Cross-Border Credit Transfers: Next Up For A Global Standard?

  Jane Hennessy, senior vice president for strategy and marketing for the international division of Wells Fargo Bank, has a problem when she competes against such large U.S. rivals as Citigroup and JPMorgan Chase & Co. for business with multinational corporations.
  Wells Fargo has partner banks in only 13 countries where it can send payroll, invoices and other routine electronic payments via automated clearinghouse on behalf of the corporations. That is a fraction of the branches or partners Citi and Chase have outside the United States. To expand, Wells Fargo would have to find new banks in the countries where it is not represented, negotiate contracts, agree on technology specifications and choose vendors. In all, that is a six- to nine-month process.
  â€œWouldn’t it be nice if I didn’t have to go through this onerous process every time I wanted to implement a new country?” asks Hennessy. “(For example) I could easily add South Africa if I have a customer that wants to send payments to South Africa.”
  The problem is, there is no rulebook or technology standard for making the growing number of nonurgent international credit transfers that multinational corporations, government agencies and other organizations increasingly demand. Hennessy is among a small group of bankers and payment-clearinghouse operators seeking to change that situation.
  The group has floated a concept for an “International Payments Framework,” which its backers say would reduce the costs and hassles for banks to make cross-border credit transfers. The group is targeting transactions between the United States and Europe, where by far the most international electronic payments pass back and forth.
  These noncard payments usually are sent in batches through automated clearinghouses to make a range of payments, from distributing employee payroll and pensions to paying bills from vendors and exporters. The transfers are considered high-volume, relatively low-value and nonurgent, since they usually take two days or more to clear.
  Today, more than 95% of all credit transfers are done domestically. But with growth of global trade, more and more corporate customers need to be able to send payments across borders, say organizers of the payments framework.
  â€œInternational ACH (automated clearinghouse) is an important business opportunity going forward,” Roy Decicco, Chase senior vice president for industry issues, tells Cards&Payments. “It’s where our customers are going.”
  Such ACH transactions require bilateral agreements between the banks on the sending and receiving ends in different countries, unless the bank has its own foreign branches. That increases costs for all parties involved, say backers of the global payments idea.
  Hennessy and Decicco sit on a steering committee that has drafted a plan for setting up the payments framework. The group in January launched a drive to recruit 25 banks and clearinghouses to form an association to manage the framework. They hope to launch a pilot with the first standard international ACH credit transfers by the end of next year.
  Ripening Situation
  Organizers say conditions are shaping up that could make such an interoperable global payments system work.
  In Europe, banks in late January began to lift barriers for cross-border credit transfers–the first type of electronic payments to be rolled out under mandates for a Single Euro Payments Area (see News story on page 8). SEPA also is to bring about a common market for direct debits by November 2009 and card payments by the end of 2010.
  With SEPA, credit transfers throughout Europe will be treated like domestic payments, just as the ACH system in the United States handles high-volume credit transfers within the U.S. and its territories. Credit transfers account for about 20% of all electronic payments in Germany, the United Kingdom and France and a much higher share in Eastern Europe, according to the European Central Bank.
  Global standards also are becoming available, most notably the ISO (International Organization for Standardization) 20022 format, for the way banks and clearinghouses securely send messages to one another. And network technology based on Internet protocols continues to advance.
  Moreover, U.S. banks and clearinghouses will have to adopt some of the same standards and rules proposed for the new payments framework to comply with demands from the U.S. government to beef up monitoring of international funds transfers. The U.S. Treasury Department’s Office of Foreign Assets Control wants U.S. financial institutions to be able to identify organizations or individuals sending funds through their banks if those funds originate or are received by a foreign bank. That is to ensure the senders or receivers are not on terrorist watch lists or covered by political sanctions.
  In effect, organizers of the proposed International Payments Framework hope the initiative will do for bank credit transfers what Visa Inc. and MasterCard Worldwide did for card payments–create a globally interoperable system for making credit transfers.
  There is one big difference, however, say backers of the framework. It does not propose banks build any new networks or lay much new infrastructure, as Visa and MasterCard did. Instead, it would link such national and regional schemes as the U.S. automated clearinghouse system and Europe’s banks and clearinghouses covered under SEPA.
  â€œWe’re creating rules and standards and new operating procedures and guidelines that enable (banks and clearinghouse) systems to talk to one another,” said Alan Koenigsberg, Chase product executive for Europe, Middle East and Africa and one of the leaders of the payment-framework effort. He helped introduce the concept at a recent conference put on by NACHA, the association that sets rules for ACH transactions in the United States.
  The idea for building a bridge between the U.S. and European clearinghouse systems and then expanding it to banks in other countries came out of NACHA’s Global Payments Forum, a discussion group the association formed some years ago to hash out cross-border payment issues.
  Organizers are stressing they are creating a new rules-making body, not a scheme. They are eager to distance the current proposal from an earlier plan to build a global ACH system. That system, the Worldwide Automated Transaction Clearing House, or WATCH, fizzled out in 2001 after banks realized the costs involved in creating the new infrastructure to make it work.
  Big Banks Onboard?
  Even the toned-down initiative may have trouble getting off the ground because it needs big banks in the U.S. and Europe to make it go. Large financial institutions may have trouble finding a business case because they now own the most market share in international ACH payments and wire transfers, says George Thomas, head of New York-based Radix Consulting and former executive vice president for the payments business of The Clearing House Payments Co., a major ACH processor in the United States.
