Perhaps the most useful thing that disruptive technologies such as cryptocurrencies have done is to kick existing payments providers out of their complacency. Two days after Facebook announced its One Cryptocurrency To Rule Them All, the international messaging service SWIFT announced its own plan for world domination. According to its press release:
SWIFT’s aim is simple: to make cross-border payments real-time, 24/7 and as seamless, convenient, cost-efficient and accessible as domestic payments.
That’s quite an ambition. Despite their claim to have revolutionized international payments, cryptocurrencies and other disruptive financial technologies have not so far achieved anything like this level of service. Could legacy providers succeed where they have failed?
Creating its own cryptocurrency doesn’t feature in SWIFT’s plan. A SWIFT cryptocurrency would simply add to what SWIFT sees as the real problem of international payments, namely the proliferation of self-contained currency systems such as Bitcoin, JPM Coin and (since its adoption of XRP) Ripple:
Importantly, we don’t think that cross-border payments challenges should be solved for with closed loop systems. Doing so would easily solve for a subset – or multiple subsets – of participants, but value needs to move everywhere – from every account, to every account. Loops create barriers and friction; they reduce fungibility and portability, they limit competition and they fragment liquidity.
This is quite a challenge to those who favor multiple competing tokens for international payments. SWIFT points out that each token would only serve its own community. There is still a need for an interoperability protocol that enables people to transfer value seamlessly across different currencies and tokens. That is what SWIFT says it is aiming to create.
In the introduction to its paper, SWIFT also hits out at another group of recalcitrant diehards. Banks. It warns that banks must adapt to the changing demands of customers or die:
Adapting to changing customer needs and payment conventions is key to survival in the payments business. A bank that refuses to issue cards or offer online banking in the UK, or ceases to issue cash in Germany, will soon be out of the payments business. That is today. Tomorrow the habits and preferences of British and German consumers and retailers may be vastly different.
Nowhere is this more key than in payments:
As domestic habits and demands change, as real-time domestic payments systems are rolled out, and as local Real Time Gross Settlement systems move to 24/7 settlement, banks know they cannot stand still. They need to adapt their own systems to support them – it’s do or die in payments.
SWIFT's comments hint at the seismic shifts already happening in the payments world. Cryptocurrency aficionados often seem to assume that the legacy payments system is set in stone. But in fact, payments “plumbing” is undergoing perhaps the most radical change since the 1980s. Domestic payment systems are going real-time. The U.K. has had “faster payments” since 2008, but now the rest of Europe and the U.S. are catching up. In November 2018, the EU rolled out its “Target Instant Payment Settlement” system (somewhat confusingly known as TIPS); people and firms in Europe can now make instantaneous Euro payments to each other 24/7, 365 days of the year. And in the U.S., The Clearing House (TCH) is gradually rolling out instantaneous 24/7/365 payments to individuals and companies. As SWIFT says, banks must respond to these far-reaching changes if they are to survive – though of course, left unspoken is the fact that SWIFT and its member banks must also respond to the threat posed by cryptocurrencies if they are to survive.
SWIFT is nothing if not ruthless. Two years ago, it ripped the heart out of Ripple’s instantaneous international payments offering with its Global Payments Initiative (GPI). SWIFT counts among its members (and owners – SWIFT is a cooperative) most of the world’s major banks. Inevitably, they adopted GPI: within a year, 160 banks were using GPI, and Ripple was struggling to find a reason to live. Ripple’s responded by adopting the cryptocurrency XRP as an international payment “standard” and focusing on app-based retail payments through its partner banks. But now, SWIFT is after that market too. SWIFT states categorically that by 2020, GPI will be the standard for all cross-border payments.
SWIFT’s proposal builds on the GPI initiative and underlying changes to domestic payments “plumbing” to create an instantaneous, unsleeping, ubiquitous international payments network. And no, it won’t be a blockchain. SWIFT is unconvinced of blockchain's value. It plans to rely on more mundane technologies: core architecture, common standards and APIs.
Lack of common standards is the biggest barrier to seamless international payments. Moving to the open ISO 220002 standard by 2021 is therefore a prerequisite for SWIFT’s plans. SWIFT enthuses about the benefits of moving to the standard:
The significance of the move to ISO 20022 cannot be overestimated. It will enable banks to channel instant payments across borders and right through domestic systems, direct to end beneficiaries’ accounts. It will allow smaller markets to internationalize faster and reach wider. And it will allow larger markets to enable fluid movements across the full currency “stack” within their markets – between banks and other payment providers, card schemes, RTGS and local clearing houses. It will enhance competition, drive innovation and reduce friction; it will benefit end-customers in terms of speed, ubiquity and choice; and it will deliver huge benefits to the industry in terms of Total Cost of Ownership reduction, ease of integration and efficient business processes.
It remains to be seen whether SWIFT’s members will agree. Bank executives are notoriously tight-fisted about enhancements to settlement systems, and keeping payment systems “closed loop” can be a source of competitive advantage for a big bank. However, the fact that central banks are adopting the standard for “high value payment” systems should concentrate their minds. There’s nothing quite like a central bank directive for getting bank executives to put their hands in their pockets.
Once ISO 220002 is established, APIs will enable banks and fintech companies to connect directly with SWIFT’s international payments network. Despite being lukewarm about blockchain, SWIFT is also hoping to steal a march on cryptocurrencies by making its system compatible with blockchain-based trade platforms:
Pending the success of a proof of concept with the R3 trade platform, we’ll also soon be enabling gpi payments on DLT-based trade platforms. Resolving the payment challenges DLT platforms face, we will enable gpi payments to be initiated within trade workflows, automatically passing them on to the banking system.
SWIFT is agnostic about the FX component of cross-border payments, but it is a partner of the FX settlement system CLS, which counts among its own members many of the world’s biggest financial institutions and all its major central banks. Clearly, FX is not going to be a problem, though exchange rates and fees might be.
All of this adds up to a concentrated effort by the legacy payments system to halt the onward march of cryptocurrencies for international payments. It is no accident that SWIFT’s proposal was released only two days after Libra was announced. Battle is most definitely joined.
Of course, SWIFT’s proposal appears to leave unaddressed the needs of people who don’t have access to bank-based payment systems because they fail know-your-customer (KYC) checks. Cryptocurrencies are fighting for their business while simultaneously defending against regulators determined to prevent KYC checks being bypassed. SWIFT distances itself from all of this, saying that users of its services must “obey the rules”. It seems content to fight for control of bank-based payments – the majority of global payments - and leave the unbanked for someone else.
Whether the legacy payments system or the emerging cryptocurrency ecosystem wins the battle for control of international payments remains to be seen. But whatever the outcome, such fierce competition can only be good news for customers. One way or another, instantaneous, unsleeping, ubiquitous and cheap global payments will be available to companies and individuals alike in the not too distant future.