Upload
vohanh
View
219
Download
1
Embed Size (px)
Citation preview
The Inefficiencies ofCross-Border Payments:
How Current Forces Are Shaping the Future
WrittenbyYoonS.Park,PHD&DBA,GeorgeWashingtonUniversity
Visa,asapaymentindustryleader,isfocusedonincreasingtheefficiencyandreducingthecostofcross-borderpaymentsforfinancialinstitutionsandtheirclients.
Cross-bordertradeisgrowingrapidlyasmorecompaniessourcegoodsandservicesoverseas.Mostcross-bordertradepaymentsarehandledthroughcorrespondentbankingrelationships.Asvolumecontinuestogrow,pressureisbeingexertedonfinancialinstitutionsandpaymentsystemstoimprovethecross-borderpaymentprocess.
VisacommissionedDr.YoonS.Park,anexpertonglobalfinancialmarketsandProfessorofInternationalFinanceattheSchoolofBusinessatGeorgeWashingtonUniversity,toexaminethecurrentchallengesofthecross-borderpaymentsprocessandhowacombinationofforcesareinfluencingthefutureofpaymentprocessing.
Wehopeyoufindthisreportusefulinunderstandingthecross-borderpaymentlandscape.Webelievethatimprovingthecross-borderpaymentprocesswillprovidequantifiablebenefitsforbothbanksandcorporates.
Sincerely,
AlizaKnoxSeniorVicePresidentVisaInternational,CommercialSolutions
TableofContents
Executive Summary 2
Overview of Cross-Border Payments 4 Scaleofcross-borderpaymentsandinternationaltrade 4 Howcross-borderpaymentsworktoday 5 Exampleofcross-borderpaymentflow 6
Cross-Border Payment Challenges 8 1. Domesticinfrastructuresarenotdesignedtohandlecross-borderpayments 8 2. Lackofcommonmessagestandards 9 3. Impactofregulatoryrequirements 9 Corporateperspectiveoncross-borderpaymentinefficiencies 10 Inefficienciesofcross-borderpaymentsdrivecosts 10
Payment Trends and Impact on Cross-Border Payments 12 Trend1: Transnationalpaymentsystemsaregrowing 13 Trend2: Government-ledinitiativesandmandatesareincreasing 14 Trend3: Riskandliquidityarebeingcloselymanaged 15 Trend4: Multinationalbanksandbusinessesareexpanding 17 Trend5: Operationalefficienciesarebeingsoughtthroughoutsourcing 18 Conclusion 18
Questions for Management 20
Appendix 22 Paymentsystemtypes 22 Asurveyofmajorsystemsfacilitatingcross-borderpayments 24 Selectedgovernmententitiesinfluencingcross-borderpayments 29 References 31
2
Cross-bordertradeisgrowingrapidlyasmorecompaniessourcegoodsandservicesglobally.Internationaltradedoubledoverthepastdecadeto$10.5trillionin2005.1Mostcross-bordertradepaymentsarehandledthroughcorrespondentbankingrelationships,wherebyaseriesofbanksanddomesticpaymentsystemsaretypicallylinkedtogethertomovefunds.
Whilevolumecontinuestogrowandmigratetoopenaccountterms(suppliercreditextendedtobuyerattimeofsale),pressureisbeingexertedonbothbanksandpaymentsystemstoimprovethecross-borderpaymentprocess.Thepaper,“Theinefficienciesofcross-borderpayments:Howcurrentforcesareshapingthefuture,”looksatthechallengesofthecurrentcross-borderpaymentsprocessandhowacombinationofforcesareinfluencingitsfuture.
Cross-border payment challengesCross-borderpaymentsareintrinsicallyinefficientbecausethereisnotonesingleubiquitousglobalpaymentsystem.Therearethreechallengesthatmustbeovercomeinordertoimprovethecross-borderprocess:1. Mostpaymentsystemsarebasedonlocallawsandpracticeswithinexisting
domesticbankingandfinancialstructures.2. Lackofacommonglobalstandardandvariationsbetweensystemshavereduced
theabilityofbothbankandcorporatetreasury/enterprisesystemstoseamlesslypassdatabetweeneachother.
3. Governmentregulationsarechanginghowpaymentsaremade.Paymentsaresubjecttodomesticregulationswhichcompoundthechallengesofcross-borderpaymentsbecauseoftenrulesvarybetweenanoriginatingandreceivingcountry.
Trends shaping the futureAnumberofforcesareshapingthecross-borderpaymentlandscape:1. Transnationalpaymentsystems–Emergingtransnationalsystemsarereducingthe
relianceoncorrespondentnetworksforpaymentsandstandardizingdataformats.2. Government-ledinitiativesandmandates–Government-ledinitiativesare
influencinghowpaymentsaremadeandwhatfeescanbecharged.3. Riskandliquiditymanagement–Paymentsystemsarebecomingmoreefficientat
managingcreditrisk,liquidityneeds,andfundingcosts.4. Multinationalbanksandcorporations–Multinationalbanksareachieving
processingeconomiesofscalewhileunintentionallyconcentratingcreditriskduringsettlement.
5. Operationalefficienciesthroughoutsourcing–Banksarebundlingpaymentsandoutsourcingoperationstootherbanksandthird-partyprocessors.Thisisdrivingprocessefficiencies,butfurtherdisintermediatingfinancialinstitutionsfromthepaymentprocessandthefinancialsupplychain.
Today,cross-borderpaymentsareslow,inefficientandcostlyforbanksandbusinesses.Increaseinglobaltradeandimprovementsinphysicalsupplychainefficienciesarecreatingdemandforprocessimprovements.Improvementintheefficiencyandeffectivenessofcross-borderpaymentsislikely,butallstakeholdersarebeingrequiredtoincreaseinvestmentstochangetheprocessesandsystemsofcorporates,banksandpaymentsystems.
1 JackStephenson,“GrowingPains:OutlookfortheU.S.PaymentsIndustry,”McKinsey&Company,2005.
Executive Summary
Overview of Cross-Border Payments
Scale of cross-border payments and international trade
Paymentsarebigbusiness.RevenuesfromtheU.S.paymentsindustryalonehavegrownat6%peryearsince1994,topping$207billionin2004.Inaggregate,thepaymentsbusinessgeneratesmorerevenuesthandotheairline,personalcomputing,lodging,orentertainmentindustries.2
Intermsofvolume,cross-borderpaymentsareestimatedtorepresentapproximately8%oftotalpayments.3Althoughitisdifficulttosizeexactly,onecanindirectlyestimatetherelativemagnitudeofcross-borderpaymentflowsbyanalyzingthescopeofinternationaltrade.Duringthepasttenyears,theworldtradevolumeasmeasuredbytotalimportshasroughlydoubledindollarvaluefrom$5.5trillionin1996to$10.6trillionin2005.Correspondingly,onecansurmisethatthecross-borderpaymentsrelatedtointernationaltradehavedoubledinsize.
Table 1: World Trade as Measured by Imports (in trillions of U.S. dollars)
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005
World 5.5 5.6 5.6 5.8 6.6 6.3 6.6 7.7 9.3 10.5
IndustrialCountries(23)1 3.6 3.6 3.7 3.9 4.3 4.2 4.3 4.9 5.8 6.4
DevelopingCountries(164) 1.9 2.0 1.9 1.9 2.3 2.1 2.3 2.8 3.5 4.1
TheBostonConsultingGroupestimatesthatthevolumeofcross-borderpaymentswillincreaseatacompoundannualrateof10.2%globallyand7.8%fortheNorthandLatinAmericasduringthedecadeof2000through2010.4
2 JackStephenson,“GrowingPains:OutlookfortheU.S.PaymentsIndustry,”McKinsey&Company,2005.3 CelentCommunications,Cross-BorderBusiness-to-BusinessPayments:TheNewFrontier,Boston,October 2004.4 BostonConsultingGroup,GlobalPayments2003:ThePaymentPuzzle,2003.
4
How cross-border payments work today
Mostoftheworld’smajorbanksmaintaincorrespondentbankingrelationshipswithlocalbanksineachoftheimportantforeigncitiesoftheworld.Thistwo-waylinkbetweenbanksisoneofmanyinterbankrelationships,suchasnostro/vostroaccountsandthesellingofcashmanagementandtreasuryservicestootherfinancialinstitutions.Theinstitutionprovidingtheservicesisthecorrespondent bankorupstreamcorrespondent,whiletheinstitutionbuyingtheservicesistherespondent bankordownstreamcorrespondent.Atleast80%ofbank-to-bankcross-borderpaymentscurrentlytakeplacethroughtraditionalcorrespondentbankingarrangementsorviaintra-banktransactions.�
Oftenbanksdonotseparatedomesticandcross-borderpayments,blurringthelineofdemarcationinpaymentflows.Globalfinancialinstitutionsutilizetheirinternalnetworkstoclearandsettlebothdomesticandcross-borderpayments.Oftenmanypaymentsarebundledinasingletransfer,withbothdomesticandinternationaltransactionscommingledbycurrency.
