A future-proof payment system?
While SWIFT, Ripple and others battle it out in one region of RTGS space, treasurers can ask their banks for a different payments mechanism, one also being transformed by FinTech and the blockchain. If cost is an issue, or if your digital business creates a high volume of low-value payments, what about ACH? By Simon Brady.
Automated Clearing Houses (ACHs) provide domestic clearing at exceptionally low cost and with very high transparency and service levels. Because clearing is critically important to the efficient operation and integrity of the financial system, ACHs are typically classified as ‘SIPs’ or systemically important payments systems and so they are to an extent future-proofed: they will be maintained and their activities are monitored by a governing body, usually the national central bank.
Most banks do not provide individual businesses with the option to send money using the country’s local ACH systems but it has long been clear that a ‘global ACH’, a consolidation of the local ACHs into some kind of network, could create a powerful alternative cross-border payment system.
However, with no global ACH standard, and over 26,000 rules that govern bank routing in all the different countries, plus ever-increasing compliance requirements, attempts to create such a network in the past have failed to make progress.
To turn cross-border ACH into a relatively seamless and easy-to-use service, banks needed to be able to join a network with a single commercial agreement that uses technology to do the heavy lifting for them. PayCommerce is one: founded in 2006 it is a global ACH payment network provider which provides wholesale FX services and a local ACH solution across borders. PayCommerce says it can save users up to 80% on the cost of a payment.
“There is a new generation of tech businesses that are very global and have a lot of payment needs, whether collections or settlements, so our focus in the next few years is on this new generation of companies and large corporates. We provide a single platform for enterprise-wide payment needs, whether outgoing or collecting payments. There is a lot of cost saving when you streamline the platform and provide an enterprise-wide solution,” said Abdul Naushad, PayCommerce Founder and Executive Chairman, describing the initial ambitions of the company.
PayCommerce has come a long way since then. In April 2017, the company announced that it had achieved a milestone of over 100 banking and financial services institutions in its consortium, spanning more than 80 countries. According to the company, “PayCommerce enterprise customers include seven of the top global banks, 11 of the top 50 US banks, 14 Global Fortune 500® firms and eight US Fortune 500® companies. Additionally, the PayCommerce platform has processed over US $400 billion, consisting of over 300 million transactions in the last 12 months.”
Its main competitor is Earthport, which also claims to be “the leading payment network for cross-border payments” providing international ACH payment capabilities to its consortium bank partners, representing cross currency payments in more than 60 countries and 25 currencies. Like PayCommerce, Earthport effectively re-intermediates banks into a global ACH payment system and lets banks, money transfer organisations, merchant acquirers, gateways and newer global payment providers make payments globally on behalf of customers or directly to suppliers or global sub-merchants.
The previous two companies provide banking services to banks, which can then offer an improved service to their corporate clients. However, corporates can access global ACH more directly via a cloud-based portal such as Tipalti which is a global payment automation service that gives global ACH as one of its choices of payment channel. These portals offer a range of integrated services, including payee registration through to invoice processing, tax and regulatory compliance, remittance, payment issue resolution, fraud risk mitigation, payment reconciliation and payee reporting. The systems also check that payees are not on any international anti-terrorism, anti-drug trafficking, and anti-money laundering watch lists prior to payments being made.
Choosing this type of system, rather than asking your banks to utilise a different channel, means integration with ERPs, accounting and performance management systems. So the choice is not simply a new, cheaper payments channel offered by your banks, it is a fully-featured automated payments and remittance system.
Both PayCommerce and Earthport started out by focusing simply on the value-added parts of the transaction chain: initiation, processing, capture and customer service: they did not aspire to create real-time, instant payments in competition with other RTGS networks.
However, both companies have also announced blockchain-based initiatives to take their consortium networks to the next level, Earthport announced its gateway partnership with Ripple in August 2015, which led to the launch of the Earthport Distributed Ledger Hub for multiple ledgers, announced in January 2016. This was designed to provide connectivity to additional distributed ledgers as they emerge, all available via a single relationship with Earthport.
The structure of transactions is not changed by the addition of blockchain, the Ripple technology simply speeds up the transaction and all counterparties reconcile to single balances on the Ripple Consensus Ledger. In other words, the addition of Ripple unites correspondent banks and market makers in the same ledger which allows all the transaction information to be shared between Earthport the banks and the FX market makers.
In April 2016, Earthport executed the first cross-border payment transaction received via distributed ledger for Santander UK, enabling it to become the first UK bank to use distributed ledger technology (DLT) for cross-border payments globally.
PayCommerce has developed a different blockchain model based on its proprietary ‘Federated Ledger’ to enable real-time, instant payments, clearing and settlement integration for its banking consortium. The Federated Ledger is a hybrid, integrating both distributed and centralised ledgers which enable faster payments across networks via its messaging platform. According to the company, this “takes the next step in instant payments by uniting disparate regional and country systems onto PayCommerce’s bank consortium model which is interoperable with other global systems and networks to maintain ledger balances across all parties.”
The Federated Ledger is a hybrid of both distributed and centralised ledgers. It acts as an integration point across different networks of the distributed ledgers. But it is still the consortium banking model that, in both cases, creates the foundation on which the global network is based.
PayCommerce has announced the launch of the pilot programme to deliver instant payments between the US and India then extended to UK to India later in the fourth quarter. In 2017, the firm plans to roll out additional originating and receiving countries including Mexico, other GCC countries and South Africa; followed by Australia in 2018.
The first phase of testing has been completed and the firm sees 2017 as the year in which it rolls out a multi-country real-time, cross-border, account-to-account service.
For corporates these developments mean ever simpler and cheaper access to faster, more visible payments. There is also clearly a process of convergence between the larger bank networks, and the use of blockchain technology, which will increasingly pit these consortia against each other and against incumbents such as SWIFT. For banks this will create a complicated set of choices about technology and partners. For treasurers it simply means a wider range of ever simpler, cheaper and faster payments channels.