Cross-border payments have traditionally remained a mystery for most users except the participating banks. These payments go through a series of banks before getting credited to the recipient’s account.  SWIFT is the primary method of communication used by banks in processing international payments.

In the era of the global digital economy, cross border payments are still felt backward and rigid. One of the most common challenges of cross border payment today is that it takes several days or a week for funds to reflect in the receipt’s account. This can be due to several reasons such as compliance requirements, regulatory differences, or high number of intermediary banks. Each participant of the entire value chain of the transaction is limited to its own data environment. Lack of visibility of payments status and control on payments affects both the parties involved in the transaction and their banks. Additional challenges in terms of High cost and uncertainty of fees to be charged leading to reconciliation issues also leaves bad customer experience. 

To solve the challenges faced by banks and cater to the changing need of corporates, SWIFT has launched new initiative- SWIFT global payments innovation (SWIFT gpi)

SWIFT gpi at a Glance

With SWIFT gpi financial institutions can send or receive funds quickly and securely across the world, with full transparency and traceability over the payments at any point in time. It aims to improve the cross-border payments across the correspondent bank and introduce a new market standard by connecting all the participants of the payments in the value chain.

How does it work?

SWIFT gpi is a cloud- based database that is hosted at SWIFT, designed to provide complete end-to-end visibility of the payments status until it reflects in the receipt’ account. SWIFT gpi seeks to meet the changing needs of corporates – faster transactions with full transparency and complete end to end traceability, without compromising banks’ ability to meet compliance obligations and market, credit and liquidity risk requirements.

To track the transaction payment, the initiating bank can assign a unique tracking code corresponding to that particular transaction. This unique code is 32 hexadecimal characters. This code is used further to track the status of the payment in the payment value chain using SWIFT gpi.

SWIFT gpi combines traditional SWIFT messaging and banking systems with new business rules. To ensure consistency, SWIFT gpi operates based on business rules captured in the multilateral service level agreements (SLA) between participating banks.

Benefits to corporates

SWIFT gpi is an initiative to improve the customer experience in cross-border payments by connecting all the stakeholders of the value chain. Its design helps banks to complete the international payments faster and without friction which will indirectly help the corporates to expand and grow their business globally. Main benefits for corporates:

• Same day transaction which was almost a week earlier.
• Transparency in the fees charged with respect to commission and exchange rates.
• End to end tracking of payment status at any point in time via the cloud using a Unique reference number.
• The transmission of full and unaltered remittance information which will ease the reconciliation of payments for the corporates.
• Cloud improves the communication between all the parties involved in the value chain.

Benefits to Financial Institution

With the implementation of the first phase of SWIFT gpi, banks can provide better end to end experience to its customers which will improve bank’s relationship with its clients and motivate these clients to increase their volume of transactions with SWIFT gpi banks only.

Cloud technology has eased the bank’s workload in terms of engaging employees for tracking the payments for clients and improving the operational efficiency of the bank. In the long run SWIFT gpi will help banks achieve higher cost saving and operational efficiencies from enhanced compliance practices and optimised intraday liquidity flow.

Correspondent banks benefit strategically by leveraging the end to end digital ecosystem provided by SWIFT gpi and connect all the parties involved in the value chain of international payments. 

Roadmap for Implementation

For smooth adoption of SWIFT gpi, it is being rolled out in three phases. First phase was launched in Feb 2017 with a new set of standards in cross-border payments to improve speed, transparency over fees and end to end tracking of payment information to all stakeholders. Second and third phases would be related to high cost and operational inefficiency in the current cross- border payments landscape.

In the second phase, more control will be given to banks on payments. In case of any fraudulent activity, the bank can immediately cancel the payment regardless of the status of payment in the payment chain. Also, participants can send additional information along with the payment if required.

SWIFT has introduced SWIFT gpi tracker to improve transparency and traceability in the international payment value chain. This tracker can easily be integrated with back-end systems of banks.

These phased rollouts and the approach taken should make it easier to adopt across banks and payment networks resulting in unravelling the mystery around cross-border payments.