Manycross-borderpaymentsareactuallysettledinaspecificcountry’sdomesticsettlementsystem.Forexample,aBritishcompanymakingaU.S.dollarpaymenttoaKoreancompanytransfersthenecessarydollaramountfromitsU.S.correspondentbanktotheKoreancompany’sU.S.bankaccountintheU.S.IftheKoreancompanydoesnotmaintainanaccountatabankintheU.S.,thefundsaretransferredtotheKoreancompanybank’scorrespondentbankintheU.S.
5 Retail Banking Research Ltd.,RetailBankingResearchLtd.,Regulation 2560/2001: Study of Competition for Cross-Border Payment Services,FinalReportpreparedfortheEuropeanCommission,London,September2005.
�
Example of cross-border payment flow
CompanyXintheUnitedStatesneedstomakeapaymenttoCompanyYinJapan.CompanyXrequestsitsbankintheUnitedStates,BankA,tosendaU.S.dollarpaymenttoCompanyY.SinceBankAdoesnotbelongtoCHIPS,itrequestsitscorrespondentbank,BankB,whichisamemberofCHIPS,tofacilitatethetransfer.BankBsendsthefundstransferviaCHIPStoBankCwhichisalsoamember.BankCisthecorrespondentbankforBankDwhichiswhereCompanyYhasanaccounttoreceivefunds.�
1
3
2
4
6
5
Company X (US)
Company Y (Japan)
Bank A (US) Bank B (US, CHIPS Member)
CHIPS
Bank C (US, CHIPS Member)
Bank D (Japan)
(1) Company(X)intheU.S.requestsitsU.S.bank(A)tosendadollarpaymenttoitsclient(Y)inJapan.(2) BankAasksitsU.S.correspondentbankintheU.S.(B)tofacilitatethistransfer.(3) Bank(B),amemberofCHIPS,sendsthefundstransfercommandtoCHIPS.(4) CHIPSexecutesthefundtransferbycreditingtheaccountofanotherU.S.CHIPSmemberbankC.(5) Bank(D)inJapanisbankC’scorrespondentbank.(6) CompanyYhasanaccountwithBankD.
6 Notshowninthediagram,SWIFT (Society for Worldwide Interbank Financial Telecommunications) is anSWIFT(SocietyforWorldwideInterbankFinancialTelecommunications)isanindustry-ownedlimitedliabilitycooperativethatsuppliessecuremessagingservicesandinterfacesoftwareforfinancialtransactionstomorethan7,650banks,securitiesbrokersandinvestmentmanagersinmorethan200countries.SWIFT provides the messaging infrastructure for most electronic cross-border payments today.SWIFTprovidesthemessaginginfrastructureformostelectroniccross-borderpaymentstoday.
�
Cross-Border Payment Challenges
Cross-borderpaymentsamounttotrillionsofdollarseachyear.AstudybytheBoardofGovernorsoftheFederalReserveSystemfindsthatendusersandfinancialserviceprovidersconsidercross-borderpaymentstobecostlyandcumbersome,butthattheincentivestodevelopfasterandlowercostsystemsdonotexist.7
1. Domestic infrastructures are not designed to handle cross-border payments
Overthepastfewdecades,manycountrieshaveestablishedbothhighandlowvaluepaymentsystemsthatarebasedonproprietarycommunicationandsecuritystandards.Asaresultoflargelyindependentdevelopment,thereisalackofstandardizationandautomationininter-bankandintra-banknetworks.Thisadverselyaffectsbanksandbusinessesalikeandresultsofteninmanualinterventiontocollectandrepairdata.
Majorbankswithsubsidiaries,branchesandassociatedbanksinmanycountriesmaymovefundstoadestinationcountrybyanintra-banktransaction.Thebeneficiaryiseithercrediteddirectlywhereithasanaccountwiththeforeignoperationorthepaymentissenttothebeneficiary’sbankviaabilateraltransfer,oranationalclearingandsettlementsystem.AreportbytheEuropeanCentralBank,however,findsthismethodtobethemostcostlyandinefficientduetotheuseofnon-standardcustomerinterfaces,incompatibleformatsbetweendomesticandforeignbanks,andthelowdegreeofautomationinbanks’internalsystems.8
Forexample,theUnitedStateshasdozensofsiloedandunderutilizedpaymentinfrastructures,oftencompetingwithoneanotherforvolumes.Withmorethan60distinctclearingandsettlemententities(downfromseveralhundred),amajorU.S.bankmayoperatedozensoflargelyredundantpaymentsoperationsandtechnologyplatforms,eachwithitsowndedicatedapplications,staffs,rules,andbusinessprocesses.
7 The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis,byFederalReserveStaffforthePaymentsDevelopmentCommittee,FederalReserveSystem,December2002.
8 European Central BankEuropeanCentralBank, Improving Cross-Border Retail Payment Services: The Eurosystem�s �iew,�s �iew,s �iew,September1999,p.10.
8
9
2. Lack of common message standards
Businessesalsofacethechallengeofremovingpaperandmanualprocessesbyintroducingstraight-throughprocessing(STP)asmuchaspossible.Thisrequirespaymentinstructionstobegeneratedelectronicallyaspartofthebusinessprocess,passedsecurely,efficientlyandcost-effectivelytotheirbanks,andmatchedandreconciledautomaticallyviaauniversalreferencenumberwithininvoicing,accountspayable,accountsreceivableandothersystems.However,accordingtoarecentwiretransfersurveyonly15percentofrespondentsreportthattheirwiresalwayscomewithsufficientremittanceinformation(forexample,customeraccountnumberandinvoicenumber,toapplythepaymentcorrectly).Thetypicalbusinessmustresearch17percentofthewiresthatitreceivesattheaveragecostof$35perwireand30minutesoftime.9Resistancetotheadoptionofstandardsarisesfromthelargecostsassociatedwithenhancinginternalsystemsandproceduresrelativetothesmallvolumeofinternationalpayments.Unlikedomesticstandards,cross-bordermessagestandardshavetosupportmultipledomesticrulesandregulationsbeforetheycanbeadoptedwithinamarket.Inadditionthevalueofastandardisrealizedonlywhenthespecificationiswidelyaccepted.Asaresult,banksmaybereluctanttomakesizableinvestmentstosupportsuchstandardsiftheyareuncertainthatotherbanksaremakingsimilarinvestmentstoupgradetheirsystems.
3. Impact of regulatory requirements
Thecomplexgovernancestructuresofthesedisparatepaymentsystems–somepublic,someprivate,someoperatedasindustryassociations–onlyaddtothechallenge.Achievingcoordinatedchangeatanindustrylevelisnearlyimpossiblewithoutgovernmentmandates.However,whengovernmentmandatesoccur,theytendtofocusmoreonrespondingtocrises(orpreventingcrises)thanonpromotingefficiency.ThePatriotAct,KnowYourCustomer(KYC),BaselII,Sarbanes-Oxley,andFederalFinancialInstitutionsExaminationCouncil(FFIEC)rulesgoverningcreditcardbusinesspractices–tonamejustafewrecentregulations–havecostbillionsofdollarsforbanks,butproducelittle,ifany,incrementalrevenues.
“We strive to adopt the most efficient and cost-effective practices in cross-border payments, but sometimes government regulations tend to stifle initiatives over safety and other regulatory issues.” Senior Manager, Treasury Team, Samsung Corporation
9AssociationforFinancialProfessionals,AFPWireTransferSurvey:ReceiptofRemittanceInformation,October2005.
