Cross-border B2B transactions — done in real time — are on the cusp of being as simple as domestic real-time payments (RTP).
Russ Waterhouse, executive vice president for product development and strategy at The Clearing House (TCH), told PYMNTS’ Karen Webster that after months of development, joint efforts between payments services providers will streamline the compliance and technical heavy lifting needed to link real-time payments systems around the globe.
Those linkups are no easy task, given the fact that it is the bank-to-bank interaction where the complexity sits.
While domestic transactions are relatively straightforward, and there’s some standardization of messaging between financial institutions (FIs), cross-border payments require the participation of one bank that provides the actual foreign exchange and another bank that provides liquidity downstream.
Beyond the mechanics of initiating payments and linking up with application programming interfaces (APIs) to get FX rates, there are additional messaging requirements and compliance mandates that include destination banks’ information.
Unifying Systems and Payments
With a new system that is now in its pilot phase, “We’re marrying all of this to create, essentially, one payment,” said Waterhouse.
As has been reported, TCH, EBA Clearing and SWIFT said last week that they are on track to begin piloting their transatlantic instant payment system known as Immediate Cross-Border Payments (IXB).
Learn more: Euro, Dollar Clearing Agencies Prep for Real-Time Transatlantic Payments
As reported this past spring, the IXB pilot will leverage the existing real-time payment systems, RTP in the United States, run by TCH, and RT1 in Europe, run by EBA Clearing.
TCH and EBA Clearing, along with a number of banks in the pilot, have been testing and developing IXB for the past six months. The service will connect existing infrastructure to enable synchronized settlement of RTP and RT1 payments.
The good news, said Waterhouse, is that aforementioned stakeholders involved have settled on the “how” of it all — the mechanics involved in getting funds across borders and how the technologies of various payment schemes will interact with one another. The remaining pieces of the proverbial puzzle center on legalities and compliance.
Asked by Webster when the first transactions will go live — and where — Waterhouse said that those initial forays will come through the euro/U.S. dollar corridor within the next few months, possibly as early as this year.
The urgency to get that functionality in place can be seen against the backdrop where the U.S./euro corridor is the largest trade corridor, globally, as measured in dollar terms.
Waterhouse noted that the announcement proves that RTP has moved beyond the framework stage and has made the leap toward reality. The announced support of 25 banks, he said, underscores the acceleration toward full-scale rollout within the next few months.
Roughly half of those banks — or 12 FIs — are already committed to participating in the pilot and doing the technical work behind the scenes to enable synchronized settlement of funds in an automated fashion. The efforts of TCH et al, he said, are aimed at automating the payment initiation, the compliance and the downstream interactions.
The more banks participate in the pilot, the more other banks will join on. “The banks are coming in tranches,” noted Waterhouse, “and this is the initial group that will be in that first tranche. Other banks will join early next year.”
Along the way, as volume builds, he said, interoperable RTP networks will become global in scale, with global payment rails taking root.
“This is all here and now,” said Waterhouse, “and it’s the best of what’s available, which is 7/24 real time, with full transparency.”
Among the benefits: Corporate senders get full transparency into FX rates and when settlement will occur — all with confirmation of the transaction within seconds. That level of transparency helps solve the existing pain points of batch systems and the fact that cross-border payments are a multi-day process.
“It brings a domestic experience to cross-border payments,” Waterhouse said.
Looking ahead, he said, the TCH and its collaborators are still testing out the RTP functionality, and efforts to scale will be in full bloom next year.
“My hope and expectation is that toward the tail end of next year, we really can open things up,” he said. Early use cases and adoption will likely focus on B2B payments, and banks will become more confident in RTP’s appeal, replacing wire payments to some degree (RT1 payment limits are still €100,000, so the initial uptake will be with mid-market firms).
As he told Webster, “We’re going to create more of a competitive market in terms of how FX transactions get done.”