Globalization: ACH and RegulationCross-border Payments Create New Challenges
"Overall, we've seen a 7.7 percent growth year-over-year in volume," she says. "Some of the challenges that still exist in the U.S. market are the continued use of checks. And intraday ACH [settlement] is posing some challenges, as well, and then looking at payment convergence and how that might cannibalism wire volume."
The Society for Worldwide Interbank Financial Telecommunication, better known as SWIFT, on a daily basis conducts more than 15 million transactions a day across its network, which includes 9,000 banking and financial-services institutions and corporate customers in 209 countries. Over the last year, transactions from the U.S. market have been explosive, jumping 11.3 percent. "Globalization will continue to bring new issues to bear," Rosenthal says. "Compliance is something institutions try to balance," and global requirements, such as those mandated by the Single Euro Payments Area, will impact all markets and regulations going forward, she says.
As international ACH payments increase, what unique security challenges do the financial and payments industries face?
During this interview (transcript below) , [transcript below] Rosenthal discusses:
- Automation of financial services to eliminate cross-border money laundering;
- Global market payment variations and the need for transactional transparency; and
- The emergence of non-traditional financial services from third-party providers.
Rosenthal, who oversees corporate and payment strategy for the Americas, joined SWIFT in early 2008, after working as a senior vice president in product consulting for Bank of America. At SWIFT, Rosenthal works on key projects with market infrastructures, banks and corporations, focusing on new product innovation, global remittances, information reporting, exception management and electronic bank account management. Rosenthal has served as a subject matter expert for payments and cash management, including integrated payables, liquidity and receivables. She has broad knowledge of treasury management and the transformation from paper to electronic solutions.
International ACH: Security and FraudTRACY KITTEN: As international ACH payments increase, what unique security challenges do the financial and payments industry face? I'm here today with Stacy Rosenthal, head of banking and corporate strategy for SWIFT, the Society for Worldwide Interbank Financial Telecommunication in the Americas.
Stacy, SWIFT is a member-owned cooperative that has more than 9,000 banking organizations, security institutions, and corporate customers in 209 countries. Could you quickly give our audience a little background about SWIFT and some of the global companies and organizations it works with?
STACY ROSENTHAL: Thanks, Tracy. SWIFT is a member-owned cooperative. We serve market segments ranging from financial institutions, market infrastructures across payments and security landscapes, corporations, really bringing the community together around the platform of a standard and secure network, to help the industry collaborate and speak a common language. Some of the organizations we work with range from the largest financial institutions globally to various market infrastructures in local communities and regions around the world, as well as global and multinational corporations. They all enjoy the standardization, reliability and security of the SWIFT network and standards.
KITTEN: And what about transaction volumes, Stacy? How many transactions does SWIFT manage in a day, and how have you seen volumes grow over the last year?
ROSENTHAL: Our average daily traffic in January was over 15 million transactions a day. The growth that we see has been really explosive in the U.S. market year-over-year. For the ending of 2010, it was 11.3 percent; and for SWIFT overall, the payments growth was 7.7 percent. So, we are seeing a lot of growth, especially in the payments landscape and across our market segment.
KITTEN: A lot of that is probably attributable to the globalization of payments, and globalization is something that we talk about quite a bit these days. What role is SWIFT expected to play in helping to manage or push more standardization in the global payments infrastructure?
ROSENTHAL: SWIFT, as an industry organization and a cooperative, is looking to bring the community together to debate the areas of interest, continuing to add standardization, market practice and communication. The goal is to help payments infrastructures lower their total costs of ownership, implement new standards, where it makes sense, and help balance regulation and innovation by being an intermediary and bringing the community together.
ACH: Unique Market ChallengesKITTEN: And, Stacy, are there unique challenges, say, facing financial institutions in the United States or North America, generally, that don't exist in Europe or Asia, or vice-versa?