Corporate perspective on cross-border payment inefficiencies
Theinefficienciesthatabankexperiencestrickledowntocorporates,resultinginhigherdirectandindirectcosts.Oftentheindirectcostsresultingfromoverallprocessinefficienciescanbemoresignificantthanthedirectcostassociatedwiththepayment.In2003and2004,theFederalReserveBankofNewYorkconductedasurveyoflargenon-financialU.S.businessesinordertoidentifythe most important andthe least well-met areasofpaymentsprocessing.10
About40percentofthesurveyrespondentsnotedthatreducingthetimeneededtodetectandresolveunauthorizeddebits,aswellasreducingtheirfrequencyandassociatedfinanciallosses,wereveryimportantorcriticallyimportanttotheirfirmsandthatcurrentserviceswerelessthansatisfactory.Inaddition,therespondentsputhighpriorityonreducingthetimerequiredtoidentifyinsufficientlyfundeddebittransactions,receivingcreditforoverseaspayments,andobtainingsufficientinformationtoprocessanincomingpayment.Companiesalsosawastrongneedtoimprovetheirabilitiestoreconcileinformationreceivedfrombanksonuseofpaymentservicesandreducebankfeesforpaymentservices.11
The Federal Reserve study “Opportunities to Improve Payments Services” identifies the following five areas as very or critically urgent but still largely unmet by the existing payments systems:• Risk reduction: decrease or eliminate losses due to fraud, security lapses, or
unrecoverable misdirected payments;• Liquidity: collect revenues faster or time payments more precisely to increase access
to funds and the amount of time a firm can use the funds;• Processing efficiency: develop improvements to reduce the amount of time required
to finish a task or the number of steps needed to complete a process, such as obtaining information or responding to inquiries;
• Explicit costs: minimize the out-of-pocket fees or investment expenses associated with a process; and
• Governance and infrastructure: establish fundamental building blocks of a well-functioning payments system, such as legal basis and operation by trusted parties.
Inefficiencies of cross-border payments drive costs
Costsassociatedwithcross-bordertransactionsarerelatedtovariousfactors.Businessestendtopayfeesnotonlyforinternationalpaymentsbutalsootherexplicitorimplicitfeessuchasforeignexchangeconversion.Moreover,variousintermediariesareinvolvedinthepaymentprocess,particularlythroughthewidespreaduseofcorrespondentrelationships.Consequently,theexecutiontimeforcross-borderpaymentsissubstantiallylongerthanfordomesticpayments,whichincreasesthefloatcost(intheabsenceofvaluedating).
10 SandyKriegerandMicheleBraun,OpportunitiestoImprovePaymentsServices:ResultsfromaSurveyofLargeCorporations,FederalReserveBankofNewYork,July2004.Thestudyaskedbusinesseswhattheyseektoachieveineachstepoftheprocessofmakingandreceivingpayments.Thequestionswereintendedtohelpcorporatesidentifytheirprioritiesforimprovements.Thesurveyencompassed733U.S.nonfinancialfirmswithatleast10,000employees,selectedfromaDunnandBradstreetdatabase.Theresearchersthensentletterstoarandomlyselectedsampleof200corporatetreasurersandchieffinancialofficersfromthispopulation,requestingthatthepersonmostknowledgeableaboutthefirm’spaymentsneedsrespondtotheFederalReserveBank’sonlinesurvey.
11 SandyKriegerandMicheleBraun,“ImprovingBusinessPaymentsbyAskingWhatCorporationsReallyWant,“CurrentIssuesinEconomicsandFinance,FederalReserveBankofNewYork,May2005. 10
Payment Trends and Impact on Cross-Border Payments
Thecross-borderpaymentsprocessisundergoingaperiodofprofoundchange.Wheretransactionservicesprovidedbybankswerevalue-added,theyarenowincreasinglycommoditized.Third-partyservices,suchasSharedServiceCenters(SSC),ERPsystems,etc.,arenowprovidingvalue-addeddatathatwasprovidedbybanksinthepast.12
Withincompanies,thetreasury,liquiditymanagementandriskmanagementfunctionsareintegratedmorecloselytotakeadvantageofnewknowledgemanagementtechnologyaspartoftheirdriveforgreaterefficiencyinanincreasinglyglobalenvironment.
Key trends impacting cross-border payments are:1. Transnational payment systems are growing2. Government-led initiatives and mandates are increasing3. Risk and liquidity usage are being closely managed4. Multinational banks and corporations are expanding 5. Operational efficiencies are being sought through outsourcing
12CurrentIssuesinEconomicsandFinance,FederalReserveBankofNewYork,May2005.
12
Trend 1: Transnational payment systems are growing
Whileoncetherewereonlydomesticpaymentchannelsineachcountry,wehavewitnessedtheemergenceoftransnationalsystemssuchasTARGET,CLS(ContinuousLinkedSettlement),theFederalReserve’sInternationalACHProject,knownasFedACHInternationalandtheproposedpan-EuropeanautomatedclearinghouseknownasPE-ACH.Ontheotherendofthespectrum,cardsystemssuchasthoseoperatedbyVisaandMasterCardaretrulyglobalinscopeandhavebeenexpandingfromconsumerbasedtransactionsintocommercialpaymentsformorethanadecade.
Transnationalsystemshavetraditionallyfocusedonprovidingpaymentswithinaregionortoasmallnumberofcountriesandusuallysupportasinglecurrency.Althoughnoneofthesesystemsareyetglobalinscope,itislikelytheywillcontinuetoexpandtheircoveragetoadditionalcountriesandcurrencies.NetworkssuchasVisaandMasterCardareexamplesofglobalpaymentsystemsthatalsosupportmultiplecurrencies,thoughtheyareprimarilyusedforretailpaymentsandadhoc/T&Ecommercialtransactions.
Recently,incountrieslikeSwitzerlandandHongKong13,newarrangementshavebeendevelopedforthesettlementoflocalpaymentsinforeigncurrency.Thesearrangementsneitherfitperfectlyinthetraditionalcategoryof“correspondentbanking”orinthatof“paymentsystems”.Themaincommoncharacteristicofthesearrangementsorsystemsisthattheydonotsettleincentralbankmoneybutacrossaccountsheldwithacommercialbankandthattheyarebasedonclearlydefinedandtransparentrulesforpaymentactivities.Comparedtotraditionalcorrespondentbanking,thesenewsolutionsarestandardizedandsettlepaymentsinrealtimewithcontinuousfinality.
In1999,Swissfinancialinstitutionsestablishedacross-bordersolutioninordertofacilitatetheircashmanagementineuros.ThissolutioninvolvesafullylicensedbankinGermany,SwissEuroClearingBank(SECB).Toprocesseurotransactions,SECBusestheeuroSICplatforminSwitzerland,whichisoftenreferredtoastheeuropaymentsystemofSwitzerland.EuroSICisareplicationoftheSwissfrancRTGSsystem,SwissInterbankClearing(SIC).SICandeuroSICareoperatedbySwissInterbankClearingAG.SECBisthesettlementinstitutionandsharestheroleofsettlementagentwiththeoperatorSICAG.SECBisalsotheliquidityproviderineuroSIC.ItextendsintradayandovernightcredittotheparticipantsofeuroSICagainstcollateral.SECBprovidesalinktotheeuroarea,asitisadirectparticipantinRTGSPLUSthroughwhichaccesstoTARGETisestablished.
InHongKong,theU.S.dollarandeuroclearingsystems,USDCHATS(ClearingHouseAutomatedTransferSystem)andEuroCHATS,wereintroducedin2000and2003,respectively.Theyenhancethesafetyandefficiencyofsettlingtheseforeigncurrenciesinthelocaltimezone.ThesesystemsarealmostexactreplicasoftheHongKongdollarRTGSsystem(HKDCHATS).ThekeyfunctionsofbothsystemsaretoenablesettlementofforeignexchangetransactionsbetweenHKdollars,USdollarsandeurosintheirrespectivecurrenciesthroughalinkagewiththeCentralMoneymarketsUnit(CMU)inHongKong.
13 SinceJuly1,1997,HongKonghasbeenaSpecialAdministrativeRegionofThePeoplesRepublicofChina.Underthe“OneCountry,TwoSystems”policy,HongKongretainsitsowncurrency.
13
TheHongKongMonetaryAuthorityhasappointedtheHongKongandShanghaiBankingCorporationasthesettlementinstitutionforUSDCHATSandStandardCharteredBank(HongKong)LimitedasthesettlementinstitutionforEuroCHATS.Bothinstitutionsprovideintradayliquiditytothedirectparticipatingbanksbymeansofreposaswellasoverdraftfacilities.OneofthekeybenefitsofboththeUSdollarandeurosystemsisthesamedayclearingoftransactions.
Alsodrivingtransnationalsystemsistheimplementationof“straightthroughprocessing(STP)”standardsfortransfersbetweenbanksaswellasbetweenbanksandcustomers.Toensuresimultaneousanddependabledeliveries,payment-versus-payment(PVP),delivery-versus-payment(DVP),anddelivery-versus-delivery(DVD)processeshavealsobeenestablished.
