SWIFT has announced a pilot for its global payments initiative to increase efficiency of cross-border payments. But is the SWIFT model ideal for corporates and could blockchain challenge its status?

The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides financial institutions – about 11,000 of them based in more than 200 countries – with a secure network that transmits payment orders, essential for making cross-border transactions. More than 6.1 billion FIN messages were transmitted in 2015 (up from 5.6 billion messages in 2014).

It may not be popular to say this in financial circles, but SWIFT effectively has a monopolistic ownership of the network that allows the transfer of global payment messages – all banks need a SWIFT code to execute payments successfully. Added to that, the bank-owned cooperative supports ISO (International Standards Organisation), and as such, it pushes its users (banks and corporates) to use ISO20022 and its XML structure on its network. While this is undoubtedly a step that will bring efficiencies to the global payments industry, end users (the companies initiating and receiving payments every day) may well ask if the efficiencies and associated lower costs will be passed on to them.

Corporates should question the status quo

There may well be some questions regarding SWIFT's position as global payment services provider. Some voices in the financial industry have expressed concern with several aspects of the SWIFT business model:

• It has no comparable competition from other network providers, even though ISO20022 messages don't necessarily have to be transmitted over SWIFTNet.
• It is a non-profit organisation owned by its member financial institutions but some argue it would serve businesses better if it were a commercial organisation, providing a service that is in competition with other commercial services.
• SWIFT pays rebates to its members based on the number of messages transferred over its network – in effect the organisation is paying its own members (the banks) for using it. What do corporates get out of this? 
• SWIFT is non-profit yet it makes a not inconsiderable profit in real terms: €38 million before taxation in 2014 (based on operating revenue of €628 million, minus fee rebate for users and minus operating costs of €559 million).
• Some believe that its position as an ISO agent should be separated from its role as network operator; an independent entity should oversee the implementation of global standards.

Could blockchain be better than SWIFT?

With these concerns in mind, SWIFT is now seeing a potential challenge from another quarter: blockchain technology. In a recent post on Finextra, Saurabha Sahu, of Mindtree, notes some of the advantages of blockchain over SWIFT:

• peer-to-peer network communication;
• intermediary network not required;
• simple transactional charge workflow;
• flexibility to share documents over network for transparency; and
• capability to facilitate the new cryptocurrencies transactions.

In other words, blockchain has the potential to do much of what SWIFT currently does. Global banks and SWIFT itself have joined the Linux Foundation's Distributed Ledger Initiative in December 2015 and it's clear they have a very vested interest in ensuring that blockchain works for them, not against them. Corporates should stay awake, because the global payments market could very well change and the status quo might not prevail forever.

Twenty-one bank salute

SWIFT is certainly intent on maintaining its global position. Today it announced that 21 banks have started a pilot for its global payments innovation initiative. The initiative aims to increase the speed, transparency and predictability of cross-border payments. So it's clear that the member-owned cooperative is working on improving its products and services for cross-border payments. It still remains to be seen how fintech disruption will change this market.

According to Wim Raymaekers, leading the initiative at SWIFT, the goal is to significantly improve the cross-border payments experience for corporate customers. He said: “As we progress, we aim to incorporate additional innovations and deploy new technologies to this global payments innovation initiative, and define additional service level agreements that will cater for other client groups, further reducing the costs and frictions arising from compliance, liquidity and processing efficiency considerations involved in cross-border payments.”

The banks participating in the pilot include: ANZ, Bank of America Merrill Lynch, Bank of China, Bank of New York Mellon, Bank of Tokyo-Mitsubishi UFJ, Barclays, BNP Paribas, Citi, Danske Bank, DBS, ICBC, ING Bank, Intesa Sanpaolo, JPMorgan Chase, Mizuho, Nordea, Royal Bank of Canada, SMBC, Standard Chartered, UniCredit, and Wells Fargo.