Reimagining Cross-Border Payments: How SWIFT’s New Platform Changes Everything

2 Treasury and Trade Solutions 3 Reimagining Cross-Border Payments: How SWIFT’s New Platform Changes Everything The FSB outlines five focus areas that are critical to address these challenges: 1. A joint public and private sector vision to enhance cross-border payments 2. Coordinating regulatory, supervisory and oversight frameworks 3. Improving existing payment infrastructures and arrangements to support the requirements of cross-border payments market 4. Increasing data quality and straight-through- processing by enhancing data and market practices 5. Exploring the potential role of new payment infrastructures and arrangements As the focus areas indicate, improving this model and achieving the objectives of ubiquitous, frictionless cross-border payments will require an ecosystem-wide effort. While the involvement of regulators and the public sector will be key across all focus areas, there are ways that the industry can take the lead. A coalition of the willing within the banking community can play a key role in driving forward new payment infrastructure, market practice, and operating models – changing market paradigms to address the primary drivers of these challenges. New market entrants and a re-imagined end user experience New market entrants and domestic instant payments schemes provide a blueprint for an optimal end user experience in a transformed cross-border payments model. Over the past decade, there has been an explosion of new entrants to the payments business, including fintechs and Big Tech companies. Many have focused on capturing consumer payments and SME business-to- business (B2B) flow but they are increasingly targeting the broader B2B market. Many new market entrants are closed loop ecosystems, such as wallets, that offer the ability to execute real-time transfers between parties. These generally aim to remove friction and allow for speedier 24/7 cross-border settlement. Closed loop models can offer an end-user experience that is significantly better than that of traditional cross-border payments. This enhanced experience is facilitated by their closed loop nature, which has a uniform global system and approach. They also tend to be built with the end user experience prioritized in their development strategy, as user experience (UX) is a key driver for commercialization and adoption of new payment schemes. However, offerings from new entrants also have their own challenges. While closed loop solutions often work well within their ecosystems, the normal hurdles associated with cross- border payments usually reappear when users need to ‘cash out’. Additionally, as the value of transactions increases, liquidity and counterparty risk become important considerations. While the OCC in the United States has recently issued an interpretive letter on the use of Independent Node Verification Networks and Stablecoins 2 , for Financial Institutions under their supervision , the guidance is mainly focused on confirming that regulations are technologically neutral and states that banks can utilise ‘stablecoins to carry out other permissible payment activities’. All requirements regarding risk, compliance, operational resiliency and the “safety and soundness” of the system will still apply. While this guidance is useful, there is still uncertainty as to how the international regulatory environment for stablecoins will evolve. This is best illustrated through a recent speech by the Governor of the Bank of England 3 who stated that for stablecoins to be widely used as a form of payment there has to be “equivalent standards to those that are in place today for other forms of payment types and the forms of money transferred through them,” and that ‘existing standards do not necessarily easily apply. There need to be minimum international standards for stablecoins’ Agreeing such standards and putting in place a comprehensive international regulatory framework is still a journey being travelled. Innovating the interbank model The benefits of the alternative models described above align with the growing expectations of Citi clients. However, we believe that a transformation in the SWIFT-based interbank model remains the most effective path to delivering the ubiquitous, frictionless cross-border payments model and experience required. The scale of the current interbank model, which benefits from connectivity between almost 11,000 institutions via the SWIFT network, is unrivalled, as is its proven safety and soundness. Transforming this platform and the experience it offers is far more feasible than building a new model from scratch that has similar scale. This scale is critical as it will enable banks and other participants around the world to offer a superior cross-border payment experience consistently to their clients. To achieve these goals, there needs to be a fundamental rethink of how the SWIFT interbank model operates. The first step – addressing transparency and traceability — has already occurred through SWIFT’s gpi initiative and the introduction of the Universal End-to-End Reference (UETR). Gpi technology has enabled banks to provide details of deductions, payment status and confirmations to a tracker hosted in the gpi cloud which can then be called on by banks and end users to get payment status and information. Launched in 2016 with 17 pilot banks, gpi has been widely embraced by the banking industry with over 4,000 institutions either live or committed to be live in the near future. 4 With nearly 70% of payments now being sent as gpi, and a Universal Confirmations mandate introduced in November 2020, gpi has highlighted the speed and efficiency of the existing model: nearly 40% of payments are credited to the beneficiary in five minutes or less and almost 100% of payments are credited in 24 hours. Analysis of gpi data also reveals that, when payments delivery is delayed, it’s mainly due to factors outside of the direct control of the interbank model including: regulatory requirements, local currency controls, time zone differences and the hours of operation of receiving payments infrastructure. The nature of these delays support the approach being taken by the FSB i.e. an ecosystem-wide effort is required, across the public and private sector, to deliver the transformation required in cross border payments. The rapid and wide-ranging adoption of gpi indicates the willingness of the industry to work together to bring tangible improvements to the payments ecosystem. The banking community can be proud of what has been accomplished; end users’ and banks’ experience has been enhanced across the payments chain. Based on these initial successes, the industry is now poised to undertake a more radical transformation of the cross-border model. This next evolution will look beyond incremental improvements to the current store and forward MT SWIFT model and instead re-imagine the architecture of the network and how it operates. 2 https://www.occ.treas.gov/news-issuances/news-releases/2021/nr-occ-2021-2.html 3 https://www.brookings.edu/events/bank-of-england-governor-andrew-bailey-on-the- future-of-cryptocurrencies-and-stablecoins/ 4 https://www.swift.com/our-solutions/swift-gpi