Thegrowthintransnationalsystemscanimprovetheefficiencyofcross-borderpaymentsbyreducingclearingandsettlementtimes,minimizingfloat.Bettervisibilityoffundsflowssupportsimprovedcashforecasting.Finally,standardizedformatswillreducecostlyerrorsandrepairs.
Case Study:Continuous Linked SettlementA good example of a transnational system is Continuous Linked Settlement (CLS), created by a number of global banks for the simultaneous settlement of foreign exchange transactions. CLS eliminates the settlement risk in cross-currency payment instruction settlement through CLS Bank by linking central bank Real Time Gross Settlement (RTGS) systems. Settlement instructions for a particular date are exchanged and funds are requested to be transferred by CLS Bank during a five-hour window of overlapping business hours. Although CLS is a specialized system only for foreign exchange settlement and not corporate cross-border payments, it demonstrates the benefits of transnational systems.
Trend 2: Government-led initiatives and mandates are increasingCross-borderpaymentsarebeingsubjecttonewrequirements.Duetotherecentdrivetowardsanti-moneylaundering(AML)andcombatingfinancingofterrorism(CFT),theimportanceofcross-borderpaymentshasincreasedtheroleofsuchgovernmentalagenciesastheU.S.TreasuryDepartment’sOfficeofForeignAssetsControl(OFAC)aswellassuchmultilateraleffortsastheFinancialActionTaskForce(FATF),theEgmontGroupofnationalfinancialintelligenceunits(FIUs),andtheWolfsbergGroupformedbyprivatefinancialinstitutionstocombatmoneylaunderingandterroristfinancing.Theseinitiativesandmandatesareimpactingthewaypaymentsarebeingmade.Thecostsofcompliancecanbesignificantforbanks,especiallybecausetheremaynotbeanoffsettingrevenueopportunitywithcorporates.
14
SEPAisagovernment-ledinitiativeasdefinedbytheEuropeanPaymentsCouncilthatishavingasignificantimpactonbothbanksandcorporationsthatmakeeuro-zonepayments.BanksinEuropenowhavetoinvestsignificantlytoadapttheirpaymentinfrastructuresinordertoachieveSEPA-compliancewhiledevelopingacogentstrategytotakeadvantageofthenewopportunitiesopentothemthroughanintegratedSEPAsystemthroughouttheeuroarea.
Government-ledinitiativesarefocusingonthereductionofcoststotheend-users,adoptionofcommonpaymentstandards,andreducingtheabilityofpaymentsystemstobeusedforillegalmeans.Ultimately,thiswilltranslateintohighercostsforbanksthatprovidecross-borderservices.However,thisleadstorevenueopportunitiesforthosebanksthatprovideservicestootherbanks.
Case Study:Single Euro Payments Area (SEPA)
SEPA supports the creation of a euro area where the differentiation between domestic and cross-border payments no longer exists. Today there are more than 15 retail payments systems in the euro area for the clearing and settlement of credit transfers and direct debits. Most of them have their own specific operating rules and technical standards. Industry estimates put the investment on the participating infrastructures at more than ¤8 billion over the next six years and revenue losses from falling fees for payment services at between ¤13 billion and ¤29 billion; however, market savings could range from ¤50 billion to ¤100 billion.14 Substantial investments coupled with plummeting revenues should encourage banks to look for the maximum economies of scale and scope that the SEPA can offer. They should particularly focus on payments highways and on leveraging any investment they have already made in open and global platforms and solutions. This will mean rationalizing infrastructure and consolidating clearing and settlement mechanisms.
Trend 3: Risk and liquidity usage are being closely managed
Paymentsystemsaresubjecttomanyrisks,themostimportantofwhicharecreditandsettlement.Creditriskisthepossibilitythatapartywithinthesystemwillbeunabletofullymeetitsfinancialobligations.Settlementriskisthatapartywillhaveinsufficientfundstomeetafinancialobligationasandwhenexpected,althoughitmaybeabletodosoatsometimeinthefuture.
14 Peter Norman, “European Banking Reform Comes under Fire: Both Industry and Regulators Are DissatisfiedPeterNorman,“European Banking Reform Comes under Fire: Both Industry and Regulators Are Dissatisfied“European Banking Reform Comes under Fire: Both Industry and Regulators Are DissatisfiedEuropeanBankingReformComesunderFire:BothIndustryandRegulatorsAreDissatisfiedwithPlanstoFacilitateCross-borderPayments,””The Financial Times, November28,2005.
1�
Inpaymentsystemswherepaymentsareprocessedinreal-timeorinbatchesduringtheday,liquiditynotonlyhasend-of-dayvaluebutalsointradayvalue.Inbothgrossandnetsettlementsystems,thereisaclearrelationshipbetweenliquidityusageandsettlementdelay.Typically,themoreliquiditythatisused,thespeedierfinalsettlementwillbe.Ifthecostsofliquidityanddelayareequal,thecost-optimallevelofliquidityislikelytobethatforwhichnopaymentsaredelayed.Adelayinsettlementreducesthesender’sliquiditycosts,butincreasesbothitsdelaycostsandthereceiver’sliquiditycosts.Therefore,paymentsystemshavetostrikeabalancebetweenminimizingtheliquiditycostandkeepingsettlementriskundercontrol.
Themechanismstobalanceriskandliquidityneedsvarybysystem.Variousstakeholdersexertongoingpressuretominimizesettlementdelaywithoutfullyimpactingliquidityneedsandviceversa.Improvementsinbothriskandliquiditymanagementhelpdrivedownoverallcostsbyreducinglossesandfreeingupexcesscapitalusedduringsettlement.
Case Study:Two approaches to managing risk and liquidityLiquidity usage and settlement risk management is significant to RTGS systems. The world’s two premier RTGS systems, Fedwire and TARGET, have addressed the issues quite differently. Despite their differences, each system provides a similar trade-off between liquidity and settlement risk.
Starting in the mid-1980s, the Federal Reserve instituted important reforms aimed at controlling the use of Federal Reserve intraday credit by depository institutions seeking an inexpensive source of liquidity. The Federal Reserve Board of Governors imposed quantitative limits – or caps - on account overdrafts at Federal Reserve Banks in 1986 and a small fee on intraday credit in 1994. As a general matter, the majority of account overdrafts at Federal Reserve Banks are uncollateralized. Caps protect the Federal Reserve by limiting the settlement risk posed by any given institution.
TARGET takes a different approach to controlling settlement risk. It is a decentralized RTGS system consisting of the “interlink” of 15 national payment systems, together with the European Central Bank. The solution that was adopted allows system participants to borrow intraday funds at a zero interest rate. In the TARGET system, liquidity is provided by the individual central banks within the European System of Central Banks (ESCB). To protect the central banks from settlement risk, all intraday credit must be collateralized. This requirement raised the fear that the system would be too demanding in terms of collateral. To remedy this potential, a wide range of assets is eligible for collateral. The design of TARGET appears to work well. Access to liquidity has turned out not to be an issue and the ESCB is protected by the required collateral.
1�
Trend 4: Multinational banks and corporations are expanding
Mergersandacquisitionshavebeenthesinglebiggestforcereshapingtheglobalpaymentslandscapeoverthepasttwodecades.Themostrecentroundofconsolidationhasleftadisparitybetweenlargeandsmallneverbeforeseen.Forexample,wehavewitnessedtheemergenceofmegabankssuchasthecombiningofBankofAmericaandNationsBank,aswellasJPMorganChasecombiningChaseManhattanBank,ManufacturersHanoverBank,MorganGuarantyTrustandBankOne.Inascale-driven,technology-intensivebusinesslikepayments,theemergenceoftruemega-playersmayleadtomarkedlydifferentcompetitivedynamics.
Actingastheirowntransnationalsystems,largeinternationalbankssuchasJPMorganChase,Citibank,BankofAmerica,andHongkongShanghaiBankingCorporationoperatetheirowninternalglobalpaymentsnetworks.Throughthese,theycanroutepaymentstodestinationsindifferentcountries.Suchinternalnetworksdonotnecessarilydifferentiatebetweendomesticandcross-borderpaymentsastheseflowsareallwithinthebank.
