We, and other payments businesses, have long lamented the outdated nature of the Central Clearing System, built on unfair and unnecessary fees from correspondent banks when making cross-border payments.
As technology has evolved, the need for an alternative, faster way of making payments has grown even stronger. The world’s centralized Clearing System may have made sense 30 years ago, as an effective means to eliminate settlement risk and declare the world ‘quits’ at the end of each day. However, in today’s on-demand economy, with players such as Uber driving high volume low value digital international transactions, this cumbersome and expensive process simply no longer fits with the current payments landscape.
In recent years, we have seen the emergence of alternative solutions seeking to challenge and disrupt the whole infrastructure. Innovative distributed ledger technologies, such as Blockchain enable the instant transfer of money, and have exposed the inefficiencies of the traditional structure. Meanwhile local payment networks have enabled a convenient side-step of the Central System. Regulation such as Dodd Frank in the US and the Payment Services Directive II (PSDII) in the UK, has also played a part in driving an open payments marketplace and opening the door for new technology to shake the foundations of the correspondent banking model.
Add to this, the pressure of a potential interest rate rise in the New Year, which will increase the significance of ‘time in transit’ for payments, and the future has seemed uncertain for the Central Clearing System of late.
As would be expected, the Central Clearing System is not ignorant to this risk. SWIFT’s newly announced programme to increase the speed, transparency and predictability of cross-border payments is an interesting development in this space. We welcome any initiative that will lead to a fairer international payments solution for customers. What’s truly apparent in the wake of SWIFT’s announcement, is the power and influence of alternative solutions to drive fundamental change in the traditional architecture.
The leaders of emerging technologies such as Blockchain should not feel disheartened that this dashes their ability to revolutionize the space. Their innovation has been a central component of this development. The global payment landscape is complex and fragmented and a new solution will take many years to embed. In the meantime, disruption from alternative players – whether it’s on-demand players creating the need for smoother solutions, or distributed ledger technologies offering direct alternatives – will be the drivers of innovation. The more traditional players like SWIFT sit up and listen to alternative solutions, and even collaborate them, the closer we will be to a truly fair and transparent global payments landscape.