OPINION: Banking collaboration is key to global payments innovation

OPINION: Banking collaboration is key to global payments innovation

Bonds Corporate & Sovereign Strategy Comment & Opinion

By Dino Sani

The exponential growth of fintech innovation in recent years has brought remarkable upgrades to Latin America’s financial services – most notably in the efficiency and ease of retail and domestic payments. 

But, despite this impressive progress, there is still a great deal to do when it comes to modernizing global transactions.

Furthermore, owing to the emergence of new trade corridors to the Latin American market – particularly from Asia – meeting the demand for real-time cross-border corporate payments has become a greater priority than ever before for the region. 

Given the importance and scale of such an undertaking, banks worldwide are increasingly collaborating to find solutions that enhance the efficiency and security of the global payment infrastructure – resulting in myriad partnerships focused on delivering the required digitalization to effect greater harmonization and to help bring trading blocs closer together.

In this respect, SWIFT’s global payments initiative (gpi) – the first phase of which went live earlier this year – has only been achievable through a critical mass of banks putting aside competitive differences in order to produce a network effect, driving standardization and interoperability in the payments sphere.

The initiative holds a great deal of promise. Leveraging a network equal to 75% of SWIFT’s cross-border payment traffic, gpi is designed to facilitate same-day payment clearing, as well as full transparency of transaction costs and remittances. 

With over 90 institutions backing the service (of which approximately 20% are from the Americas, including Banco do Brasil, Itaú Unibanco, and Banco de Crédito del Peru), gpi represents a milestone in banking collaboration that could ultimately help break down trade barriers and facilitate more efficient, effective transactions in Latin America.

Of course, any project that requires a critical mass also needs to ensure regulatory and process standardization in order to succeed. In this respect, one key development has been the ISO 20022 initiative, which has introduced common messaging and standards between financial institutions.

ISO 20022 messages have more data fields, can transfer information such as remittances and can also support non-Latin characters – crucial for transacting with Asian markets.

ISO 20022 should help drive interoperability between domestic payment systems, and the ISO Real Time Payments Group has recently been created to explore and help standardize the role of ISO 20022 in real-time cross-border payments.

 A key challenge here is achieving the network effect in Latin America, with Colombia currently the sole participant on the continent in the payments space.

ISO 20022 is present elsewhere in the region, however, which is promising in terms of potential future growth in the payments arena. Brazil, for example, has used the format for securities since 2011, and is a member of the ISO 20022 Registration Management Group (RMG), the governing body of the standard. 

Certainly, interest in adopting ISO 20022 for financial business transactions appears to be gaining momentum in the region. Nine projects are underway in South America, and central securities depositories in Barbados and Jamaica have recently signed up to the SWIFT ISO 20022 Harmonization Charter – a framework of principles for the harmonized adoption of ISO 20022 – and are “poised to support regional and international initiatives."

 With the combination of the growing presence of ISO 20022 across Latin America, and global cross-border payment initiatives gaining in strength, it is hoped that this will help to encourage Latin America buy-in for ISO 20022 adoption for payments.

Banking on blockchain?

Elsewhere, distributed ledger technology, or “blockchain,” is being explored with great anticipation by the Latin American market, with the belief that its cryptographically secure and transparent qualities make it a well-suited solution to facilitate payment flow in an onerous regulatory environment. 

 Indeed, the region’s best known start-ups in the blockchain field, including Argentina’s BitPagos, have opened up new avenues for cross-currency payments for many small businesses.

In light of blockchain’s huge potential, both banks and fintechs are involved in collaborative initiatives, exploring how it could transform the nature of payments. The R3 consortium, for instance, comprising approximately 70 financial institutions, including Itaú Unibanco, has been founded with the aim of addressing the practicalities – including achieving common standards and communication protocols – required to turn blockchain from a proof of concept into a practical solution for the financial services industry.

Amid the buzz surrounding the disruptive nature of fintech, Latin America is certainly well-placed to benefit from its resultant technological advances. 

But it is only by working together on this shared goal that banks can hope to truly transform global payments. Thankfully, with a critical mass of start-ups already operating in the fintech ecosystem, as well as a host of key financial players embracing the benefits of collaborative partnerships, we are edging ever-closer to creating ground-breaking developments for cross-border transactions.

Mr. Sani is the head of treasury services Latin America at BNY Mellon. The views expressed herein are those of the author only and may not reflect the views of BNY Mellon. This does not constitute treasury services advice, or any other business or legal advice, and it should not be relied upon as such.