Thetrendtowardconsolidationinthebankingsector,bothgloballyandindomesticmarkets,exertsinfluenceonpaymentsystems.Increasedconcentrationofpaymentflowsmayhaveimportantcredit,liquidityandoperationalriskimplications.Forexample,thecreditexposuresthatarisewithinapaymentssystemthatdoesnotachieveintradayfinalityarelikelytobecomeconcentratedonasmallernumberofbanks.Operationalproblemsexperiencedbyasinglelargebankcouldhavesignificantrepercussionsforotherparticipantsinthesystem.Aconcentrationofpaymentflowsincommercialbankshasemergedtoreflecttheincreasingrolethatmoderncommercialbanks,especiallylargeglobalbanks,haveplayedinthepaymentsystemsaroundtheworld.Thevolumesandvaluessettlingacrosstheirbooksare,insomecountries,quitesubstantial.Suchtraffichasoftenbeenaccompaniedbyincreasedformalizationofthecorrespondentrelationswithin,aswellasacross,nationalboundaries.
Banksthatachieveglobaleconomiesofscalecanfurtherdrivedownpertransactioncostsandderivehigherrevenuesbykeepingpaymentswithintheirownnetworks.Forglobalcorporations,ithasallowedthemtomatchtheirglobalneedswithahandfulofbanksratherthanmanagingalargenumberoflocalrelationships.
17
18
Trend �: Operational efficiencies are being sought through outsourcing
Traditionalfinancialinstitutions,suchasbanks,areincreasinglyexpectedtofocusonmarketingexistingandnewproductsthatareinlinewiththeircorecompetenciesratherthanexpendingeffortsonconqueringmorerepetitivebackofficetasks.Thesearchforoperationalefficiencyhasledtotheoutsourcingofpaymentservicesclearingtothirdparties,whichmaybebankornon-bankentities.Bankshaveincreasingrecoursetosuchentities,allowingbankstospecializeinthe“salesfunction”(coveringdirectrelationswithclients,includingaccountholding)whileoutsourcing“productionfunction”suchastheprocessingofpaymentsandsecurities.Someexpertsworryabouttheregulatoryvacuuminthisareaassomeoftheseservicefirmsarenotbanksandmaynotberegulatedorsupervisedbygovernmentagencies.
Internalconsolidationinpaymentfunctionswithinanindividualfinancialinstitutionalsoleadstotheconcentrationofpaymentservicestothirdparties.Thisevolutionisincontrastwiththetraditionalorganizationofmajorinternationalbanks,wherepaymentsbusinessisdistributedamongtheirbranchesandsubsidiariesabroad,eachofthemhavingresponsibilityforsettlementsinthelocalcurrencies.Largeinternationalbanksnowtendtoconcentratemostoftheirworldwidepaymentsactivitiesinoneorafewprocessingcenters.
Gainingoperationalefficienciesthroughoutsourcingofnon-coreactivitieswillimprovetheoverallpaymentsprocess.Outsourcingwillallowmanybankstoreduceoperationalcostsaswellasofferadditionalproductsthatcouldnototherwisebeprovided.Thedownsideofoutsourcingmaybethatabanklosestheabilitytorapidlychangeproductofferingsthattheydonotdevelopandmanage.
Conclusion:
Asmarketsbecomeincreasinglyglobal,pressuremountstofulfillthefundstransferrequirementsofcorporates,thefinancialinstitutionsthatservethem,andthepaymentsystemsthatenablethepayments.Thevolumeandvelocityofcross-borderpaymentsismadeallthemorecomplexbythedifferingstandardsofdomesticpaymentsystems,increaseofinternationalregulationsandthechanginglandscapeofemergingtransnationalandglobalsystems.Marketpressuresandtheexpansionofmultinationalbanksandbusinessesaredrivingthesearchforoperationalefficiencies.Improvementintheefficiencyandeffectivenessofcross-borderpaymentsislikely,butallstakeholdersarebeingrequiredtoincreaseinvestmentstochangetheprocessesandsystemsofcorporates,banksandpaymentsystems.
181�
Questions for Management
Ascross-borderpaymentvolumeincreases,andcorporationsandgovernmentsdemandprocessimprovements,bankswillfaceincreasingpressuretoaddresstheremaininginefficienciesofcross-borderpayments.Inordertobeginthisprocess,banksshouldconsiderthefollowing:
What is the size and scope of your cross-border payment operations?Thecostofestablishinganefficientcross-borderpaymentprocessfromthegroundupmaybecost-prohibitiveforallbutthelargestbanks.Banksneedtofullyunderstandthecostsassociatedwithcross-borderpayments.
Are you maximizing your investments in existing payment systems?Theremaybeanopportunitytoharnesswell-establishedinternationalpaymentsystemstoincreasetheefficiencyandreducethecostofcross-borderpaymentsforyouandyourcustomers.
Does your bank have a strategy for determining what products and services should be kept in-house and what should be outsourced?Whendecidinghowtosupportabreadthofproductsandservices,decisionsshouldbebasedonanumberoffactorsincludingstrategicimportance,revenueprojectionsandcostconsiderations.
Are there hidden costs in your bank’s payment process?Banksshouldconsideranalyzingallpaymentsacrossthevariousinstruments,withaspecialfocusonthecross-subsidiesthatcharacterizethecurrentpaymentslandscape.
Do revenues reflect the true market value of your products? Banksmaybenefitfromabetterunderstandingofwhattheirclientsneedandhowtheyvaluetheservicesprovidedtothem.
How can your bank integrate throughout the supply chain process to avoid commoditization of payment? Banksmaybenefitfromworkingmorecloselywithpaymentsystemsandkeyalliancesbyprovidingvalue-addedservicestoclientsthatarebeingdeliveredbynon-banksolutionproviderstoday.
20
22
Appendix
Payment system types
Todateinternationalpaymentshavebeen,toalargeextent,basedoncorrespondentbankoperations.Thetraditionalapproachtoprocessingpaymentswasend-of-daynetbatchprocessing.Today,batchsystemsoperatewithsettlementcyclesasshortasevery30minutes,knownasdeferrednetsettlementsystems(DNS).Thankstoreal-timeprocessingcapabilities,however,paymentscannowbeprocessedindividuallyandimmediately,withsuchatrendexpandingfromlarge-valuetransferstoretailpaymentsinresponsetocustomerservicerequirementsandthegrowthofe-commerce.Real-timepaymentsystemsfallintotwogroups:thereal-timegrosssettlementsystems(RTGS)ofcentralbanksandcontinuousnetsettlementsystems(CNS).
RTGS:volumeisgrowingbutitisdifficulttoimplementforallcross-borderpayments.RTGShascertaincharacteristicsthatmadeitchallengingtoimplementforcross-borderpayments: • Runbycentralbanks • Highliquidityneeds
Value Transfer Funds Settlement Timing Liquidity Needs
RTGS Immediate Immediate High
CNS Immediate Endofday Variable
DNS Endofcycle Endofcycle Low
Hybrid Variesbysystem Variesbysystem Variesbysystem
RTGSsystemseliminatethecounterpartycreditriskpresentinDNSsystemsbyrequiringparticipantstosettleallindividualpaymentsinstantaneouslyonagrossbasisinreal-time.However,thiscreditriskreductioncomesatthecostofarequirementforpotentiallyexpensiveintradayliquidity.Centralbankshavesoughttoreduceliquiditycostsforsettlementbanks,forexamplebyprovidingcollateralizedintradayliquidityandgoodsystemdesign.Evenso,intradayliquidityinRTGSsystemsisnotfreeandunlimited.
23
AnimportantdeterminantoftheliquidityefficiencyofanRTGSpaymentsystemistheextenttowhichthesystemdesigngivessettlementbanksanincentivetomanagetheirpaymentsinanefficientway.InanRTGSsystem,onebank’spaymentsareasourceofintradayliquidityfortherecipientbank,whichitmaythensubsequentlyusetomakeitsownpayments.Withpaymentssettledonareal-timegrossbasis,banks’liquidityneedsunderRTGSaregreaterthanthoseunderDNS.Ifbanksrecycleliquiditysufficientlyquickly,however,theaggregaterequirementforintradayliquidityunderRTGScanbesimilarlyreduced.
CNS: CNSsystemscanbeconsideredprivateRTGSsystemsthatnormallysettleatendofdayinRTGSsystems.However,thesesystemsoftenusevariouskindsofswaporliquidityinjectionmethodstoreducetheirinternalriskpositions.SometimesprivatesystemscanautonomouslysettleusingcentralbankRTGSsystems.Insuchcases,theprivatesystemtransferscentralbankliquidityintoaseparateaccountheldbythecentralbankorthesystemitselfonbehalfoftheclearingparties.Alltransactionsarethenbookedontheseaccounts.ExamplesofCNSsystemswithRTGSinterfacesaretheCLSusedforreal-timesettlementofforeignexchangetradesandCHIPSintheU.S.andFrance’sPNS(ParisNetSettlementSystem).