ROSENTHAL: I think some of the challenges that still exist in the U.S. market are around the existence of checks, which we've seen not be a challenge in the European and Asian landscapes. All of the landscapes do face similar challenges, as far as regulation, even though the regulations may differ and be more reticent to our market and our market challenges. I think in this year to come, some of the market practices that are changing the landscape that financial institutions are facing will include large projects are around the introduction of intraday ACH and the change of settlement times there. To that end, looking at payment convergence and how that may cannibalize wire volume. Also, the introduction of the new Fed methods for extended remittance information, and how banks are going to support that within their market, as well as how those payments will slow cross-border transactions. So, I think the challenges are very similar, yet we still have the check in the U.S. It's here to stay, and how that's going to impact other payment instruments remains to be seen.
Intraday ACH: Paper to Electronic Fraud?KITTEN: Now, you've mentioned the intraday ACH transactions, and I've spoken with a few industry experts about that, namely at the Federal Reserve. Are there any security challenges or risks associated with conducting those transactions in a faster manner?
ROSENTHAL: I think there's always the question around transparency, and how to implement technology and business best practices to ensure that we don't move from paper-based fraud to electronic-based fraud. We have to look at the systems that have been built around that settlement, and understand how systems can be integrated to not only speak the language but support the workflow and the security elements. Also, we need to understand how to bring institution-based security down to the individual, personal identity management level, to ensure that not only the institution level has that security that we all trust and love, but that the employee also is doing the right things and that we have security at that level as well. I think it's very similar to the challenges of any near real-time settlement mechanism, and understanding how we move the benefits of what we see in our real-time gross settlement in wire-based systems to the ACH systems. I think it's going to be a matter of how do we quickly develop and get more of an integrated payables platform out to the community and then how its services out to corporate clients.
Mag-stripe vs. EMVKITTEN: And talking about payments innovation and emerging payments technologies, I'd like to talk about payment card technology. As the U.S. continues to rely on the mag-stripe, while most of the world completes various deployment phases of EMV technology, how do you see that impacting global transactions, and what challenges are cultural differences posing?
ROSENTHAL: I think that in terms of global transactions, we're going to continue to see that growth. Payment card technology is going to need a technology overhaul for the U.S. market, and I think the U.S. market has been trying to figure out how to innovate as quickly as possible without scrapping what's already been invested. I think the European markets are definitely ahead, in terms of their technology deployments, but there still are some cultural acceptance challenges that exist. The U.S. markets are very comfortable in credit and debit card transactions, almost trumping the growth that we're seeing in any other segment. In Europe, there's still a cultural bias or challenge to wanting to accept cards, because of the amount of fee base that gets taken out of the transaction. So, I think they're leapfrogs ahead, and our market can learn from them and leverage the great investments they've made; but there are still some challenges, in terms of the cultural landscape and the overall acceptance of cards. And we see that even in some market segments here with small business, so I think each regional area can learn from one another and leverage what they've done, not only from a social perspective but also from a technology perspective.
KITTEN: And that's an interesting point, Stacy. My next question was going to be about 2011 perhaps be the tipping year for EMV technology or advances in payment card technology. But I think I'd instead like to ask, do you think that 2011 might be the tipping year on both sides? Might we see more acceptance in European markets of payment cards, and how do you think that the United States can learn from some of the examples that have been set in European markets?
ROSENTHAL: Well, I think in terms of a tipping point, it goes beyond just payment cards. I think it extends itself out to how industries and regions work together to drive collaboration and assistance. I think the tipping point is across all payment methods, and how organizations continue to innovate while dealing with regulation and balancing client priorities. I think it remains to be seen, but I think it will be a tipping point for payments overall, as the expectations from consumers and corporations increase. Financial institutions and market infrastructures need to be more innovative. They need to develop products and bring them to market more quickly, and are our expectations of what we experience in our consumer lives with social media and new product development is that trumping our expectations in our business world. I think it will be a tipping point on how nimble organizations can be to really get to that last mile.
Securing TransactionsKITTEN: And what about security concerns when it comes to global payments and global payments infrastructure? What role is SWIFT playing to ensure that transactions are secure?
