Instant payments: Swift and the future of cross-border transactions

Ever since Swift replaced Telex as the dominant means of making cross-border payments, it has been the world’s foremost means of moving money overseas, now facilitating $150 trillion in payments per year.

However, Swift isn’t the only way to transfer funds internationally – card networks, fintechs, blockchains and central bank digital currencies have all emerged in the past decade or so as viable alternatives to Swift, though none of them are even close to capturing its market share.

The G20 group of nations and many other national, international, and corporate entities are all working towards either improving Swift or building an alternative, and their efforts may bear fruit. Here we will look at Swift as it stands, what it could be, and what alternatives to it may emerge.

Can we go beyond Swift?

Whether you are a multinational corporation paying an overseas supplier or an individual sending money to a friend overseas, Swift is, with a few exceptions, the standard for international transfers. The system was brought online in 1973, replacing the earlier Telex system.

Telex was functionally little different from faxes: messages saying that person X is transferring amount Y to person Z had to be written manually, printed, and input manually at the recipient’s end. It was only a slight improvement over telegrams and letters, and the human element meant that mistakes could be made. Swift was a direct bank-to-bank interface, and today it is fully automated, even at the anti-fraud level – though as we’ll see that doesn’t mean that it is by any means fast.

Swift is not without its drawbacks. The first being, as is often the case, price: banks will typically charge 2-5% to cover exchange rate costs when transferring between currencies, and individual banks will often add extra charges. Barclays, for example, can charge £25 for making an international transfer from one of its branches, and there is a complex array of fees for sending to different countries, plus the possibility that the recipient has to pay for the money they are being sent.

There is also the issue of speed: a cross-border payment using the Swift network typically takes between one and four working days. This is because international transfers on Swift can only happen when foreign exchange markets are open. If a payment is sent late at night, it will have to wait until morning in its destination to be processed. Weekends and bank holidays will further extend this.

The complex anti money-laundering and fraud checks that need to take place at the sender and recipients’ banks are usually almost instant, but if there is ambiguity or some other delay then this can also add time to the transfer, possibly pushing it into another day. Then there are the agreements between sender and recipient banks that need to be in place for a fast direct transfer – much like flying from one city to another, if there is no direct route then your money will have to make a stop-over at a connecting bank, prolonging its journey.

Are instant cross-border payments possible?

Although both businesses and consumers can send instant payments within their borders, international payments lagged far behind until recent years. There are of course obstacles that need to be confronted, such as the differing jurisdictions and rules between countries, but these are not insurmountable given the enormous computing power available today and the ability for algorithms to sort information much faster than was previously possible.

There are several alternatives to Swift that enable instant cross-border payments. PayPal is one of the largest, though it is not suitable for business-to-business transactions as yet. Cryptocurrency can also be instant, though again businesses are unlikely to want to pay in Bitcoin and there are concerns around everything from fraud to its environmental impact. Ripple is a blockchain-based international payments system that aims to work in real-time and is aimed at B2B payments, and both Wise and Revolut offer real-time or close to real-time payments for SME companies. Lastly, established companies like Western Union have been working in the international transfers space for decades, and in some cases their transfers are faster than Swift.

There are also systems like IXB (immediate cross-border payments), being developed by EBA Clearing, The Clearing House (TCH) and Swift, in collaboration with 25 financial institutions (FIs). IXB aims to utilize existing instant payment building blocks – namely TCH’s RTP and EBA Clearing’s RT1 – to provide instant cross-border payments along the euro and US dollar currency corridor. This means that a European RT1 user bank will soon not only be able to reach other RT1 users, but also US banks that are connected to RTP (and vice versa). This will be achieved using synchronized settlement of RTP and RT1 payments which, in turn, will ensure certainty of execution. Although it is not the worldwide instant payments service that would revolutionize payments, it is a step in the right direction.

There are a number of other developments happening in other regions too: residents of Singapore, Indonesia, Malaysia and Thailand can now send instant payments thanks to a new payments systems, for example, and India and Singapore have also established similar systems as part of a ‘growing trend’ in Asia.

What’s next for cross-border payments?

A more wide-ranging change to global payments may come from the G20 group of nations, whose members represent 85% of global GDP. They have developed a roadmap for enhancing cross-border payments (PDF), that is aiming for 75% of global payments to be made within sixty minutes or less.

This could be the major change to international payments that businesses around the world have been looking for. Although it doesn’t cover every single nation on Earth, having the G20 implement a instant payments system, likely using Swift as its foundations, would spur the rest of the world to follow suit, and hopefully lead to a global financial system that is frictionless, low-cost and extremely fast.

Overall, the future of cross-border payments is very exciting. There are a number of new technologies and initiatives that have the potential to make sending and receiving money internationally faster, cheaper, and more secure. It will be interesting to see which technologies and initiatives emerge as the dominant players in the cross-border payments market in the years to come.