  â€œWhy would you want to level the playing field for all the smaller financial institutions?” he asks. “There’s no incentive for large global banks to do that. [European banks] were forced to do it for SEPA.”
  Thomas also is not so sure corporate customers are clamoring for a new, standardized, global electronic payments system. A survey his former company did in late 2006 concluded U.S. corporations do not send cross-border electronic payments in sufficient quantities to have justified the company starting a new division. And the U.S. Federal Reserve, the largest processor of ACH transactions stateside, says it only handles 1 million international transactions per year, to four European countries, compared with an average 40 million domestic transactions per day.
  How Much Demand?
  U.S. corporations apparently are turning more and more to wire transfers to pay their foreign suppliers or to make other international payments. A 2007 survey by the U.S.-based Association for Financial Professionals found that 43% of respondents increased their use of wire transfers over the previous two years, while only 17% said they decreased their use.
  Wire transfers, which carry higher fees than ACH payments do, are available in more countries and clear more rapidly, were the most-frequently used method for making international payments. Checks were second, said respondents. Fees vary, but international ACH transactions can cost US$1 to $4 says Wells Fargo’s Hennessy. Today, banks charge customers $8 to $12–and sometimes more than $30–per international wire transfer, observers estimate.
  Making international credit transfers easier also could cost banks fee revenue from wire transfers, points out Thomas. This may be one reason organizers of the payments framework could point to few big banks ready to join when they introduced the concept at a NACHA conference in January, 12 months after the project team began work on the concept.
  Neither Citibank nor Bank of America Corp. or the largest European banks gave any indication they were ready to climb on board. Even Decicco could not guarantee Chase would become a member.
  But he and other organizers point out the recruitment phase of the project had just begun. Well Fargo’s Hennessy told Cards&Payments she was “very optimistic” the committee would meet its goal of signing up 25 large banks and clearinghouses to launch the organization by the end of March. Among those European banks that have expressed strong interest are UK-based Royal Bank of Scotland and UBS in Switzerland, according to Arthur Cousins of South Africa-based Standard Bank, who also is a member of the steering committee. Observers also expect Chase to sign on, among other U.S. banks.
  Threats From Nonbanks
  If some big banks on both sides of the Atlantic seem to be attracted to the idea of a system for transcontinental credit transfers, it may be because they realize their customers eventually could go elsewhere for for lower fees, faster transactions and fewer lost or returned items. That means more competition could come from nonbanks.
  â€œIt’s not sustainable over time,” says Dag-Inge Flatraaker, general manager for group payment strategy and infrastructure at one of Norway’s largest banks, DnB Nor. He notes a range of new players are nibbling away at the business of banks for cross-border electronic payments, including remittances made by expatriate workers. These players range from Internet payment scheme PayPal to U.S.-based funds-transfer service Western Union. A growing assortment of remittance schemes using mobile phones or more rudimentary “hawala” systems in developing countries also are making a play.
  And there are, of course, threats from such giants as Google and Microsoft. “They will be part of the landscape,” says Flatraaker. “You need to be innovative, using new technology.”
  The Federal Reserve charges banks an extra $2 per transaction to send credit transfers to such countries as the United Kingdom and Germany. That compares with less than half a U.S. cent to process domestic transactions. Wire transfers and international card payments, of course, are more expensive.
  In short, the business case for the payments framework is that “it will make it less expensive and more simple for financial institutions to connect,” says Henrik Parl, head of Denmark-based cross-border payments provider Eurogiro Network.
  But for some big multinational corporations that need to pay invoices and payroll and make other relatively low-value transactions around the world, the real cost savings is not in the lower bank fees, says Paul Burstein, head of operations services for the corporate treasury department at U.S.-based General Electric Co.
  â€œThe beauty of [a payments framework] is we would deal with one or two or three banks for service, instead of having individual relationships in a dozen or two dozen countries,” he tells Cards&Payments. And with the common rules and technical standards, GE could equip its own back office to send the payments to banks or clearinghouses.
  Questions Remain
  A number of unanswered questions regarding the International Payments Framework remain. One is how easily banks and clearinghouses outside of Europe and the United States could plug into the system, especially in such developing countries as Brazil, China and India, which have tight regulations governing the foreign-currency reserves banks can hold.
  â€œWe have very controlled borders, not only for traditional goods but also trading in (U.S.) dollars,” says Joaquim Kiyoshi Kavakama, CEO of Camera Interbancaia de Pagamentos, a Brazilian ACH processor. “I don’t think legislation allows us to receive transactions and send them to foreign ACHs.”
  Who will gain access to the interoperable system also is a matter of contention. Organizers are seeking big banks among the 25 charter members, but will these banks be in a position to dominate, charging fees to nonmember banks for the latter to send and receive payments under the framework?
  Organizers have not yet made it clear whether membership is required to tie into the system, but Chase’s Decicco recalls the original plan was “you would be a member to participate in the framework.”
  Despite these problems, organizers believe they will launch the organization on schedule at the end of this month and conduct the first standard transatlantic transactions well before the end of next year. Market forces more than anything else are compelling the banks to act, say backers.
  â€œWe see more of our clients doing low-value payments,” says Wells Fargo’s Hennessy. “We need a better way of doing it.”
  (c) 2008 Cards&Payments and SourceMedia, Inc. All Rights Reserved.
  http://www.cardforum.com http://www.sourcemedia.com