendors and banks,” Lenaerts adds. “This is helping the industry to make progress in the space of on-demand treasury, starting with what appear to be the most prevailing use cases.”

In addition to API standards, other harmonisation initiatives will also vastly improve the processing of international payments. One of the most significant projects is the migration from the SWIFT MT payment messaging standards to ISO 20022 for the entire industry. With the migration deadline of November 2025, the move to ISO 20022 aims to improve the data richness of cross-border payments. This can support more straightforward and efficient anti-money laundering (AML) filtering and compliance investigations. At the same time, the additional data fields will help reduce the number of rejected or blocked payments due to missing and incomplete information. ISO 20022 also underpins the new SWIFT platform, more on which later.

CBDCs are coming

Central bank digital currencies (CBDCs) are another much talked about development in the payments space. Indeed, they are becoming more or less inevitable – more than 60 central banks have so far begun exploring the concept, according to PwC’s CBDC Global Index. Driven in part by the popularity of private digital currencies such as Bitcoin, CBDCs are seen by some as a way for central banks to ensure a safe and efficient payment network that remains firmly within their domain of financial regulation. But with myriad CBDC projects in hand, all moving at a variety of speeds and with different end goals, the role of CBDCs in the future of payments is somewhat unclear.

Raymaekers explains: “There will be many CBDCs out there, so it’s a bit like existing fiat currency in some sense. You will need an interchange mechanism to go from the CBDC into an existing infrastructure, maybe supported by an RTGS [real-time gross settlement], or you may have two CBDC systems running on different DLT [distributed ledger technology] systems. Then there is also the question of if you buy a CBDC it may come with a certain price when you buy and sell, and there’s a likelihood of FX [foreign exchange] between different CBDCs. While it may use new technology, the fundamentals of interchange and interconnection would still be there.”

It is important for corporate treasurers to see some use cases emerging from the various CBDC projects, which will help to provide some clarity on their potential benefits.

Grosemans adds: “CBDCs obviously have local use cases in replacing cash, but they will also play a role in offering new ways to manage high-value traffic from a local market perspective. We also see initiatives out there from consortia, for example, that are trying to leverage on that, or use stablecoins, to try to interlink important currency traffic. This is going to play a role in corporate treasury management, and treasurers have to be ready. It’s going to take a few years, but it’s going to appear.”

From the banks’ perspective, interoperability will be a crucial aspect if CBDCs are to be successful, as Grosemans notes. “Another question revolves around whether we are creating new and separate ecosystems with CBDCs, or if we still need to find a way to interlink all of those. This is where the banks, as well as SWIFT, have a critical role to play going forward.”

As the many CBDC projects hit maturity in the near future, this is a space for treasurers and their banking partners to monitor closely.

Enriched services and solutions

The third dominant payments trend looking ahead to 2025 is that payment services providers, including the transaction banks and SWIFT, will enrich their services offering beyond pure payments and reporting to offer more comprehensive solutions.

A good example of this trend is provided by the new SWIFT transaction management platform, the first release of which is planned for November 2022. Built on the foundations of SWIFT gpi, this orchestration platform will lay the foundations to achieve ultimately frictionless and instant cross-border payments. It aims to provide progressively features such as upfront validation of beneficiary details, central management of exceptions, an extension of gpi faster payments to lower-value payments and new rich data services based on the ISO 20022 standard.

Raymaekers says: “I see technology as a means to achieve business goals. As long as we focus on that, then it will be a continuous dynamic environment where we need to keep evolving our product propositions.”

For banks, technology developments such as the new SWIFT platform offer an opportunity to innovate across the whole value chain. Value-added services include business-to-business (B2B) invoicing, e-invoicing, reconciliation automation, and even smart schemes that select the optimal payment means for corporate clients. Banks that position themselves purely as payments providers risk losing volumes to more agile market participants, such as fintechs.

Also known as banking-as-a-service (BaaS), this trend reflects the fact that corporate clients are expecting more from their banking partners in terms of the data they receive and the simpler customer experience they demand.

Lenaerts explains: “Banking as a service enables corporates to embed banking exchanges into their corporate processes in a frictionless and efficient way. This can also be for other corporate processes beyond treasury, for example, vetting counterparty bank coordinates prior to storing them in the master vendor data management system. This is not a treasury process, but it can also make use of banking services.”

Banking as a platform is also building momentum within this trend. This is where banks essentially become an ecosystem for fintechs and other third parties to quickly and securely integrate via open APIs with the bank to obtain the necessary data to build on top of the bank’s existing infrastructure. Banks, in turn, can offer these new solutions through their own channels and even play the role of aggregator for other services.

“There’s value in banking as a platform because in recent years there has been an explosion of fintech activity,” continues Lenaerts. “It’s not always obvious to corporates what the right solutions are for them in terms of service, functionality, and sustainability. Corporates benefit from banking as a platform, as it is essentially a bank offering a catalogue of services offered by the fintech community. The bank involvement provides that extra level of trust and reassurance for the corporate.”

That reassurance can also be provided regarding cybersecurity. This topic is top of mind for corporates as fraudsters become more technologically savvy while simultaneously succeeding with simple phishing techniques such as the business email compromise scam.

Grosemans comments: “Fraud is much more complex to solve in the cross-border space. This is also an area in which banks can provide great value to corporates because they have more volume and therefore more data - both payment and non-payment data - available to capitalise on, compared with fintechs, for example. In addition, services like SWIFT’s pre-validation of payments can play an important role in reducing fraud.”

Key takeaways

As these three trends have demonstrated, several positive developments in the payments space will have a significant impact on corporate treasury management.

“These very promising evolutions in the payments world are going to deliver many opportunities, particularly through leveraging data to provide better help to corporates in the cash management and payments processes,” states Grosemans. “But while we are innovating, at the same time we have to ensure we’re still getting the basics right. Banks and corporates have a role to play together to get those basics right, particularly with data. We need to make sure that the ISO 20022 migration is a success and that corporates, together with the banks and SWIFT, play the game of structuring and delivering quality data, as that’s going to be the basis for everything else.”

Banks must continue to innovate to remain competitive but also understand where they can collaborate with partners, as Raymaekers outlines. “In my view, banks should think carefully about what they want to build in-house and then what they would like to add as a value on their platforms – they don’t need to do it all themselves. SWIFT offers an example of this in our platform strategy. We are looking to bring fintechs and third parties onto the platform for the richer benefit of the community. Banks can do this for their clients.”

Rather than trying to tackle several projects at the same time, the key for treasurers is to first look at their processes and be led by the challenges they need to solve. Lenaerts concludes: “You can’t do everything at once, so try to identify the weak spots in your treasury processes and address those first. When you address them, look at the specific use case, limit the use case and experiment with those innovations. Assess the value they add to your processes, mature in that technology and then scale afterwards.”