At the ICC Banking Commission’s annual meeting in Jakarta in April, GTR’s Shannon Manders conducted an onstage interview with Swift’s recently-named head of trade and supply chain, Huny Garg – his first interview since joining the organisation the previous month. This was their conversation.
Manders: Swift created its know your customer (KYC) registry in 2014 to enable its community to collectively address the global challenge of KYC compliance. What has been the take up since then? How are banks making use of the service?
Garg: When I worked for a bank, one of our greatest challenges was maintaining correspondent banking relationships with smaller banks or banks located in markets that are considered to be higher risk. It’s very difficult to maintain a high quality level of KYC with those banks. The ICC Banking Commission’s annual survey last year noted that approximately 65% of banks have reduced the number of correspondent banking relationships, and the primary reason for this was not having adequate KYC data on those banks. The main challenge behind the lack of data is the spread of correspondent banking relationships themselves – and that’s where Swift’s KYC registry comes into play.
So far, 3,800 banks have signed up and the number continues to rise, with new banks joining every week.
The KYC registry provides a comprehensive, standardised baseline of KYC data and documentation that is validated by Swift and kept up to date by member institutions themselves. The registry saves member banks both time and money since instead of each bank needing to reach out to hundreds or even thousands of counterparties to collect that information individually, it can find everything in one place at once. It helps to eliminate the huge amount of duplication that is currently taking place in the market.
Manders: What else is Swift’s compliance team working on in terms of new developments in this area?
Garg: In addition to the KYC registry, Swift is continuing to expand its financial crime compliance portfolio in the areas of sanctions, data analytics/AML and fraud prevention.
Swift’s transaction screening service, Sanctions Screening, is used by over 600 banks and corporates to screen payments and trade messages. Swift has complemented this service with Name Screening which screens single names and will soon provide automated screening of databases. This will help organisations better manage sanctions risk related to business and trading partners.
Many smaller institutions find it difficult to keep sanctions lists up to date and to handle the lack of standardisation in sanctions list data. Sanctions Screening and Name Screening are both hosted utility services, meaning Swift manages all list updates and list standardisation for optimal screening effectiveness and efficiency. Swift recently introduced a Payments Data Quality service which helps banks comply with FATF Recommendation 16, whose principles for including originator and beneficiary data in payment transactions have been incorporated into regulation by the Monetary Authority of Singapore (MAS), among others.
Manders: Swift’s global payments innovation (gpi) service, launched in February, improves the customer experience in cross-border payments by increasing the speed, transparency and end-to-end tracking of cross-border payments. What has been the reaction from the banking community to this new service?
Garg: The Swift gpi service was developed in close collaboration with its member banks. To date almost 100 banks have signed up and 12 went live in January with numerous other banks set to join them in the coming months. These 100 member banks account for nearly 75% of Swift’s cross-border payment message volumes globally. Already today, thousands of gpi payments are being made every day covering over 80 country corridors.
Manders: What is the problem that it’s trying to solve?
Garg: The primary problem Swift gpi solves is the need for transparency and traceability when transactions are in transit. With gpi, corporates – through their banks – will now be able to track the payment from its initiation until the money is credited on the account of the beneficiary, as well as see the fees charged, all on the same screen. Swift gpi also now offers corporate treasurers certainty that their payment will be credited to the beneficiary in one day, instead of three to four days. This is a significant improvement on the current system.
Manders: Critics have pointed out that gpi does not integrate distributed ledger technology (DLT) or blockchain – which is seen by many to be the future of cross-border payments. Are you able to address that concern?
Garg: The approach taken is to solve a problem, and not to try to implement a technology without meeting the needs of banks’ corporate customers.
In 2015, together with a major market analyst, Swift analysed the challenges corporate customers face when making international payments and identified areas for improving the existing system. Top of the list were pain points around the traceability and speed of payments, the quality of data transmission and transparency on the bank fees deducted. Strongly supported by the bank community, these pain points tackled in 2016 are delivered today, in the first phase of gpi.
There is already work on-going for a second phase of gpi services which will focus on other high-level priorities highlighted by the corporate and bank community. This includes increasing the richness of data that can be transferred with payment instructions. It will be possible, for example, to attach an invoice, an invoice overview, or any other required documentation along with the payment instruction.
Another service will allow gpi users to stop and recall payments instantly, wherever it is on the network at that point in time. Currently stopping a payment is cumbersome, involving a chain of messages slowly passed along the payment chain.
Member banks can implement phase 1 and 2 of gpi using their existing infrastructure, meaning minimal costs and an extremely quick time to market: gpi went live in less than a year from it first being announced. It’s also worth remembering that not all of Swift’s 11,000 member banks have the financial means to move to a new infrastructure based on a technology such as blockchain. This requires banks to make a high-level investment in new systems and significantly re-structure their back-office processes.
Our overall aim is to be able to act quickly using infrastructure that is already available to banks. We must underline that, when combined with the gpi business rules, banks’ current Swift infrastructure, is perfectly capable of meeting customers’ needs. It can deliver fast and traceable payment messaging with certainty and transparency.
Nevertheless, the banking community has highlighted that challenges remain around nostro-vostro reconciliation – which forms a significant element of the cross-border payments process – and that these could be solved through the use of blockchain or DLT. Along with a number of global banks, Swift has therefore launched a proof of concept (PoC) to explore whether DLT can be used by banks to improve the reconciliation of their nostro databases in real time to optimise their global liquidity.
Blockchain is very much on our radar – it’s a very exciting technology and we’re looking to find the best use cases to make that adoptable.