Changes to payments plumbing provide an opportunity for organisational transformation

Regulatory changes in the cross-border payments systems ahead of the move to a new core settlement engine that goes live next year can strain and distract companies as they work to align their systems to the new regime. But, with the support of financial services organisations like StoneX, companies can use the compulsory changes to restructure their business to generate more profits.


This article is sponsored by Stone X

We are in the midst of a particularly eventful time in the payments ‘plumbing’ calendar. ‘Payment plumbing’ refers to the more critical and complex part of the payments system – that is, the ‘wholesale’ part – payments between financial institutions, the central bank and the government. The term ‘plumbing’ is used because this is not visible to the retail user but makes the whole system function.

This year will see a number of ISO 20022 migrations which will impact both domestic and cross-border payments through the SWIFT network. 

We will also see refreshes to the Real Time Gross Settlement (RTGS) payment systems, ahead of the move to a new core settlement engine that goes live next year. Even these changes won’t be the end of change, as the Bank of England recently outlined a further roadmap for the UK payments industry.

Any regulation update or change is incredibly cost- and resource-intensive. Getting the C-suite on board to commit the budget to implementing these changes can prove challenging. The aforementioned updates for 2023 will place a strain on already resource-stretched teams as they charge ahead with their implementation. They also serve as a distraction, taking professionals away from a focus on delivering for customers and improving business operations. Businesses can be forced to be less strategic because of these regulatory changes and the threat of fines that comes with them. 

But this does not necessarily have to be the case. It is possible for companies to use these compulsory shifts to restructure their businesses for greater success. There are three primary avenues for companies to explore that are relevant to both the changing regulatory environment and improving their operations. 

The cost of processing international payments. Companies need to explore ways to lower the cost to process international payments. 

McKinsey research found that cross-border flows represent around 16% of total transaction values, but 27% of global transaction revenues. This is equal to more than $200bn a year and is rising by more than 6% annually. 

The first step in driving down the cost of processing these payments is to break down the process into components, from treasury and operations to FX, to compliance. From there, companies need to look towards ways to build efficiencies throughout the process and move towards a unified process. 

Reducing payment failures. Payment failures are increasingly disruptive and preventing them from happening is a core function of any treasury management system (TMS). 

While it is hard to exactly measure the true cost of a failed payment, we typically estimate a broad range between $15 and $150. Multiplied by the millions of daily payments treasuries see, this is a serious and unnecessary cost for companies to bear. It provides a major incentive to improve failure rates, and a useful estimate to show how more efficient tools can improve the industry. 

Improving failure rates requires an understanding of why and where payments fail by looking across the pre- and post- settlement payment value chain. 

Currently one-third of cross-border payments fail because of incorrect account and IBAN details. Acquiring data to automate pre-validation is paramount in the payment initiation phase and can help reduce failures later on. This can be accomplished with an in-built format library, containing country-specific and bank-specific formats and standards across a variety of institutions and geographies.

Direct connections. Customers’ back-office applications, systems and software must be directly connected to bank partners in both developed and emerging markets. From a security, risk and fraud perspective, this creates a lot of additional attention. Treasuries are being asked to provide cash visibility in markets where they use non-standard formats and standards that their TMS applications cannot ingest. 

This can continue even when there are direct connections as often, they’re receiving bank statements as PDFs or Excel files that are not in a standard format. Businesses need to be input agnostic and be able to easily create standardised outputs, no matter what information they receive.

Our customers – be they large or small – have the ability to be agnostic about these various preferences and inputs. They are able to process transactions – no matter the payment network or method, the format and channel. 

StoneX Global Payments’ customers are able to send payments to more than 180 countries, across more than 140 currencies. The company has a network of more than 350 correspondent banks globally to engage in price discovery. 

StoneX has been a fully certified and accredited SWIFT Service Bureau for the last 20 years. This breadth of service means the company is a trusted payment partner for corporates, NGOs, and banks around the world.

When combined with StoneX’s Payments Technology, which enables clients to better adapt to change, operate more easily, and benefit from payment automation and cash visibility across all bank partners, there’s no disruption. 

In fact, we are dedicated to helping customers reduce – and where possible eliminate – friction in their operations. Back-office applications are able to communicate effectively and efficiently with business counterparties. In sum, firms can use a standardised framework to work at a lower cost with fewer failures. 

This transformational year – and those beyond this one – does not have to be seen as a series of obstacles to overcome. Instead, the opportunities can enable strategic change and provide better service for clients throughout the world. With support from firms like StoneX and as the African Continental Free Trade Agreement (AfCFTA) make tariff-free trade within the continent more of a reality, African companies can plan their expansion strategies confident that the payments systems in place will ensure secure and speedy transactions (see below). 

The Pan-African Payment and Settlement System

In 2020, the World Bank found that the enforcement of the AfCFTA has the potential of increasing African exports by $560bn, while boosting Africa’s income by $450bn by 2035. Notably, it reported that “out of the $450bn, $292bn would come from stronger trade facilitation – measures to reduce red tape, simplify customs procedures and make it easier for African businesses to integrate into global supply chains.”

The World Bank added that, while money is the lifeblood of an economy, a well-implemented payment infrastructure is its circulatory system.

One such measure includes the development of a centralised payment and settlement infrastructure to support trade in this new arrangement – now led by the African Export-Import Bank (Afreximbank) in partnership with the AfCFTA Secretariat and dubbed the Pan-African Payment and Settlement System (PAPSS). With PAPSS, payment facilitators – whether banks or emerging fintech ventures across Africa – will be able to plug in to make secure and instant payments on behalf of their customers.

Businesses across Africa will enjoy the benefit of receiving and making payments instantly, which will increase trust and trade volumes, and free up time previously lost while waiting to confirm payments. 

For instance, if a fashion house in Accra were to purchase kikoy fabric from a small fabric manufacturer in Kenya, it would be able to pay for the fabric instantly and in its own local currency. The fabric manufacturer in Kenya would receive payment instantly into its bank account, in its local currency, thereby skirting currently common delays in customs and tax procedures – freeing up time to respond quickly to the order from Accra.

How PAPSS works

With instant payment, participants no longer need to convert local currencies into hard currencies, which previously entailed the funds leaving Africa to be converted before being sent back again to the beneficiary bank – adding days to the transaction time. 

In addition, compliance, legal and sanctions checks are performed instantly within the system. Near-instant payments process within 120 seconds.

Due to the speed of the real-time payment process, PAPSS needs to guarantee that funds are available to complete the originator’s transaction before effecting the movement of debits and credits between participants’ accounts. Participants must, therefore, agree to a pre-funding arrangement.

Direct Participants integrate directly with PAPSS and the Real-Time Gross Settlement (RTGS) systems of central banks in the pre-funding process. Participants without an RTGS account – Indirect Participants – are able to fund or defund their clearing accounts on PAPSS with the aid of a Direct Participant providing the required liquidity.

Notifications are carried via the ISO 20022 messaging standard, notifying PAPSS, the Participants and RTGS of the status of every stage of the transaction.

PAPSS needs to ensure prompt settlement within 24 hours. Net settlement across all participating central banks occurs at the same time – 11.00 UTC – each day.