28 September 2016
Review from SIBOS - Day 2
Day 2 of Sibos started with a trip around some of the many stands. I can happily report that the coffee is great! As one barista told me: “a few years ago at Sibos there were just a couple of us – these days we’re everywhere.” For me, top prize goes to Standard Chartered whose blend of finest Kenyan beans and frothy milk was exquisite.
Suitably loaded with caffeine, I made my first stop at the ACI stand for a media briefing from Paul Stoddart, VocaLink’s Managing Director, Strategy, Products, Marketing and Business Development and Craig Saks, Group President, Strategic Products at ACI to discuss the new joint partnership, which combines each of the companies’ solutions with the aim to speed up the adoption of immediate payments around the world. More information on the news can be found here.
Following this session, I attended an excellent discussion on payments interoperability. As real-time payments extend their reach across the globe, a key challenge is to enable different payment systems, whether that be domestically, cross-border or across multiple currencies to efficiently connect with one other. While the proposition for this meeting was essentially technical – is it possible to instantly confirm a payment across multiple players? – it quickly became apparent across the panel that this was the relatively easy part. The key challenge was finding a solution that suitably manages the risk across multiple territories.
A slightly different format from previous discussions I’ve attended in that panellists were provided with statements and asked to respond based on the extent to which they agreed or disagreed. The diversity of the panel, including two central bankers, Sylvain Debeaumont of European Central Bank (ECB) and Bernard Wee of the Monetary Authority of Singapore (MAS); a banker in charge of transaction banking, Simone Del Guerra of UniCredit, and VocaLink’s own Director of Instant Payment Services (IPS), George Evers, provided us with some unique perspectives, ensuring lively and interesting discussion.
This was particularly evident during the opening gambit: “Interoperability between real-time payment clearing systems using different currencies can only be achieved if participating banks use the correspondent banking network for settlement and liquidity.”
For Simone Del Guerra, who has a senior role in helping deliver Unicredit correspondent banking services, there was clear agreement with this statement. Whatever two instant payment systems are used to deliver the service, there is still the FX component that needs to be addressed. He argued, in the short to medium term corresponding banking will be the main beneficiary from a cross-border real-time environment. However, he acknowledged that in the longer-term, it would be possible for central banks to address this.
Bernard Wee was a little more cautious. A key issue for using central banks to manage settlement and liquidity is that while instant payment systems operate 24-7, settlement typically occurs through the central bank, which is only available during business hours. If markets are not operating 24-7, it increases risk, which will then raise the price of payments. A number of potential solutions were touted, including deferred net settlement and pre-funding of settlement by banks whereby the clearing of payment needs to be done in real-time, but the settlement does not. The ECB’s Sylvain Debeaumont summed up these barriers, in that while there are currently issues, it is something the community is working on and it will be solved.
VocaLink’s George Evers argued that there is significant potential for instant cross-border payments without the need for a traditional correspondent banking network. The industry has invested to reduce the technical burden and barriers for all participants and much has been done to align technical standards globally, such as ISO2022, to ensure there is consistency in how the message set is used. International Payment Framework Association has also just issued a rule book for instant cross-border payments to ensure the right conditions are put in place. There has also been enormous focus on access to these payment systems driven by the regulator. A number of banks are already directly connected to multiple infrastructures, and many systems have been designed to enable agency banks to operate effectively and efficiently. For example, it is possible for banks to be provided with technical access to the payment system even if their liquidity is managed by another provider. So there are a number of barriers that have come down that will allow more efficient access to these systems for a much larger community of users.
For other statements the panellists were closer to consensus. In particular there was strong agreement on the importance of cross-border legal frameworks. A lot of focus on cross-border instant payments tends to be around the technical, i.e. whether it is possible to send the payment in seconds. This is not the big challenge. The real difficulty will be managing the legal side and the risk. The legal aspect provides the important trust and certainty of the payment, for example, banks will need certainty in order to accept the credit risk for a payment from another ACH.
According to Sylvain Debeaumont, if you are able to make the system efficient and reduce risk, this will make the legal framework required easier. George Evers made an important point regarding VocaLink’s experience of how Faster Payments has managed credit risk over time. When Faster Payments started, payment limits were low and liquidity was tightly managed. As the service evolved, experience enabled the increasing of these limits. The same will hold true for cross-border payments. Insights are already available around cross-border payments flows that will enable banks to manage liquidity risk.
Another important area of debate was whether cross-border interoperability would open up competition between international market infrastructure providers for domestic payments. Bernard Wee from MAS argued that in theory this could happen, but in practice in most territories it was unlikely. In many market domestic bias is likely to ensue and it will be difficult for international providers to gain traction. He noted that where cross-border solutions have succeeded they have followed cross-border payment corridors. He used the example of how Chinese payment companies have been successful by following Chinese tourists, such as the Alipay launch in Europe for Chinese travellers.
George Evers also strongly agreed that competition will open up as a result of cross-border interoperability:
“Different territories are making major investment to modernise their payment systems and in doing so they are also thinking about how they open up those payment systems and connect them to others that are also being modernised. So why wouldn’t you take the opportunity to think about how you connect with those payment systems and deliver back some of those efficiencies and user experiences to your customers.”
How exactly this competition will evolve may vary, for example, it could be that domestic transactions are processed by an overseas provider on a bank by bank basis, so that you end up with a number of interoperable suppliers in a market. Alternatively, the presence of multiple interoperable suppliers could create choice for schemes or regulators to run competitive tenders for the awarding of a single contract. This could see the replacement of existing domestic incumbents.
Overall this was an engaging and positive discussion, and while there was a lot of agreement across the panel, closing statements were again reflective of their key prioritisations. Both central bankers emphasised that cross-border interoperability is not a technical problem, but a question of risk. The banker’s focus was all about their customer, as interoperability will enable them to transfer additional value. The final word from George Evers was a veritable call to arms for the industry:
“Two years ago the focus on Sibos was on what an instant payment is. Now we are getting down to very practical applications. Be ambitious. You are making very large investments in modern infrastructure. So capitalise on this investment and develop the propositions to support your customers. Only with ambition will we solve the issues and challenges we have identified here.
For a short interview with George Evers on the topic of cross-border payments - visit the Finextra website here
I’m off to the HSBC stand. Rumour has it that their barista is the best and accompanies them to conferences all around the world!