How lack of regulation will splinter cross-border payments

Published by GT News

A lot can change in five decades. Advances since the 1960s have brought us a global information system, driverless cars, a tunnel under the English Channel and even brought down the Berlin wall.

By comparison, however, the realm of international finance moves slowly. In fact, the business of global payments is still stuck in the past and the old world of borders and inertia.

The problem goes back 43 years, to the inception of the Society for Worldwide Interbank Financial Telecommunication, aka SWIFT, that was founded in 1973 to implement a messaging standard and a network for transmitting interbank transactions.

Over time, SWIFT has grown to become the de facto method. Already this year more than 1.5bn transactions have been facilitated using SWIFT’s financial institution network (FIN) messages. But could we now be approaching peak SWIFT?

At this volume of payments traffic, SWIFT is creaking. Transactions are slow to conclude and can be error-strewn. Relying on a complex series of business identifier codes (BIC), the system is anachronistic, causing many customers to lose money by wrongly inputting a single character. Investigations can take weeks to conclude, during which the money is stuck in limbo.

Furthermore, SWIFT’s reliance on a third, intermediary bank, between the sender and recipient banks, for clearance places additional wait and inefficiency on the whole process. Furthermore, the system is expensive, with the average small business incurring a fee of about $25 to $40 for each transfer, without taking currency exchange in to account.


Behind the times

If you were inventing a global payment network today, you wouldn’t devise it this way. This is the equivalent of using Morse code in the era of WhatsApp.

With such a problem to address, you would think the time was ripe for an upgrade to the standard. But don’t bet on SWIFT swiftly improving to help users.

As an effective cartel governed by international banks themselves, SWIFT has no incentive to improve. Why would it? Cross-border payments generate around US$45bn in revenue per month for banks, one of their biggest earners. Viewed through that lens, this is a system working well.

But the biggest roadblock to change is not just corporate inertia, it is…