DNS:Inadeferrednetsettlementsystem,fundtransfersaresettledonanetbasisaccordingtotherulesandproceduresofthesystem.Aparticipatingbank’snetsettlementposition,whichiscalculatedoneitherabilateralormultilateralbasis,isthedifferencebetween(1)allthetransfersthatithasreceiveduptoaparticularpointintime,and(2)allthetransfersthatithassent.Thepositioncanbeeitheranetdebitoranetcredit.Mostnetsettlementsystemsarenowprimarilymultilateralinnature.Settlementoccursatoneormorepre-specifiedsettlementtimesduringtheday.ExamplesofDNSsystemsareBACSintheU.K.,ACHintheU.S.A.andVisa.
Hybrid Systems: Intruereal-timeprocessing,theliquidityneedisfixedbytheprocessedpaymentflowsoitcannotbeinfluenced.Infact,theliquidityneedcanbesmoothedbydeferringpaymentsthroughaqueuesystemandbynettingqueuedpaymentsbetweenbankswithopposingqueuedpaymentflows.Thissituationalsogivesthepossibilitytosaveinterbanksettlementliquiditywhenallpaymentsdonotrequireimmediateprocessing.Thishasresultedintheemergenceofathirdgroupofsystems,hybridsystems,whichcombinefeaturesfromreal-timeanddeferrednetsettlementsystems.Mostlarge-valuepaymentsystemscurrentlyoperatedbycentralbankssuchasFedwireandTARGETareRTGSsystems,buttheycontinuallyacquireanincreasingnumberofhybridfeaturesforpreservingliquidity,optimizingtheuseofliquidityandresolutionofgridlocksituations.
24
A survey of major systems facilitating cross-border payments
American Express:isapubliclytradedcompanythatissueschargeandcreditcardproductsbothdirectlyandthroughnearly100financialinstitutionsaroundtheworld.AmericanExpresshad$484billioninglobalsalesin2005.15
CHAPS(ClearingHouseAutomatedPaymentSystem):CHAPS,establishedin1984,istheUnitedKingdom’shigh-valuepaymentsystem,consistingoftwosystems:CHAPS SterlingandCHAPS Euro,whichprovidesettlementfacilitiesforsterlingandeuropayments,respectively.Overadozenlargebanksandbuildingsocietiesare“direct”orsettlementmembers,whiletherearealsoover400“indirect”members–typicallysmallerbanksandbuildingsocieties–whohaveaccesstothesystemthroughasettlementmember.
CHIPS(ClearingHouseInterbankPaymentSystem):CHIPSisabank-owned,privatelyoperated,real-time,multilateralelectronicpaymentssystemthattransfersfundsandsettlestransactionsinU.S.dollars.CHIPSbeganoperationsin1970with9participatingbanksand,asofmid2006,itprocessesabout300,000paymentsadaywithanaveragedailyamountof$1.5trillion.Itcurrentlyhas46participantsfrom19countriesaroundtheworld,includinglargeU.S.banksandU.S.branchesofforeignbanks.ThepaymentstransferredoverCHIPSareoftenrelatedtointernationalinterbanktransactions,includingthepaymentsresultingfromforeigncurrencytransactions(suchasspotandcurrencyswapcontracts)andEuroplacementsandreturns.
CLS (ContinuousLinkedSettlement):TheCLSsystemistheprivatesectorresponsetoaG-10strategytoreduceforeignexchangesettlementrisk.CLSwasfoundedin1997tocreatethefirstglobalsettlementsystem,eliminatingsettlementriskintheforeignexchangemarket.Formedinresponsetoregulatoryconcernrelatedtothetemporalandsystemicrisks(Herstattrisk)associatedwithforeignexchangetransactions,CLSsimultaneouslysettlesbothsidesofforeignexchangetradesusingamulti-currencypayment-versus-payment(PVP)mechanism.CLSisauniquereal-timeprocessenablingsimultaneousforeignexchangesettlementacrosstheglobe,eliminatingthesettlementriskcausedbydelaysarisingfromtime-zonedifferences.CLSsettleswellover$1trillionperday,accountingforasubstantialmajorityofcross-currencytransactionsacrosstheglobe.
15http://ir.americanexpress.com/phoenix.zhtml?c=64467&p=irol-reportsAnnual
2�
Eurogiro:ownedby16banks/postalfinancialservicecompanies,isanelectronicpaymentnetworkforpostalandgiro(postbank)organizationsthatexchangecross-bordercredittransfersandcash-on-deliveryorders.Establishedin1989,Eurogirohasmorethan40participantsfrom37countriesinEurope,Asia,Africa,SouthAmericaandtheU.S.Membersactascorrespondentsforoneanotherandholdreciprocalaccountswitheachothertoexecutepayments.
EURO1:aprivatesector-ownedhigh-valuepaymentsystem,operatedbytheEBAClearingCompanyforcross-borderanddomestictransactionsineurobetweenbanksoperatingintheEuropeanUnion,anditisthelargestofEurope’sfourlarge-value,netsettlementsystems, processing on average 170,000 payments a day with a total value of about €170 billion.Launchedin1998,EURO1wasdevelopedtoprovideanefficient,secureandcost-effectiveinfrastructureforlarge-valuepaymentsinthenewsinglecurrencyenvironmentoftheEU.EURO1isbasedonstate-of-artmessaginginfrastructureandcomputingfacilitiessuppliedbySWIFT.
FedACH International Services:ThisinternationalgatewayarrangementserviceisownedandoperatedbytheFederalReserveSystem.Currently,theFederalReserveBanksofferasuiteofFedACHInternationalServicesaspartofFedACHServicesandprovideU.S.-originatingdepositoryfinancialinstitutionswiththeabilitytosendinternationalnon-time-criticalpaymentsviathesameprocessusedtosenddomestictransactionsformanydecades.FedACHInternationalServicesofferanintegrated,uncomplicatedmethodtoensurestraight-throughprocessing(STP)ofcross-bordertransactions,usingNACHAformatsthataresupportedbymostsoftwarevendors.
Fedwire(FederalReserveWireNetwork):Thisisahigh-speedelectronicnetworkthroughwhichtheU.S.FederalReserveprovidestheFedwireFundsService,theFedwireSecuritiesService,andtheNationalSettlementService.TheFedwireFundsServiceprovidesanRTGSsysteminwhichmorethan9,500participantsinitiatefundstransfersthatareimmediate,final,andirrevocablewhenprocessed.
2�
LVTS(LargeValueTransferSystem):ThefullyelectronicLVTS,Canada’sreal-timegrosssettlementsystem,becameoperationalinearly1999.AsCanada’swirepaymentmechanism,itfacilitatestheelectronictransferofCanadiandollarpaymentsacrossthecountryinreal-time.Canada’snationalpaymentssystemhasbeenoperatedbytheCanadianPaymentsAssociation(CPA)since1980.MasterCard:isapublicly-tradedcompanythatoperatesaglobalpaymentsystem.InadditiontotheMasterCardbrand,theMaestroandCirrusbrandsarealsopartofthecompany.MasterCardbrandedcardsgenerated$1.7trillioninglobalsalesin2005.16
RTGSPLUS:istheGermanBundesbank’snewliquidity-savingRTGS,whichbecameoperationalinNovember2001.Itcombinestherisk-reducingbenefitsofgrosssettlementoftheformerGermanRTGSsystemknownastheEuroLinkSystem(ELS)withtheadvantagesofliquidity-savingprocessingoftheformerhybridsystemknownasEuroAccessFrankfurt(EAF).
SWIFT(SocietyforWorldwideInterbankFinancialTelecommunications):SWIFTisanindustry-ownedlimitedliabilitycooperativethatsuppliessecuremessagingservicesandinterfacesoftwareforfinancialtransactionstomorethan7,650banks,securitiesbrokersandinvestmentmanagersinmorethan200countries.
SWIFTpaymentmessagesareprocessedbytheFinancialInformationNetwork(FIN),whichoperatesonasecureIPnetworkcalledSWIFTNet.SWIFTisintegratingintotheACHmarketsegmentasapaymentserviceproviderviaitsFileActmessagingservice.ACHnetworkssuchastheEBAClearingCompanyandtheSouthAfricanAutomatedClearingBureauarealreadyusingSWIFT’smessagingplatform.