E-Commerce has broken the political borders and offers products & services across different country borders. This has resulted in a high volume of cross-border goods and payment flows. 

Cross border payments have become an integral part of the day-to-day activities of global businesses. Small Businesses’ zeal to expand their business beyond their country boundaries has been well supported by ongoing digitalisation and high-end technological capabilities across multiple sectors and industries. However, it continues to face significant challenges owing to complicated cross-border mechanisms. The Small businesses face challenges in making or receiving payments internationally because of dealing in different currencies and country specific rules and regulations for international payments. This has created a need for a more agile and frictionless cross border payment framework making cross-border payments as simple as domestic transactions.

What are Cross-border payments?  

Cross-border payments are defined when both the parties i.e. buyer and sellers involved in the transaction are registered in different countries. Most popular cross border payments methods are wire transfer, credit cards and alternative payment methods- mobile wallet, low value payment method. All interaction for payments happens between buyers and sellers through their respective Banks. The Banks communicate with each other through the SWIFT mechanism when it comes to international transactions. 

In Traditional cross-border payments of correspondent banks, the number of intermediary banks depends on the relationship of the buyer’s and seller bank’s with the correspondent bank. As the number of intermediary banks increases, costs associated with fees and commissions also increase. A Bank can track the transactions till its immediate bank. It becomes difficult for the originating bank to track the transaction once the payment goes to the next bank in the sequence. There is no standard procedure for cross-border payments due to different rules and regulations of each country.  Evolving customer requirements, instantaneous fund transfer, cost reduction, complete transparency and technological innovation has initiated the process to improve cross-border payments as a whole.

Cash Flow in Cross-border Payments

When a customer makes a purchase, there’s a complete back-end process wherein money gets transferred from the buyer’s bank account to the seller’s bank account. This process becomes very complex when it comes to cross-border payments. In international transactions, currency exchange rates and foreign transaction fees are also involved along with the fees or commission charged by the different bank in the value-chain. In cross border payments domestic and international financial institutions are working together to make the transfer of funds.

When a purchase is made, if the buyer’s and seller’s bank have a direct relationship payment is done very easily and seamlessly but in the absence of direct relationship intermediary bank’s role becomes important. These intermediary banks are called correspondent banks.

Major Banks across the globe have their own branch or correspondent bank’s branch in another city. In such cases, the funds will first move from the Buyer’s bank branch to the Bank’s own branch or its Correspondent bank’s branch in the seller’s country. This fund is further transferred to the seller’s bank who will then credit the seller’s account. There are many entities, different currencies, exchange rates and transaction fees involved in the single international transaction which make the process slow and opaque in nature. The more the number of correspondent banks in the chain, cost and complexity of transaction keeps on increasing

In the Era of Globalised Digital Economy, international payments still felt backward and analogue.

A Revolution in Cross Border Payments  

The future of cross-border payments is clear wherein the world requires ability to move funds instantaneously, seamlessly with full transparency and 24*7 access. As the payment industry started moving forward on this journey, an array of new industry initiatives and emerging technologies are transforming the payments process. Fintechs using emerging technologies like blockchain, artificial intelligence, machine learning have started offering faster, agile and seamless solutions to the financial institutions to cater the emerging needs of customers.

Currently multiple paths are being used by the payment service providers such as Real-time payments, SWIFT gpi, SWIFT’s transaction manager, artificial intelligence, blockchain and digital currencies- cryptocurrency, central bank digital currency and stable coins. These new ways in cross-border payments would provide opportunities to make cross-border transactions faster, more frictionless, efficient, transparent and cost-effective like domestic transactions. Fintechs act as catalysts for innovation and bring global payments together through various approaches. Banks have started collaborating with fintech to mend their strengths and optimize their offerings by enhancing the payments infrastructure with latest technologies.

This revolution will transform the landscape of cross-border payments and empower the end user with full control on sending and receiving international payments at any point in time with complete transparency related to fees/ commissions charged and traceability of transactions in the system.

As per Deloitte report – B2B and P2P payments with blockchain would result in a 40% to 80% reduction in transaction costs and take an average of four to six seconds to finalize (compared to two to three days using the standard transfer process).

