Published: April 25, 2018
In this Executive Interview, Bruno Mellado, Head of International Payments and Collections, BNP Paribas Cash Management, shares his views on some of the most exciting developments in the payments space today, whilst explaining how new technologies can work in harmony with existing infrastructures to drive innovation.
In the digital age, it is no longer acceptable that international payments take several days to process – and yet supply chains work on a just-in-time basis, with parts being shipped all over the world in a matter of hours. What’s more, almost one in every 200 cross-border payments gets held up, often as a result of incomplete data, drawing out the international payments process even further.
Thankfully, a number of different initiatives are now under way with the aim of improving international payments through the use of technologies such as cloud computing and blockchain and new networks. Many of these initiatives are being run by alternative payment service providers and BNP Paribas has participated in several initiatives with new and existing players in this sphere, since we believe the future of cross-border payments depends on greater collaboration. After a very successful pilot, we are launching our new blockchain-based payment solution for corporates in the coming months.
Despite the promise of these alternative networks, SWIFT’s global payments innovation (SWIFT gpi) initiative is emerging as a frontrunner in the race for better cross-border payments. Connecting the largest ecosystem of payment providers, including BNP Paribas, SWIFT gpi offers a standardised environment that is well suited to corporates who want to process high value international payments in a secure yet speedy and transparent manner.
As SWIFT gpi demonstrates, innovation doesn’t have to be about building brand new payments rails. It can be about finding new ways to use existing infrastructures and complementing those with the latest technology to create a much more powerful solution for treasury needs.
SWIFT gpi offers corporate treasurers same-day value, pricing transparency, and end-to-end tracking across their cross-border payments. Nearly 50% of SWIFT gpi payments are credited to end beneficiaries within 30 minutes, and almost 100% of payments within 24 hours.
Nevertheless, for these benefits to be sustained and to grow, the industry must build out a complete gpi highway, with as many participants on board as possible. We are not there yet, but a great deal of progress is being made – including the agreement of US payment market infrastructures to support SWIFT gpi tracking of cross-border payments. As of February 2018, 150 financial institutions have signed up for gpi, together with more than 50 payment market infrastructures. Today BNP Paribas is amongst the first 40 institutions live.
As I mentioned, however, there is still some way to go before the potential of SWIFT gpi can be fully realised. Not only are there more development phases to accomplish, there needs to be a greater push from the corporate community for more banks to support gpi functionality. Only through an industry-wide, community-based effort, can SWIFT gpi truly solve current international payments challenges.
All gpi banks have direct access to the cloud-based gpi tracker, from where they can see the status of a payment since each gpi payment is assigned a unique end-to-end transaction reference (UETR). Corporates are unlikely to want to check the status of every payment they send; they are most likely to want to see the information within the tracker when there is a delay or a problem with a payment.
With this in mind, not all banks have integrated the gpi tracker into their corporate banking platforms. To this end, BNP Paribas has enabled its global e-banking channel to receive the latest gpi status and a copy of the message from each correspondent bank in the chain. This allows the beneficiary a more accurate proof of the payment initiation.
Centralising payments and rationalising bank account structures through payments on-behalf-of (POBO) is definitely becoming a more widespread practice among the treasury community, especially in Europe. Collections on-behalf-of (COBO) are also becoming increasingly popular.
Banking technology solutions, especially virtual accounts, significantly enable the adoption of both POBO and COBO structures and liquidity optimisation into few currency accounts while not losing traceability and granularity of the OBO payments and collections. However there is significant debate as to how far the model can be implemented without creating a breach of AML or legal requirements which may vary in some countries. For example, initiating payments where virtual accounts are used to replace the original physical accounts may be a step too far for many regulators. For receipts, meanwhile, virtual accounts enable organisations to know precisely who has paid them and in relation to which invoices. As a result, manual exceptions are decreased and key personnel are freed up to tackle more value-added tasks.
As their value is increasingly recognised by the treasury community, virtual accounts are becoming more mainstream, but it is important to remember they are just one of many technology solutions that can help to improve the success of POBO or COBO set-ups. Machine Learning Technology (Artificial Intelligence), for example, could be used within a COBO structure to further improve reconciliation efficiency or hedging of foreign exchange international payments below a threshold. Algorithms can learn from past reconciliations how future receipts should be treated. They can also learn about individual buyers’ payment behaviours, thereby enabling a greater percentage of reconciliations to be automated.
There is an evolving regulatory trend that treasurers would do well to watch. The Payment Services Directive 2 (PSD 2), which came into force on 13 January 2018, has led to debate in certain European countries as to whether POBO/COBO legal entities may require a payments licence even when performed for wholly owned subsidiaries. I believe it is not possible to back-track from the current state of prevalent POBO structure: the cost and impact would be very high.
Certain banks and corporates are already actively lobbying the relevant authorities around this issue. And while this debate is by no means cause for panic, for those corporates who already have POBO/COBO operations in those countries, it is worth keeping a close eye on developments and staying in regular contact with your banking partners and cash management consultants.
For any corporates at the stage of contemplating a POBO/COBO set-up, it would be wise to factor this potential regulatory risk into current deliberations in order to future-proof treasury operations where possible.
The first thing to know is that APIs are not new. They have been around for at least ten years, so they are a tried and tested technology. What’s special about APIs right now is the way they are being used, as a result of PSD 2 and open banking, to bring different players in an ecosystem together
BNP Paribas believes that treasury opportunities abound when it comes to the growing and accelerating pace of API interfaces, together with the advent of instant payments. In our view, APIs represent two main types of opportunities for treasurers.
The first is a different way to accept payments from customers via a credit transfer. Where e-commerce websites typically accept card and perhaps wallet payments (e.g. PayPal) today, an API could be leveraged to easily offer payment by credit transfer on that website. Not only would this lead to a more inclusive range of available payment methods for buyers, it would also enable the merchant to receive funds via an instant payment.
The second API opportunity revolves around extending treasury efficiencies by integrating more combined offers from banks and third parties, whether fintechs or otherwise, into an end-to-end, secure client experience. Examples could include electronic direct debit mandates enabled via a third party, or specialist invoice reconciliation and dunning tools that could be plugged into the corporate’s accounting system for invoices and to the bank’s account system for reconciliation. This kind of collaborative approach enables corporates to benefit from the agility of new entrants, while still leveraging the robust standards and security protocols that banks adhere to.
Implementing an API strategy at treasury may require a move towards real-time treasury or a scenario where information is pulled on demand only when needed. Not all treasury functions are yet able to make the business case for real-time treasury, so careful consideration will be required when looking to leverage APIs in this way.
Absolutely. Thanks to PSD 2 and open banking, APIs are starting to come into their own. Soon, treasurers will be able to use APIs to connect in alternative, and potentially more efficient ways, with their banks. APIs may even replace some types of SWIFT based messages.
As I alluded to, vendors and fintechs will also be able to interface with banks more easily, which will really open the door to more innovative solutions – but still within that secure environment that we talked about. This can only be a good thing for everyone: the banks; third parties; and, of course, corporate treasurers.
When we talk about machine learning technology or artificial intelligence, there is often a misconception that the technology will do 100% of the heavy lifting when it comes to improving reconciliations. In fact, 50% of the effort revolves around the knowledge that already exists within the treasury function. Only by combining unique human knowledge with the right technology expert will a genuine breakthrough occur.
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