ROSENTHAL: "Failure is not an option" is our mission and mantra. We believe that everything we do needs to be at the highest levels of security, reliability and trust. We continue, regardless of whether it be a market infrastructure, a corporation or a financial institution, to always to think about security and how we can maintain that integrity across the payment-value chain. Sometimes there is a fine balance between how you remain secure and quickly bring products to market. SWIFT continues to bring that mission and approach to every working group and every methods layer when we develop our solutions and talk about industry standards. We're going to continue to drive to the level of success that SWIFT always has in having a secure, reliable network, and we continue to try to trump what we're seeing in terms of cybercrime and cyberfraud, looking at new payment instruments and settlement times coming to bear. We want to be sure we bring all of that up to the same level of comfort that SWIFT has had for over 35 years.
Cross-border money launderingKITTEN: From a fraud standpoint, what role is SWIFT playing in the cross-border fight against money laundering?
ROSENTHAL: Well, right now, as SWIFT always is, we are listening to our constituents on where we should be playing in the sandbox. At this point, we handle the payment instructions and we make sure that it's a secure package from end-to-end, from institution-to-institution. We will continue to look at where we should be developing and spending our resources based on the community's interest in SWIFT being involved in anti-money laundering. Today, it's being debated on how SWIFT should play in that space, and it's going in front of our board, in terms of where we should develop or where we should just be debating the common language and standards. We will continue to fight fraud, whether it be in anti-money laundering or at the transaction level, and this is really going to be based on the guidance of the community.
SEPA's ImpactKITTEN: And as we talk about industry guidance, I'd like to ask a little bit about regulatory compliance and meeting those requirements, such as those that have been stipulated by the Single Euro Payments Area. How will globalization impact regulatory mandates, from your perspective?
ROSENTHAL: I think that regulation will continue to grow. I think globalization will continue to bring new issues to bear. I think that compliance is something institutions struggle with, when it comes to how to balance their budgets and their product development with regulatory compliance. The requirements that were created for the Single European Payments Area, I think, has begged the question of how do we get the same level of transparency, now that we have things like the international payments framework and international ACH transactions. So, I think globalization will bring to bear whether we have too much regulation or too little and how, potentially, regulatory bodies can work together and be more collaborative. And I think globalization is going to increase the regulation that we have, because there will be a continued need for transparency. How payment instruments converge will also impact regulation, as well as things like the growth of fraud, new payment instruments and the emergence of new players like third-parties. All of that will also impact regulatory mandates.
Global Innovation: P2P, Mobile and 3rd PartiesKITTEN: And I was going to ask about innovations that SWIFT is implementing to help meet the growing needs of its global members, and it sounds like you're already thinking about that. A lot, of course, will depend on some of the mandates and some of the technology that emerges from outside of SWIFT.
ROSENTHAL: In our 2015 strategy, innovation is one of the pillars based on community development on how we stick to our core yet leverage partnerships based on community requirements. We do have a team at SWIFT that is constantly evaluating how we can extend our brand, our support and our resources to the community and innovate where it makes sense. So we try to balance the growing regulation and the foundation of our organization with the need to innovate and continue to stay ahead of the game.
KITTEN: And from a high level, Stacy, what impact do you see payments, as far as global payments are concerned, having on financial institutions in 2011?
ROSENTHAL: I think in 2011, globalization will cause financial institutions to develop new products and services to get closer to their clients by simplifying the payments landscape and offering tools that have a single window or single view to the payments landscape. I think players like SWIFT offering global standards will assist financial institutions in their development. I think you'll see continued new entrants into the market and third parties trying to get a piece of the pie. Some of them will be partnering with financial institutions in a co-development manner, or we're going to see new entrants like we've seen in the consumer space and the person-to-person space. I think globalization will also continue to leverage and drive the use of mobile technology and social media as vehicles to support globalization and how payments innovation is delivered, not only as an information vehicle but as an initiation vehicle.
KITTEN: What top trends at SWIFT would you like our audience to be aware of this year?
ROSENTHAL: I think a lot of the trends in the payment space we've covered in the call today really focus on a few areas: simplicity in the payments value chain and continuing to secure transactions, not only at an entity level but also extending to personal digital identity. Automation and new areas that go beyond payments will be a focus. We will be asking bankers whether SWIFT should be innovative in other areas, like sanctions-screening. Should we be a utility for areas where the industry may not have a competitive advantage? Is there a way for SWIFT to continue to assist in those areas to help the industry lower its total cost of ownership? I think it's going to be an exciting year.