Digital currency would shift the world’s economy towards a cashless economy. Digital currency has the capability to change the perspective of individuals towards money. The continuous rise of cryptocurrencies such as Bitcoin, Ethereum has led the global central banks to explore the benefits and challenges of a regulated Digital Currency – Central Bank Digital Currency (CBDC). Few countries have even started work on the same and most of them are at the R&D stage and China is in the pilot stage of CBDC.

What is Digital Currency?

The Digital currency has all the intrinsic properties of cash/ physical currency except the form. Cash/Physical currency has both physical and electronic form, however Digital currency exists only in electronic form. Digital currency can be accessed with computers or mobile phones. Digital currencies can be used to purchase goods or pay for services like cash/physical currency. For example, Instead of using cash or making e-payments, customers can make the payment to retailers by transferring digital currency using a mobile phone. 

Success Stories from the Past

In the early 80s, all the trading of equity stocks and the Government securities was done offline through paper-based certificates but in today’s world of technology, all the trading of stocks and government bonds is being done only digitally. The digitalisation of the complete trading process has been seamless and created more growth opportunities and transparency. Similarly, digital currency can remove the intermediaries and perform direct peer to peer transactions with higher speed, accuracy, transparency and traceability. 

Distributed ledger technology-based cryptocurrency such as Bitcoin,  Ethereum exist and are being used around the globe. Their production is completely digital and is not regulated by any government authority or central banks. Central banks around the world are also researching regulated digital currency (CBDC).

How Digital currency differs from Virtual and Cryptocurrency

From a broader perspective, virtual and cryptocurrency are subsets of Digital currency. Virtual currency is an unregulated digital currency mainly controlled by its developer, the founding organisation, or the defined network protocols such as cryptocurrencies and coupon- or rewards-linked monetary systems. 

Virtual currency that uses cryptography to secure, control and manage the creation of new currency units and finally verify the transactions is commonly known as cryptocurrency. Bitcoin and Ethereum are the most popular decentralised cryptocurrency and Facebook’s Diem is an example of centralised cryptocurrency. 

Concept of CBDC and how it would work?

Digital currency that will be issued and regulated by the country’s central bank is known as a central bank digital currency (CBDC). For example, think of a cryptocurrency being managed and backed by the full faith and support of the country’s central bank like RBI in the case of India. This cryptocurrency would be stated as CBDC. At present, no central bank across the world has its own digital currency. 

CBDC would work in a similar fashion as the cash/ physical currency. Only difference is that, once a payment is made using CBDC then the counter-party can neither cancel nor reverse the transaction, However, in regular online payment, such transactions can be reversed and cancelled. This is because CBDC uses blockchain technology which does not let users make alterations in past transactions. This is one of the key features of Digital currency. CBDC would be legal in the country and can be used for any purpose.

Benefits of Digital currency

Faster payments – All inbound and cross border transactions gets completed on a real-time basis

Cost-effective– Digital currency reduces intermediaries in peer to peer transactions especially in the case of cross border payments causing significant reduction in terms of fee charged.

24*7 Accessibility– At present, Post working hour financial transactions take more time but with digital currency, the transactions can be performed at any time with the same speed.

Transparency & Traceability – Digital currency brings more transparency and easy traceability of transactions to all the parties involved in the financial transactions particularly in the case of cross border transactions.

Support for unbanked or underbanked– CBDC helps all unbanked individuals to pay bills and make payments online using the digital currency with no extra charges.

More efficient government payments– It also helps governments to make the payments to individuals in a quick and seamless way especially in the case of an emergency like the Covid-19 pandemic. It is very difficult to help the gig workers financially in this situation when lockdown is imposed everywhere and no source of earning for them. Digitally currency (CBDC) would have helped them by enabling governments to transfer the fund on a real time basis even in case of unbanked workers. 

Digital currency Disadvantages

High efforts to learn how to use digital currency- To learn all the basic tasks of digital currency like how to open a wallet account, store digital currency is a bit challenging especially for uneducated or illiterate users. 

