Making cross-border payments has traditionally been a cumbersome task. A typical transaction could take several days to clear while the recipient’s bank carries out the necessary compliance checks. Delays are common, sometimes payments fail. For global businesses, this can have a negative impact on supply chains and fulfilling customers’ orders.
A new international payment standard currently being rolled out, known as ISO 20022, could start to change all that by harmonising payments data around the world.
“This format is the emerging de facto standard for new types of real-time payments systems that are in development globally,” says Aleks Stefanovski, vice president of strategy at Currencycloud, a cross-border payments platform. “That’s important because it enables fintechs to establish connectivity to different real-time payments systems around the world in a way that removes friction and improves the speed and customer experience of cross-border payments, reducing what, maybe ten years ago, took two or three days to just a matter of seconds.”
The new ISO standard follows recent regulatory changes in Europe with PSD2, the new payment services directive that underpins open banking and makes payments more secure, which came fully into force in the European Union at the start of this year. While the two are unconnected, both are critical cogs in building what blockchain-based payments network Ripple’s vice president of global account management Pat Thelen calls the “internet of value”, a future where he envisions money will move around the world like information does today.
“In the legacy world, you have very fragmented data and restricted, closed environments, which creates two things: poor user experiences and a lot of manual costs,” says Thelen. “That’s where ISO 20022 steps in, providing a rich data format that allows for more payment information to be tied to an individual payment in a way never done before. Then with PSD2 you get to the last mile, the ability to have open access to that data and allow different payment schemes to connect with one another.”
Replacing outdated payments systems
One of the issues with a lack of harmonisation when it comes to cross-border payments, particularly in an increasingly globalised digital economy, is companies making or receiving payments in different jurisdictions are exposed to different regulatory regimes and standards.
“The payment information that the UK regulator requires is different to what the regulator in, for example, India requires and a lot of it is driven by each of them developing their rules in isolation and they are not fit for purpose for frictionless cross-border trade or streamlined international operations,” says Stefanovski.
The second challenge is the existing infrastructure that supports global payments activity was built in a pre-digital era.
The payment information that the UK regulator requires is different to what the regulator in, for example, India requires and a lot of it is driven by each of them developing their rules in isolation
“Many of these payment systems were developed decades ago,” says Stefanovski. “They were developed primarily to process domestic payments at a time when there was no expectation for a lot of data to be attached to each payment instruction.”
Hong Kong’s old low-value payments system, for example, supported fewer than 20 characters of information, just enough to show which account to debit and which to credit, he adds.
All those different data standards and formats create a barrier to innovation, but it is something that data harmonisation and access to richer data will start to address, says Kuba Zmuda, chief strategy officer at business payments platform Modulr.
“Harmonisation doesn’t solve all the problems, but it certainly helps with the ability to accelerate innovation by making certain things easier and more consistent,” he says.
Generating richer data insights
An area where richer data could help drive innovation is with payment reconciliation, particularly for businesses that need to process high volumes of incoming payments.
“There is a lot of excitement around providing additional detail associated with invoices so the recipient of a payment can see exactly what the invoice payment relates to,” says Zmuda.
Another area where richer data could help improve payments is by attaching greater detail for cross-border transactions to satisfy compliance requirements, ensuring payments can be approved faster.
“For cross-border payments, you have to include information about the payer and the reason for the payment, so the receiving bank looking at it will be able to run its checks on their side to make sure the payer or payers are not on any sanctions list and they’re not processing payments on behalf of any individuals for whom they have concerns around potential fraud, money laundering or terrorism financing,” says Stefanovski.
Harmonisation doesn’t solve all the problems, but it certainly helps with the ability to accelerate innovation by making certain things easier and more consistent,
This backdrop is already creating opportunities for collaboration across the industry. Modulr, for instance, has used its payments technology to enable challenger bank Revolut to credit its customers’ salaries into their accounts a day earlier than would otherwise be possible.
“The data is only as good as what you do with it,” says Zmuda. “Businesses increasingly need a payments partner that can keep them on the front foot and have the digital infrastructure in place to benefit from these changes.”
Wider benefits of the changes also extend to merchants and consumers. Take payment initiation, a PSD2-enabled service that makes online payments more seamless and secure.
“As a customer, you can make payments with a merchant online and be redirected to your banking app to authenticate yourself without ever having to enter your card number, so there’s a huge amount of scope to improve the experience for the end-customer,” says Alan Irwin, head of product and customer solutions at payments technology provider Global Payments.
That is also enabling merchants to benefit from faster, lower-cost payments. “Whereas in the past, card payments might take up to three days to settle, now those payments can land in the merchant’s account in a matter of seconds,” Irwin says. “The impacts are going to be huge.”
