Correspondent banking – a current system used by banks to execute cross-border payments – is based on bespoke, bilateral agreements between banks, and has historically been associated with high fees, slow settlement times and a lack of transparency and security. In view of these pain points, attempts to improve the cross-border payment space has been a prioritized item on many agendas in recent years.
One such initiative is Swift gpi, a service launched by Swift in 2017 to enable instant and frictionless global payments. Leveraging a set of standards and rules, over 4,000 financial institutions can now send and receive funds quickly and securely to anyone, anywhere in the world. There is a catch, however: like correspondent banking, Swift gpi was focused on high-value cross-border payments.
This means that while the service has helped to solve some of the challenges faced by large financial institutions and corporates, pain points for businesses and individuals that regularly transfer low-value cross-border payments remain. This has resulted in the growth of new fintech providers that offer a cheaper and more transparent cross-border payment experience for consumers and SMEs, which, in turn, has led to a loss of market share for banks.
This could be set to change with the launch of Swift Go. Using service level agreements that made Swift gpi a success, Swift Go will empower SMEs and individuals to send fast, predictable, highly secure, and competitively priced low-value cross-border payments anywhere in the world.
Picture the scene: an SME operating out of Milan needs to make a critical payment to a supplier in Mexico City. The SME informs its bank, which then sends the payment along its correspondent banking chain – where it passes through multiple jurisdictions that each have different regulations, security laws, operating hours and payment processing capabilities. From the time the payment is sent to the time it arrives, the SME does not have transparency over where it is or what fees are accumulating – adding uncertainty over whether the critical payment will arrive in time and at the right value.
The opportunity is to improve efficiency and transparency. Correspondent banking, as mentioned, relies upon inefficient bilateral agreements instead of uniform service level guidelines. Additionally, intermediary banks lack the mechanism to communicate status updates directly to the debtor and creditor.
This is why Swift Go is a welcome development that offers the efficiencies of digitalisation while retaining the network and geographic breadth of the global banking system.
Leveraging tighter service level agreements between institutions and pre-validation of data – a hallmark of Swift gpi – Swift Go informs the payee from the start how many banks will be involved in the processing chain, allowing the payee to track the payment through its journey via an online tracking portal. It also provides an upfront breakdown of fees to guarantee that the beneficiary will always receive the intended principal amount in full, in the currency expected, with banks passing on the benefit of the increased efficiency with reduced fees.
So how might that payment from Milan to Mexico City look using Swift Go? In this new scenario, the SME’s bank can provide upfront visibility on processing times and costs, giving security that the critical payment will arrive on time and at the right value.
It is clear that Swift Go brings a host of benefits, but, as with any industry-wide initiative – including Swift gpi before it – challenges remain when it comes to adoption. Banks must continue to deal with the responsibilities of operating in a regulated environment, which involves KYC and AML processes that cost money to execute.
That said, by reducing the costs for the customer, banks are able to attract a wider customer base. Previously, small- and medium-sized businesses (SMEs) had restricted access due to the associated costs, but, through the reduced and fully-transparent costs of Swift Go, SMEs are able to grow their businesses while retaining the security and comfort of utilising their bank’s global network. A win-win, for sure.
Not all of the work is done. To connect and integrate Swift Go, banks’ back-office systems require an upgrade, which – due to the costs involved – is delaying its adoption. And even once finally implemented, many banks still will struggle to align their correspondent banking network via Swift Go as this still requires individual, bilateral discussions between counterparties.
While Swift is working to reduce these obstacles, it is clear there is still some way to travel before the industry sees universal adoption. Swift gpi was met with initial resistance from financial services, but as its reach increased, the benefits that it brought to the entire network became all the more apparent. If Swift’s previous ventures are anything to go by, then it is clear that continued collaboration between financial institutions to support Swift Go’s adoption will be key – and certainly worth the effort.
Steve Wojciechowicz is Senior Principal for Product Management at BNY. responsible for development and delivery of USD Clearing services. He is a former chairman of the BAFT Payments Committee and a former dean of The Payments Institute. Steve joined BNY in 2019 after holding leadership positions in risk and product management at Deutsche Bank and HSBC. He has held a variety of roles at SWIFT, including sales and market development of file transfer and FX trade matching services in North America. Steve received his BA in Economics from Rutgers University and his MBA from Wake Forest University.
About BNY Mellon
BNY is a global financial services company that helps make money work for the world — managing it, moving it, and keeping it safe. For 240 years we have partnered alongside our clients, putting our expertise and platforms to work to help them achieve their ambitions. Today we help over 90% of Fortune 100 companies and nearly all the top 100 banks globally access the money they need. We support governments in funding local projects and work with over 90% of the top 100 pension plans to safeguard investments for millions of individuals, and so much more. As of March 31, 2024, we oversee USD 48.8 trillion in assets under custody and/or administration and USD 2.0 trillion in assets under management. BNY is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). We are headquartered in New York City, employ over 50,000 people globally and have been named among Fortune’s World’s Most Admired Companies and Fast Company’s Best Workplaces for Innovators. Additional information is available on www.bny.com. Follow us on LinkedIn or visit our Newsroom for the latest company news.
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