Blockchain transactions can be expensive-  Current digital currency like Bitcoin uses blockchain where electricity cost is very high because computers are used to solve complex equations to record and perform the transactions. Cost charged Per transaction, independent of transaction value so it is not an efficient option for  small value transactions.

The large swing in digital currency price-  Current digital currency value is very volatile due to consumer sentiment and psychological triggers. However, CBDC is expected to be more stable like current fiat currency.

Developing CBDC is a very time-consuming process – Currently global central banks are exploring the opportunities with CBDC and even if some central banks decide to create CBDC, it would be very costly and time consuming to develop, implement and replace the current Fiat currency.

In countries like ours which is predominantly a cash dominated economy where most SME and MSME transactions are done through either cash or cheques. The anonymity and untraceability of cash transactions make it even more challenging to completely accept digital currency (CBDC) in India. 

However, India has always been ahead of other countries in terms of adoption of technology and digitization. So, Now is the time for our central bank to start exploring the opportunities in central bank digital currency to launch the World’s first CBDC.

Card industry has seen steady growth in the last two decades from EMV chip card (use a smart microchip to store data instead of mag stripe) payments to contactless payments, but security remains a big challenge for the industry. These concerns have led to innovations towards more reliable and secure technologies such as biometric card payment. Such technologies have received significant boosters during the contagious Global pandemic of COVID-19. People started preferring contactless payment methods for payments using Mobile wallets or tap and pay cards to avoid any kind contact as precautionary measures. The main concern with the current contactless payment system is the upper cap on the transaction amount. To boost the contactless payment, RBI has increased the limit from Rs 2000 to Rs 5000 during the pandemic period. However, higher transaction limits for tap and pay cards posed bigger security concerns since no second factor is being used for payment authorisation. Biometric cards do provide a ray of hope by addressing some of the challenges faced by the card industry.

Biometric Cards: Innovation for Secure Payments

What are Biometric Cards? 

Biometric cards are a unique combination which uses the payment mechanism of a regular Card, authentication mechanism of biometric based payment while maintaining the safety mechanism of contactless payment. Biometric contactless cards offer more security and seamless user experience than all the other payment modes by combining their best features and avoiding their shortcomings. Each Biometric Card has a built-in fingerprint reader hence customers do not need to remember their PIN or touch any POS terminal, as all transactions are performed by touching the fingerprint reader on the card itself. Biometric payment cards ensure the same existing EMV standards and use typical safety measures like end-to-end encryption along with tokenization with additional layer of security, by adding finger size biometric reader on the card for biometric authentication. In the case of cards Lost or Stolen, chances of replicating fingerprints or stealing data from Card for fraudulent activities is implausible. Also, personal data of cardholders is stored only on the card and is neither held on the bank server nor sent to any external database. We tech savvy people always want more personalised and high technology cards and these biometric cards are the exact solution for our requirements.

How do Biometric cards work?

• Once the biometric card is received, the cardholder can securely install the fingerprints data in the card by inserting the biometric card in the sleeve and following the simple procedure provided.

• Cardholders can also configure the fingerprints by visiting their nearest bank branch.

• Card activation is completed at the time of the first transaction at the POS terminal. 

• At the time of making the payment, customers can place the card on the POS terminal.

• The POS terminal reads the card details and requests for authentication.

• Customers can authenticate the transaction by placing their finger on a biometric reader on the card thus avoiding any direct contact with the POS terminal.

Benefits to Stakeholders

• Highly Safe, Secure and easy to use. 

• Easy and quick registration of fingerprint data on card at home or by visiting bank branch

• Instant and seamless payments authorisation.

• No need to remember the card PIN.

• Technical compatibility with the existing contactless or chip payments terminals

• No additional cost for merchants to accept payments through biometric payment.

• Self-charging – biometric sensor is powered using a terminal.

• No queue on the checkout counter because payment processing is faster with biometric cards.

The only challenge with the biometric card is that only the cardholder can use the card because transactions get completed only after the successful fingerprint authentication and biometric technology can only capture one unique identity that can never be changed.

