Unlocking the future of payments

The future of payments is insight. Some of the most exciting and dynamic changes the industry has ever seen are taking place, with multiple innovative industry initiatives and technologies, including SWIFT gpi, distributed ledger technology (DLT) and digital currencies, presenting opportunities to unlock a future that is instant, 24/7/365 and fully transparent.

But, as the industry pursues this path to improve payments, what direction should it take to ensure we arrive at the right destination? Put simply, no single path, no one innovation, is a silver bullet. Instead, multiple routes are emerging; it is a combination of solutions that together will shape the new payments space. As this journey advances, banks will therefore need to equip themselves with a comprehensive toolkit of solutions and services in order to meet the growing, and ever-changing, needs of their clients.

Collaboration and innovation

To reach a payments destination that incorporates faster, smarter, more transparent and convenient transactions, banks are working with the wider industry to develop and implement a series of new initiatives and technologies. Huge strides have already been made in this respect.

Powerful new initiatives are transforming transactions across the globe, including real-time payments – with over 50 countries now able to clear and settle payments instantly – and SWIFT gpi, which addresses a number of long-standing frictions traditionally associated with cross-border payments. Furthermore, SWIFT – in collaboration with the industry – plans to launch the Transaction Manager – a platform that will enable account-to-account transfers with transparency, predictability and security.

Meanwhile, a range of emerging technologies are being utilized by the industry to create new capabilities or enhance existing ones. For example, many banks are exploring how DLT – decentralized ledgers that can transparently record and store information on a shared network – can be applied to bring about significant advances, such as the facilitation of instant payment settlement. Elsewhere, artificial intelligence (AI) is also being applied to a range of specific use cases – including fraud monitoring, compliance and simple customer inquiries – to improve the client experience and enhance operational efficiencies.

Applying digital currencies

Digital currencies represent another important piece of the payments puzzle. Split across three broad categories – cryptocurrencies, stablecoins, and central bank digital currencies (CBDCs) – digital currencies potentially hold the key to revolutionizing payments. Like physical money, digital currencies are token-based, meaning that they can be held directly by the participants of a transaction, and thereby transferred directly and instantly from one party to another, irrespective of value, on a peer-to-peer (P2P) basis.

Of the three types of digital currencies, stablecoins, which are cryptocurrencies with a value pegged to a pool of assets, appear to offer the most immediate potential for the payments space – with cryptocurrencies seen as too unstable, and the implementation of CBDCs seen as too far away. With this in mind, how exactly could stablecoins transform and modernize payments? 

One important potential application is in securities settlement. Currently, due to concerns over settlement risk, mechanisms are in place in delivery versus payment (DvP) transactions to ensure an asset can only be transferred after the payment has been finalized – meaning that the settlement leg can currently only be as fast as the payment leg.

By using stablecoins to tokenize the payment leg, both legs of the transaction can be completed instantly, with the buyer and seller simultaneously receiving their respective asset and payment. This removes the need for third-party support, while also reducing capital costs, reconciliation efforts and credit risk.

When used as digital tokens, stablecoins can also be applied to payment versus payment (PvP) transactions to enable real-time, 24/7/365 cross-border FX swaps – providing banks with greater transparency and security over each individual trade, as well as a much longer window in which to transact.

Ultimately, stablecoins also have the potential to introduce a new way to process cross-border transactions – one that effectively removes the need for the correspondent banking model. Instead of having to engage multiple parties, stablecoins would enable cross-border payments to be performed instantly, securely and 24/7/365, P2P, thereby drastically reducing counterparty and institutional risk.

Multiple routes forward

From SWIFT gpi and real-time payments, to blockchain and digital currencies, a number of innovative solutions and initiatives are emerging to enhance the payments industry. With many paths forward available, now is the time to embark on as many routes as possible to ensure we arrive at the instant, 24/7/365 and fully transparent payments destination. As this new era of payments unfolds, the onus will be on banks to continue investing in a comprehensive product suite – ensuring they are positioned to serve their clients effectively for years to come.

The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.

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