The international payments network Swift has a target painted on its back, and a number of upstarts are aiming for it. But a new technology it is experimenting with could be the shield Swift has been looking for.
One rival, Ripple CEO Brad Garlinghouse, is fond of referring to Swift as a horse and buggy and his own company’s distributed-ledger technology for cross-border payments as a race car. He has repeatedly said that Ripple will take business away from Swift: “What we’re doing and executing on a day-by-day basis is, in fact, taking over Swift,”
But lately Swift, which once considered Ripple and other tech company rivals an existential threat, has struck a more confident tone. Swift says the progress it is making with so-called global payments innovation, or GPI — technology that lets banks see where their payments are at all times, and that comes with rules around response and confirmation times — will neutralize the competitive threat posed by Ripple and others. It says its bankers are happy with the speed and insight GPI gives them.
Moreover, Swift argues, distributed-ledger technology does not fix the delays in international payments that typically occur for two reasons. One, legal and regulatory requirements make the use of a shared ledger impossible among banks that lack mutual know-your-customer relationships. Second, banks are unwilling to let their rivals see how much money they have.
Manish Kohli, global head of payments and receivables at Citi and a supporter of GPI, agrees with that argument. He said he looks at five things in international payments: cost, speed, transparency, convenience and security. While originally the industry thought GPI would only provide transparency, he said now everyone agrees that it helps in all five areas.
“With GPI, we can see the charges banks have made along the way and how long they have taken to process a payment,” Kohli said. “Seeing how much each bank is deducting puts pressure on the ecosystem to reduce costs. If customers can see how long a bank is taking to move a payment, that forces banks to move toward faster processing or straight-through processing and speed up the time that it typically takes to send money across borders."
“We’re strong believers in GPI,” he said.
Why GPI
While Ripple says it has 200 companies using its software, Swift says 450 banks — which handle 80% of international payments — are using its GPI technology. More than $300 billion of payments is settled over GPI daily.
GPI is essentially a payment tracker. If a New York bank is sending a payment to a bank in Vietnam with which it does not have a relationship and there are three correspondent banks in between, the New York bank can open GPI and see at all times where that payment is and address any issues that may arise.
GPI does not, in and of itself, speed the payment up. However, according to Swift, GPI banks commit to confirming payments within the same day. Half of GPI payments are credited within 30 minutes and 40% are credited within five minutes, according to Swift.
"Our banks are quite happy with the API-based technology we have in GPI, it produces a faster payment experience,” said Wim Raymaekers, head of the global banking market at Swift.
With the use of correspondent banks, if there are five banks in a chain and they each take a day to respond, a payment could still take five days to settle. One banker, a new Ripple customer, recently told me he had sent a payment internationally on Dec. 29 and on Jan. 4 didn’t know where it was.
This is the kind of thing Ripple rails against.
Yet Raymaekers said Ripple’s technology does not address the underlying problem, which is a regulatory one.
“If you are a bank in Oklahoma and you need to make a payment to Mexico or Vietnam, unless you have relationships with banks in those countries already, you’re going to need an intermediary bank,” he said. “If the two banks don’t have the relevant KYC information, they’re not allowed by their compliance departments to send or receive payments between each other because they don’t know each other. In this situation, the only way to get to get a payment to a bank in Vietnam is to go through a correspondent bank. Whether that’s using SWIFT or another provider, it has nothing to do with the technology, it’s to do with legal, contractual and compliance agreements between banks.”
That is why the connections between correspondent banks are necessary and technology cannot remove them or even change them much, Raymaekers said.
Kohli would like to see all banks using GPI, and more services offered through it.
One example of a recently added service is the Stop and Recall Payment. If a sending bank sees a possible error, fraud or cyber-incident, it could ask to have a payment stopped and recalled within GPI. In the past, the bank would have to call up the various banks downstream and ask for the payment to be returned.
Another service Swift is working on is pre-validation of payments. When one bank is going to send payments to a personal bank account at another bank, the service checks whether that bank account number exists and if it belongs to the person who is marked as the beneficiary.
“Value added services like pre-validation and case management are in the conceptualization stage; we hope to make them available all across the network,” Kohli said.
The hope is that these add-ons will remove all the existing points of friction in cross-border payments.
“We feel this is the most credible path, as compared to alternatives, for us to get to a much improved payment experience in the future,” Kohli said.
Alternatives systems such as Ripple will be more effective only when all banks use it, he said.
“It needs 11,000 banks to be speaking the same language and have that technology embedded for a bank to successfully send payments to another bank,” Kohli said. “That’s a very long haul for all banks to start adopting such alternatives.”
And the idea of using cryptocurrencies in international payments is remote, he said.
“Very few banks will do this, if any at all, because of the market risk that cryptocurrencies carry,” Kohli said.
All things considered, “we’re doubling down on Swift,” Kohli said. “We believe that if Swift continues the progress it’s made over the last few years, in terms of rolling out continuously new products and services in GPI coupled with improvements we’re seeing in national infrastructure, it’s a more credible path for us to see the world of payments getting transformed.”
Swift’s blockchain experiment
Asked if Swift would ever use a distributed ledger for the movement of payment messages within its network, Raymaekers said, “Never say never, but we haven’t yet seen how DLT would improve the service we are currently providing to customers.”
Last year, Swift and 40 member banks ran a blockchain proof of concept for so-called nostro reconciliation.
Swift banks open nostro (from the Latin for "our") accounts with each other to facilitate cross-border payments. The proof of concept tested the idea of using a hyperledger to see the positions of those accounts in real time. If an account is empty, the bank that receives the payment instruction would not be able to pay the beneficiary.
“As a settling bank, I would like to know how much money I have with you, otherwise my payment is not going to go through,” Raymaekers explained.
The conclusion of the experiment was that the blockchain did not improve transparency. Banks would only tell each other at the end of the day how much money they have, which was not that helpful.
“What banks need to do is to improve the speed by which they communicate the status of the account to you,” Raymaekers said. “They realize that they have to change their back-office processes in order to provide more frequent updates.”
The other problem with using a blockchain was an excess of transparency. Each participant could see every update on the ledger.
“Banks have indicated they do not want to communicate how much money they have on an account to everybody else,” Raymaekers said. “We had to keep the conversations private.”
Swift ended up deploying bilateral blockchains between all the participants because the banks did not want others to know how much money was in their nostro accounts. Running several hundred bilateral blockchains became very complex.
“Our conclusion is that it’s quite challenging for banks to adopt a DLT-based system today,” he said.
Agreement with R3
At the end of January, Swift announced that it is partnering with R3 to have GPI Link work with its Corda Settler distributed ledger. News accounts gave the impression that the giant payment network was embracing the idea that faster distributed-ledger technology will replace the framework of correspondent banks, nostro accounts, and the store-and-forward messages that Swift maintains, and that Swift was going to use XRP, the digital currency of Ripple. The price of XRP shot up.
However, none of this is true.
Companies use R3’s Corda Settler to trade among one another. R3 is adding Swift’s GPI to the options Corda-Settler-using companies can turn to when they want to initiate a payment, besides using XRP. The payment itself will settle between banks as usual over the Swift network and the corporates will be able to track the payments. So this is actually a win for Swift over Ripple.
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