Way Forward

Biometric cards can bridge the gap between innovation and security concerns of the current payment system. It will gain trust of banks and service providers by providing complete customer assurance and convenience to use with no additional efforts on their part than simply putting a thumb on the card. All these benefits put together make biometric cards setting the new industry standards from a security and convenience point of view in the payment industry. According to the ABI research around 2.5 Million biometric contactless cards are expected to be issued in 2021 and growth of biometric cards is expected to soar globally in the next few years.

In a country like ours which is predominantly rural and agricultural based, where the illiteracy rate is very high and remembering PIN/ Password for cards is very challenging. The benefits of Biometric cards will be a real boon for us. Biometric payment cards provide all-in-one high-end technology, convenience, usability of smartphones and security assurance with reduced effort on the customer’s part. Now is the perfect time for Indian banks to start offering biometric cards to its users and  make India a cashless and digital economy.

In Today’s world of Digitalisation, the Government of India (GoI) is taking steps to provide the infrastructure and technology to promote the digital payment ecosystem. GoI has initiated steps like BHIM Aadhaar Pay, an alternative for online and card based payment to popularize digital payments in Rural India which forms 65% of Indian Population. Aadhaar pay is still not accepted by the merchant and the customers of rural areas because of lack of any awareness about Aadhaar Pay solutions and its benefits. In the absence of any publicity campaigns about Aadhaar Pay in print media or broadcast media, customers find it difficult to trust Aadhaar Pay.  

What is Aadhaar Pay?

Aadhaar Pay is a smartphone app for individual merchants developed by National Payments Corporation of India (NPCI). Using this app, merchants can receive instant payments in their bank accounts from the customers having an account with any of the banks. Aadhaar Pay uses Aadhaar number along with validation using biometric authentication or OTP sent on the Aadhaar linked mobile number. This is extremely helpful in rural contexts, since most rural users do not remember their password and PIN. 

How does Aadhaar Pay work ?

Rahul is an owner of a kirana store in a small village of India. Mohan is a regular customer and purchases all the household goods from his shop. Today while making payment for the goods, Mohan realised that he had forgotten his wallet at home and requested Rahul to make a note of the bill amount and he will clear these dues tomorrow. On hearing this, Rahul informed Mohan about the concept of Aadhaar pay. At first, Mohan was confused because he had never heard about it. However, after Rahul explained to Mohan that he can use aadhar based payment process to make direct payment from his bank account without the need of an ATM card or a smartphone, Mohan decided to give it a try. 

Rahul logged into Aadhaar Pay through a mobile app of his bank using his Aadhaar number and typed the bill amount. Thereafter, Mohan typed his Aadhaar number and selected his Aadhaar linked bank name and completed the transaction by authenticating with a fingerprint. After the completion of payment both Rahul and Mohan instantly received confirmation messages on their phones.

Mohan’s story highlights the need for a “payment solution” that would simplify and digitize transactions especially for those with low literacy levels in rural areas.

Aadhaar pay will help merchants to receive funds on a real time basis and no MDR is charged by the bank. Currently, approximately  96 crore bank accounts are linked with Aadhaar including 75% of Jan Dhan Yojana accounts. Some of the largest banks in India such as State Bank of India, ICICI Bank, Andhra Bank, Syndicate Bank, IndusInd Bank and IDFC First Bank have gone live with Aadhar Pay. 

Despite its high utility and ease of user experience, the reliability and security of Biometric authentication pose a high challenge to its wider acceptability. The task becomes particularly challenging when there have been cases of leakage of Aadhaar data. UIDAI has tried to mitigate such concerns by ensuring that the Aadhaar database is not directly connected to the service provider and all the authentication is done through APIs only. Another main concern is that many people in India do not have clear fingerprints due to the nature of their work causing high authentication failure during fingerprint impressions on the biometric reader. However, this problem has drastically reduced as Biometric readers have evolved ever since and now new biometric readers including iris scan are being used which are more reliable.

Challenges faced in Implementing Aadhaar Pay

Technical Challenge

According to UIDAI, ~ 16 lakh Aadhaar authentication requests fail every week mainly due to problems faced in capturing fingerprints mainly due to very high match ratio (98%) being set in certified Biometric readers.