16http://www.mastercard.com/us/company/en/docs/Corporate%20Overview.pdf
STEPS (StraightThroughEuroPaymentSystem): TheSTEPSprogramwaslaunchedbytheEuroBankingAssociation(EBA)toofferafullrangeofeuropaymentsacrossEurope.STEPShasevolvedintotwosystemsaimedataccommodatingabroadbaseofprocessingneedswithintheEuropeanUnion:STEP1(apan-Europeansystemdesignedtoprocesssinglecross-border,low-valueretailpayments)andSTEP2(apan-EuropeanACHforbulk/highvolume,low-value,cross-borderanddomesticinterbankpayments).
STEP2:apan-EuropeanACHsolution,isajointventurebetweentheEBAandItaly’sACHoperatorSIA.STEP2processeshigh-volume,commercialandretailpaymentorderssenttothesystemviafilesthroughasecurenetwork.CharacteristicsofpaymentordersthatareprocessedviaSTEP2arecommercialandretailtransfersineurothatareformattedtoagreedtechnicalstandards.AccessiblethroughSWIFTNet,STEP2offerspaymentprocessingandsettlementineuro.
TARGET (Trans-EuropeanAutomatedReal-timeGrossSettlementExpressTransfer): TheEurosystem,whichcomprisestheEuropeanCentralBank(ECB)andthenationalcentralbanks(NCBs)ofthe12EUmemberstateswhichhaveadoptedtheeuro,hascreatedTARGETforlarge-valuepaymentsineuro.TheTARGETsystemisa“systemofsystems”composedofthenationalpaymentsystemsof16of25countriesthatarecurrentlymembersoftheEU,theECBpaymentmechanism(EPM)andaninterlinkingmechanismthatenablestheprocessingofpaymentsbetweenthelinkedsystems.
TARGET2:ThecurrentstructureofTARGETwasdecidedonin1994andwasbasedontheprinciplesofminimumharmonizationandinterconnectionofexistinginfrastructures.ThiswasthebestwayofensuringthatthesystemwouldbeoperationalfromtheverystartoftheEuropeanEconomicandMonetaryUnion(EMU)in1999.TARGET2isanenhancedversionofthecurrentTARGETincorporatingtechnicalconsolidation,asinglesystem-widepricingstructurefordomesticandcross-borderpayments,aharmonizedservicelevel,andthesystem-widepoolingofavailableintradayliquidity.Thego-livedateforTARGET2issetforNovember19,2007,withgradualmigrationtothenewsystembythememberstatesinfourwaves.AllcentralbanksparticipatinginTARGET2,togetherwiththeirnationalbankingcommunities,areexpectedtobeusingthenewsystembyMay2008.
27
Visa:isaprivate,membershipassociationjointlyownedbymorethan20,000memberfinancialinstitutionsaroundtheworld.Visadevelopscommonstandardsandspecificationstofacilitatecommerceandprovidememberfinancialinstitutionswiththeglobalpaymentplatformtosupporttransactionson1.46billioncardsthatgeneratemorethan$4.3trillioninglobaltransactionsinover160countries.17
Voca:wasformedin1968andwasknownasthe“BankersAutomatedClearingSystem”orBACSwhichissimilartoACHintheUS.BACSchangeditsnametoVocain2004.VocaisoneofanumberofdomesticACH-typesystemsinEuropeandownstheBACSinfrastructurethatprocessesthemajorityofnon-RTGS,non-card,electroniccreditanddebitpaymentsforB2C,C2BandB2BintheUK.VOCAperformed5billiontransactionsin2005.
28
17www.visa.com
Selected government entities influencing cross-border payments
Bank for International Settlements:BasedinBasel,Switzerland,theBankforInternationalSettlementswasestablishedbytheHagueagreementof1930asaninternationalorganizationofcentralbanks.TheBankforInternationalSettlementsseekstomakemonetarypolicymorepredictableandtransparentamongits55membercentralbanks.Whilemonetarypolicyisdeterminedbyeachsovereignnation,itissubjecttocentralandprivatebankingscrutinyandpotentiallytospeculationthataffectsforeignexchangeratesandespeciallythefateofexporteconomies.Bankingservicesareprovided,butonlytocentralbanksortointernationalorganizationslikeitself.BaselIIwhichbeganin2001focusesonminimumcapitalrequirements,supervisoryreviewandmarketdisciplinetopromotegreaterstabilityinthefinancialsystem.
FATF(FinancialActionTaskForce):FATFonMoneyLaunderingisa33-memberorganizationestablishedbytheG-7SummitinParisin1989withprimaryresponsibilityfordevelopingworldwidestandardsforAMLandCFT.Itworksinclosecooperationwithotherkeyinternationalorganizations,includingtheIMF,theWorldBank,theUnitedNations,BankforInternationalSettlements,andFATF-styleregionalbodies(FSRBs),mostofwhichparticipateinitsmeetingsasobservers.FSRBsincludetheAsiaPacificGrouponMoneyLaundering(APG),theCaribbeanFinancialActionTaskForce,theOffshoreGroupofBankingSupervisors,andtheOrganizationofAmericanStates.
FinCEN(FinancialCrimesEnforcementNetwork):FinCEN’smissionistosafeguardthefinancialsystemfromtheabusesoffinancialcrime,includingterroristfinancing,moneylaundering,andotherillicitactivities.ItadministerstheBankSecrecyActof1970,whichauthorizesthereportingandrecordkeepingobligationswithrespecttofinancialtransactionsforlawenforcementpurposes.Sinceitscreationin1990,FinCENhasworkedtomaximizeinformationsharingamonglawenforcementagenciesanditsotherpartnersintheregulatoryandfinancialcommunitiestocombatillicitfinance.AstheUnitedStates’financialintelligenceunit(FIU),FinCENlinkstoanetworkofoverahundredsimilarFIUsaroundtheworld,sharinginformationtopursueinvestigations.
29
OFAC(OfficeofForeignAsstsControl):ischargedwithadministeringandenforcingU.S.economicandtradesanctionsbasedonforeignpolicyandnationalsecuritygoals.OFACcurrentlyadministersroughly30programsthattargetterrorists,roguecountriesandregimes,narcoticstraffickers,WMDproliferators,andotherilliciteconomicandnationalsecuritythreats.OFACisthesuccessortotheOfficeofForeignFundsControl,whichwasestablishedattheadventofWorldWarII.OFAC’sexpertiseinadministeringsanctionshasmadeitamodelforothercountriesthroughouttheworld.
SEPA: TheEurosystemhasavisionfortheSEPA–aeuroareainwhichallpaymentsaredomestic,wherethecurrentdifferentiationbetweennationalandcross-borderpaymentsnolongerexists.ThismeansthattheSEPAprojectnotonlyaimstoimprovetheefficiencyofcross-borderpayments,butalsoaimstodevelopcommoninstruments,standards,proceduresandinfrastructuresinordertofostersubstantialeconomiesofscale.WithintheSEPA,customerswillbeabletomakepaymentsthroughoutthewholeeuroareaasefficientlyandsafelyasinthenationalcontexttoday.TheSEPAisanaturalconsequenceoftheintroductionoftheeuro.TheultimateobjectivewithregardtodirectdebitsisthatalleuroareadirectdebittransactionsbeprocessedinaccordancewiththeSEPAscheme.
TFFC(TerroristFinancingandFinancialCrime):actingasthepolicydevelopmentandoutreachofficeforTFI,TFFCcollaborateswiththeotherelementsofTFItodeveloppolicyandinitiativesforcombatingmoneylaundering,terroristfinancing,WMDproliferation,andothercriminalactivitiesbothathomeandabroad.TFFCworksacrossthelawenforcement,regulatoryandintelligencecommunitiesandwiththeprivatesectoranditscounterpartsabroadtoidentifyandaddressthethreatspresentedbyallformsofillicitfinancetotheinternationalfinancialsystem.TFFCadvancesthismissionbypromotingtransparencyinthefinancialsystemandtheglobalimplementationoftargetedfinancialauthorities.
TFI(OfficeofTerrorismandFinancialIntelligence):TheUnitedStatesestablishedTFIinApril2004aspartoftheU.S.TreasuryDepartmentinordertomarshaltheTreasuryDepartment’sintelligenceandenforcementfunctionswiththetwinaimsofsafeguardingthefinancialsystemagainstillicituseandcombatingroguenations,terroristfacilitators,WMD(weaponsofmassdestruction)proliferators,moneylaunderers,drugkingpins,andothernationalsecuritythreats.TFIcomprisestheOfficeofTerroristFinancingandFinancialCrimes(TFFC),OfficeofForeignAssetsControl(OFAC),andFinancialCrimesEnforcementNetwork(FinCEN),amongothers.
