Changes to payments plumbing provide an opportunity fororganisational transformation


We’re in the middle of a particularly busy time in the Plumbing payments calendar. “Payment plumbing” refers to the more critical and complex part of the payment system – namely the “wholesale” part – payments between financial institutions, the central bank and the government. The term “pipe installation” is used because this is not visible to the retail user but makes the whole system work.

This year there will be a number of ISO 20022 migrations that will impact both domestic and cross-border payments over the SWIFT network.

We will also see updates to Real Time Gross Settlement (RTGS) payment systems ahead of the move to a new central settlement engine going live next year. Even these changes will not be the end of the shift as the Bank of England recently outlined another roadmap for the UK payments industry.

Each regulation update or change is incredibly costly and resource intensive. Getting the C-suite to allocate the budget to implement these changes can prove difficult. The above 2023 updates will weigh on already stretched teams as they move forward with their implementation. They also serve as a distraction, diverting professionals from focus on delivering for clients and improving business operations. Due to these regulatory changes and the associated threat of fines, companies may be forced to act less strategically.

However, this does not necessarily have to be the case. Companies can use these forced shifts to restructure their business more successfully. There are three main avenues companies can explore, relevant both to the changing regulatory environment and to improving their operations.

The cost of processing international payments. Businesses need to look for ways to reduce the cost of processing international payments.

McKinsey research has found that cross-border flows account for around 16% of total transaction value but 27% of global transaction revenue. This equates to more than $200 billion per year and is growing at more than 6% annually.

The first step to reducing the cost of processing these payments is to break down the process into components, from Treasury and Operations to FX and Compliance. From there, companies must look for ways to gain efficiencies throughout the process and move towards a unified process.

Reduction of payment defaults. Payment defaults are increasingly disruptive and preventing them is a core function of any treasury management system (TMS).

While it’s difficult to accurately measure the true cost of a failed payment, we typically estimate a wide range from $15 to $150. Multiplied by the millions of daily payments the coffers see, that’s a serious and unnecessary cost for businesses to bear. It provides an important incentive to improve failure rates and a useful estimate for showing how more efficient tools can improve the industry.

To improve failure rates, you need to understand why and where payments fail by looking at the payments value chain before and after settlement.

Currently, a third of cross-border payments fail because of incorrect account and IBAN information. Capturing data to automate pre-validation is paramount at the payment initiation stage and can help reduce later errors. This can be achieved with an integrated format library that contains country and bank-specific formats and standards for a wide range of institutions and regions.

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

Even with direct connections, this can go as far as receiving account statements as PDF or Excel files that are not in a standard format. Businesses need to be input-agnostic and be able to easily create standardized outputs, no matter what information they receive.

Our customers – large or small – have the opportunity to be independent of these different preferences and inputs. They are able to process transactions – regardless of the payment network or method, format and channel.

StoneX Global Payments customers can send payments to more than 180 countries and in more than 140 currencies. The company has a network of more than 350 correspondent banks worldwide to participate in pricing.

StoneX has been a fully certified and accredited SWIFT service bureau for 20 years. This breadth of service makes the company a trusted payment partner for corporations, NGOs and banks around the world.

Combined with StoneX’s payments technology, which enables customers to better adapt to change, work more easily and benefit from payment automation and cash transparency across all banking partners, there is no disruption.

In fact, we strive to help clients reduce—and where possible—eliminate, friction in their operations. Back office applications are able to communicate effectively and efficiently with business counterparties. In summary, companies can use a standardized framework to operate more cost-effectively with fewer downtimes.

This transformational year – and the years beyond – need not be viewed as a series of obstacles to be overcome. Instead, opportunities can enable strategic shifts and better serve customers around the world. With the support of companies like StoneX and as the African Continental Free Trade Agreement (AfCFTA) makes duty-free trade within the continent a reality, African companies can plan their expansion strategies knowing that the payment systems in place ensure secure and fast transactions (see below ).

The Pan-African payment and settlement system

In 2020, the World Bank found that enforcing the AfCFTA has the potential to save African exports by 560 billion in more trade facilitation measures – measures to cut red tape, simplify customs procedures and facilitate the integration of African companies into global supply chains.”

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

One such move includes the development of a centralized 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 intermediaries – whether banks or emerging fintech companies across Africa – can connect to make secure and instant payments on behalf of their customers.

Businesses across Africa will reap the benefit of receiving and executing payments instantly, increasing trust and trading volume, and freeing up previously lost time waiting for payments to be confirmed.

For example, if a fashion house in Accra bought Kikoy fabric from a small fabric manufacturer in Kenya, it could pay for the fabric immediately and in its own local currency. The fabric manufacturer in Kenya would receive payment immediately in its local currency in its bank account, bypassing the current delays in customs and tax procedures – and buying 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 meant funds leaving Africa had to be converted before being sent back to the beneficiary bank – adding days to transaction time.

In addition, compliance, legal and sanctions checks are performed instantly within the system. Almost instant payment process within 120 seconds.

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

Direct participants integrate directly into the pre-financing process with PAPSS and central banks’ Real-Time Gross Settlement (RTGS) systems. Participants without an RTGS account – indirect participants – can top up or charge back their clearing accounts on PAPSS with the help of a direct participant who provides the necessary liquidity.

Notifications are transmitted via the ISO 20022 messaging standard and inform PAPSS, the participants and RTGS of the status of each phase of the transaction.

PAPSS must ensure prompt processing within 24 hours. Net settlement across all participating central banks occurs at the same time each day – 11:00 UTC.