 Administration Challenge

Only prerequisite for Aadhaar pay has been linking a Bank account number with Aadhaar. However, the Honourable Supreme Court of India has made the linking non-mandatory in its judgement. 

Key to the success of any new tech enabled platform is the absolute trust and confidence of customers and service providers that their privacy will be protected and transaction is secured. To make Aadhaar pay more secure and safer than card payments, there should be proper laid down procedures for Certification and Testing of third party apps used by merchants for payments. This would build confidence in authenticity and reliability of Aadhaar pay and would promote its use amongst the mass population. 

Way Forward

Based on our market understanding and research, we conclude that the potential of Aadhaar Pay is still underutilised and the idea of cashless India can still be achieved with Aadhaar pay with support from all stakeholders. GOI and banks should create awareness and incentive schemes for Aadhaar Pay amongst merchants and customers especially for rural areas using both print and digital media.

We feel that Aadhaar Pay will create an ecosystem especially for rural demographics wherein customers have ease of payments and merchants have quick access to the payment with a comparatively low- cost payment solution. 

Buy Now Pay Later (BNPL), as the name suggests, facilitates users to buy products now and pay at a later stage. The facility offers the advantages of a credit card without carrying the card at the time of payment. This concept is similar to the local Indian concept of the “Khaata system” – the consumer purchases items from the shopkeeper on credit. The settlement is done on a monthly or weekly basis.  

BNPL and Millennials

BNPL is available to users of demographics. But it has the highest acceptance amongst “millennials” because of their high willingness to spend coupled with lower availability of resources & non-availability of credit. 

Pay later without credit assessment enables Millenials to avail credit services without having a good credit score. Millennials are also attracted to exciting discounts and cashback offered by fintech and retail companies for using their BNPL services.

In the era of digitalization, BNPL brings the new generation credit facility to its users with a more secure, easy and quick process to sign-up with just a few clicks in less than 30 seconds.  

Advantages of BNPL

Users can avail of the Credit facility with no hidden charges, at zero interest rate fee, and with an easy EMI payment option that helps them buy the products immediately without spending any upfront cash in real-time. There is a minimal penalty levied in case of late payment. 

A customer can sign up with different fintech at the same time and avail of higher credit limits. In the current scenario of increasing cyber fraud, BNPL eliminates users’ risk by not exposing sensitive data such as bank account and card details.

Several fintech companies provide BNPL services to change the shopping experience for their users. It allows them to enjoy credit facilities at various e-commerce websites and offline in-store purchases POS by QR code. Retail stores or e-marketplaces provide the BNPL facility to their customers by themselves or through partnerships with fintech providers. 

BNPL services empower their customers by getting the products/ service accessible in the most convenient manner, especially during a pandemic situation, which develops further trust and loyalty between the merchant and the customer. 

This flexible payment option reduces the cart abandonment rate and provides a better customer experience, thus increasing customer penetration. Some market players offer high discounts, cashback and loyalty rewards for using the BNPL payment option, enabling them to increase customer’s shopping basket size and purchase frequency with this easy and seamless checkout option. 

Disadvantages of BNPL

Though a boon to many, ease of accessing “Buy Now Pay Later” services at the checkout could become a temptation for young consumers to spend more than they can afford. It may eventually become a part of their lifestyle and lead to excessive impulse shopping and eventually fall into a debt trap. 

People use BNPL facilities at the time of cash crunch and when they have sufficient cash since it provides them with an easy, secure, convenient, and quick checkout mechanism. 

BNPL users have been continuously increasing across the globe. At present, one of every five digital users has used this facility during this pandemic. 

Bottom Line

Every product or service bears its pros and cons. It depends on users’ consumption behaviour to use the positives to their advantage and avoid falling on the negative side. For those who extensively use free credit available facilities and get in the trap of a vicious debt cycle, BNPL could be troublesome.

However, BNPL has come out as a blessing for users facing liquidity crunch to get the essentials products during the lockdown.