30
References
RobertAdams,PaulBauerandRobinSickles,“ScaleEconomies,ScopeEconomies,andTechnicalChangeinFederalReservePaymentProcessing,”JournalofMoney,CreditandBanking,October2004.
AssociationforFinancialProfessionals,Electronic Payments Initiatives and the Internet,Bethesda,Maryland,August2000.
AssociationforFinancialProfessionals,Electronic Payments Initiatives and the Internet,Bethesda,Maryland,October2004.
AssociationforFinancialProfessionals,Payments Risk Survey,Bethesda,Maryland,March2006.
AssociationforFinancialProfessionals,Wire Transfer Survey: Receipt of Remittance Information,Bethesda,Maryland,October2005.
BankofEngland,Payment and Settlement Systems,2006.
BankofEngland,Payment Systems Oversight Report 2005,February2006.
BankforInternationalSettlements,75th Annual Report, June2005.
BankforInternationalSettlements,BIS Quarterly Review: International Banking and Financial Market Developments,March2006.
BankforInternationalSettlements,Central Bank Payment and Settlement Services with Respect to Cross-Border and Multi-Currency Transactions,September1993.
BankforInternationalSettlements,The Contribution of Payment Systems to Financial Stability,September2000.
BankforInternationalSettlements,Cross-Border Collateral Arrangements, January2006.
BankforInternationalSettlements,Current Topics in Payment and Settlement Systems,December1999.
BankforInternationalSettlements,New Developments in Large-�alue Payment Systems,May2005.
BankforInternationalSettlements,Policy Issues for Central Banks in Retail Payments,March2003.
BankforInternationalSettlements,Statistics on Payment and Settlement Systems in Selected Countries,March2006.
AllenBerger,DianaHancockandJeffreyMarquardt,“AFrameworkforAnalyzingEfficiency,Risks,Costs,andInnovationsinthePaymentsSystem,”JournalofMoney,CreditandBanking,November1996.
ClearingHouse,The Remaining Barriers to ePayments and Straight-through Processing,March2002.
“Cross-borderPayments:theSEPAImpact,”CorporateFinance,May2004.
DavidK.Eiteman,ArthurI.StonehillandMichaelH.Moffett,Multinational Business Finance, 10th edition,Pearson-AddisonWesley,Boston,2004.
EuropeanCentralBank,Cross-border Payments in TARGET: A Users� Survey,November1999.
EuropeanCentralBank,E-Payments without Frontiers,IssuesPaperfortheECBConferenceonNovember10,2004.
EuropeanCentralBank,Payment and Securities Settlement Systems in the European Union and in the Acceding Countries,March2006.
EuropeanCentralBank,Progress Report on TARGET2,2006.
EuropeanCentralBank,Second Progress Report on TARGET2,February2005.
EuropeanCentralBank,Towards a Single Euro Payments Area: Objectives and Deadlines, FourthProgressReport,February2006.
FederalReserveBankofChicago,Global Electronic Payments,April2004.
FederalReserveSystem,The 2004 Federal Reserve Payments Study: Analysis of Noncash Payments Trends in the United States: 2000-2003,FederalReserveSystem,December15,2004.
FederalReserveSystem,Fedwire Funds Transfer System: A Self-Assessment of Compliance with the Core Principles for Systemically Important Payment Systems,December19,2001.
FederalReserveSystem,A Snapshot of the U.S. Payments Landscape,RetailPaymentsResearchProject,FederalReserveSystem,2002.
31
FinancialActionTaskForce,Third Mutual Evaluation Report on Anti-Money Laundering and Combating the Financing of Terrorism: United States of America,June23,2006.
AndrewHaldaneandEdwinLatter,“TheRoleofCentralBanksinPaymentSystemsOversight,”BankofEnglandQuarterlyBulletin,Spring2005.
ThomasM.Hoenig,Payments and Settlement Systems: Future Players and Issues,SpeechattheBAIMoneyTransfer2000Conference,November9,2000.
DavidD.Humphrey,LawrenceB.Pulley,andJukkaM.Vesala,“TheCheck’sintheMail:WhytheUnitedStatesLagsintheAdoptionofCost-SavingElectronicPayments,”JournalofFinancialServicesResearch,February2000.
InternationalMonetaryFund,“TheIMFandtheFightagainstMoneyLaunderingandtheFinancingofTerrorism”,September2005.
InternationalMonetaryFund,Intensified Work on Anti-Money-Laundering and Combating Financing of Terrorism (AML/CFT),April17,2002.
InternationalMonetaryFund, International Financial Statistics,July2006.
JacobJegher,Cross-Border Business-to-Business Payments: The New Frontier,CelentCommunications,Boston,October2004.
R.BarryJohnstonandOanaM.Nedelescu,The Impact of Terrorism on Financial Markets,IMF,2005.
CharlesKahnandWilliamRoberds,“PaymentSystemSettlementandBankIncentives,”TheReviewofFinancialStudies,Winter1998.
GeorgeKaufman,“CommentonFinancialCrises,PaymentSystemProblems,andDiscountWindowLending,”JournalofMoney,CreditandBanking,November1996.
JabonnKim,“RetailPaymentServicesbySecuritiesCompanies?”KoreanEconomic&FinancialReview,April2006.
SandyKriegerandMicheleBraun,Opportunities to Improve Payments Services: Results from a Survey of Large Corporations,FederalReserveBankofNewYork,July2004.
SandyKriegerandMicheleBraun,“ImprovingBusinessPaymentsbyAskingWhatCorporationsReallyWant,”CurrentIssuesinEconomicsandFinance,FederalReserveBankofNewYork,May2005.
HarryLeinonenandKimmoSoramaeki,Optimizing Liquidity Usage and Settlement Speed in Payments Systems,BankofFinlandDiscussionPapers,Helsinki,Finland,1999.
AntoineMartin,“RecentEvolutionofLarge-ValuePaymentSystems:BalancingLiquidityandRisk,”EconomicReview,FederalReserveBankofKansasCity,FirstQuarter2005.
HeatherMcKenzie,“SWIFTCastsaWiderNet,”InstitutionalInvestor,NewYork,July2004.
StephenMillardandMarcoPolenghi,“TheRelationshipbetweentheOvernightInterbankUnsecuredLoanMarketandtheCHAPSSterlingSystem,”BankofEnglandQuarterlyBulletin,Spring2004.
PeterNorman,“EuropeanBankingReformComesUnderFire:BothIndustryandRegulatorsAreDissatisfiedwithPlanstoFacilitateCross-borderPayments,”FinancialTimes,November25,2005.
Jean-CharlesRochetandJeanTirole,“ControllingRiskinPaymentSystems,”JournalofMoney,CreditandBanking,November1996.
RetailBankingResearchLtd.,Study of Competition for Cross-Border Payment Services,ReportpreparedforEuropeanCommission,London,September2005.
DavidSawyerandJohnTrundle,“CorePrinciplesforSystemicallyImportantPaymentSystems,”FinancialStabilityReview,June2000.
GlennR.Simpson,“U.S.IsMovingonSeveralFrontsToPoliceFinancialTransactions,”TheWallStreetJournal,June24,2006.
GertrudeTumpel-Gugerell,“EurozoneBanksMustIntegrateCross-borderPayments,”TheFinancialTimes,October3,2005.
StephenWilliamson,“PaymentsSystemswithRandomMatchingandPrivateInformation,”JournalofMoney,CreditandBanking,August1998.
32
©2006VisaInternationalServiceAssociation
Allrightsreserved.November2006.
PrintedintheU.S.A.
Payment Products Plus Spending Information Equals Intelligent Payment
WithVisaCommercial,youhaveaccesstopaymentsolutions
designedspecificallytofittheneedsofyourbusiness.Ourflexible
paymentsolutionsandinformationmanagementcapabilitieswork
togethertoimproveyourprocure-to-payprocessforvirtuallyany
sizepayment.Whetheryouareasmallbusiness,alargecorporate
multinational,oragovernmententity,VisaCommercialoffers
solutionsthatwillbenefityouroperations.
Together,VisaCommercialpaymentsolutionsandVisaInformation
Managementdeliveracompletepurchasingprogramthatwill
helpyouoptimizepaymentprocessesandmakebetterbusiness
decisions.VisaCommercialpaymentsolutionsofferyouandyour
employeestheconvenienceofsimplifiedpaymentandpurchasing
efficiencies.Andbycombiningthiswiththeinsightandaccessof
VisaInformationManagement,youhaveacomprehensivesolution
thatwilldrivesuperiorbusinessperformance.
For more information go to www.visa.com/visacommercial or
contact your Visa Financial Institution today.