Correspondent banking business model: Challenges to ......Correspondent banking has historically...

Bob Lyddon is the coordinator of the IBOSInternational Cash Management network from itsLondon office. The two pillars of the office’sactivities are: supporting sales and implementa-tion efforts of the IBOS proposition by the salesteams in the 31 member banks in 28 countriesand agreeing what products will be offered col-lectively by the member banks, drafting specifi-cations and supporting rollout and managementin-production. In parallel, Bob has a private con-sultancy and training practice focusing on SEPA,PSD and international banking services. In thatrole, Bob delivers the UK ACT’s Advanced CashManagement training. Until 2000, Bob was aPrincipal in the Strategic Change ManagementConsulting practice of PricewaterhouseCoopers.In a banking career of over 17 years, Bob waslatterly Director of European Cash Managementat BankBoston, where he designed theConnector multibank payments network.

ABSTRACT

Reciprocity has always been a major considera-tion in the payments world, is integral to corre-spondent banking and, therefore, also to the wayin which international payments are made. Butthis model is coming under direct threat fromthree directions. First, the model depends onlarge lines of credit extended by one bank toanother, and these are no longer so palatableafter the credit crunch. Secondly, banking regula-tions must increasingly be factored into delibera-tions that correspondent bankers couldpreviously decide on volumes, values and fees.

Thirdly, and most cogently, price and competi-tion — especially in the Single Euro PaymentsArea (SEPA) — will all but eliminate the cor-respondent model and supplant it with directuse of infrastructures, but without reducing costs.That could be the worst outcome of all. Outsidethe SEPA, banks are hamstrung by regulationand by their tie-in to high-cost IT approachesand, indeed, to the use of one another withinthose models. Inside or outside the SEPA, theresimply is not enough money on the table toallow generous reciprocity, and that, combinedwith credit and regulatory considerations, willchange the correspondent discussion from a part-ner discussion to a buyer/supplier one.

Keywords: correspondent, correspon-dent banking, payments, clearing,cross-border payments, internationalpayments, Single Euro Payments Area

INTRODUCTIONUntil 2008, there was a trend among banksto develop closer correspondent relation-ships among fewer major counterparties,to even think of a ‘super-correspondent’,where business was concentrated on a fewnames, with other banks regarded as arm’s-length customers or ‘buyers of services’and not having reciprocal business directedtowards them.

Reciprocity has always been a majorconsideration around the awarding of cor-

Journal of Payments Strategy & Systems Volume 6 Number 3

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Journal of Payments Strategy &SystemsVol. 6, No. 3, 2012, pp. 246–259� Henry Stewart Publications,1750–1806

Correspondent banking business model:Challenges to reciprocity

Bob LyddonReceived: 30th April, 2012IBOS Association Limited, Golden Cross House, 8 Duncannon Street, London WC2N 4JF,UK. Tel: +44 (0)20 7484 5389; Fax: +44 (0)20 7484 5180; Mobile: +44 (0)7939 132341; e-mail: [email protected]

Bob Lyddon

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respondent business, but this model iscoming under direct threat from threedirections. This paper concentrates on theprice/competition angle of attack, althoughthere are two more of significance.

The reciprocity model has been dis-cussed for some time as being underthreat, and there is a risk of crying wolf,but these three drivers in combinationappear to represent a watershed.

The degree of regulation within theSingle Euro Payments Area (SEPA) shouldat least ensure that credit transfers anddirect debits remain within the bankingsector; the same cannot be said for the restof the world. Indeed, there the degree ofregulation plays into the hands of non-banks.

Within the SEPA, the protection maybe seen as a double-edged sword: banks areforced to play, to be reachable, but there isno money in the business. Either way —whether it is the reduction in the amountof money on the table to share in reci-procity, or the regulation around the tradi-tional model of making payments — thecorrespondent model cannot remainimmune to the wider pressures on thepayments business.

CREDIT RISKThis is the first point and a simple one,which has changed the game since 2008:banks are not altogether confident in otherbanks’ public ratings.

Writing very large intraday lines is nolonger a formality if the amount is ‘themaximum debit turnover on any one day’.That is the formula that was common atUS banks in the 1990s for US dollar clear-ing lines and, for even a modest Europeanbank, the Intraday Payments Limit (IDPL)for Fedwire/CHIPS payments could beUS$500m. That is in addition to moneymarket and FX lines and, indeed, clearinglines in other countries, if the bank wanted

to do sterling and euro clearing as well.Super-correspondent relationships

involve concentration of risk. The cer-tainty that banks all have complete trust inone another is no longer there: ‘My wordis my bond — well give us your bondthen.’

The drying-up of the LIBOS three-month interbank contract — up to 2008the most liquid interbank contract — doesnot mean simply that banks are restrictingtheir lending to one month, one week orovernight: they have stopped lending. Theinterbank market has been replaced, byEuropean Central Bank credit in Europe,and by quantitative easing in the UK.

Clearing lines are, in some cases, nowneeding to be collateralised, or else theclearing bank is making full use of theleeway in the service level and clearinghouse rules: to make payments during thebusiness day, but not necessarily at thestart, unless payments are explicitly timedpayments, such as for CLS. The clearingbank will thus manage its queues to ensurethat the account of the correspondentdoes not go either overdrawn or to amuch lower level, and that the bank itselfmitigates any overdrawn position in theclearing.

The formula for an IDPL — ‘the max-imum debit turnover on any one day’ —infers the willingness of the clearing bankto make all the requested payments, even ifno credits come in. Banks have moved along way from that scenario, which funda-mentally changes the discussion betweenthe two banks to a discussion between aprovider bank and a customer bank, andnot one between partner banks.

COMPLIANCE RISKThe second area now interfering with thefreedom of banks to select one another asbusiness partners is in the compliance areaand, in its most recent incarnation, is con-

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nected to the shutting out of Iran frominternational banking markets. At least onemajor US bank was recently asked toreview all its clearing relationships so as toensure that there was no connection, byshared membership of a third-party organ-isation, between the bank and any suspectinstitutions. Two such institutions wereidentified: Iranian-owned German banks,who were visible sub-participants inTARGET under the sponsorship of amajor German bank.

Had the two Iranian-owned banks con-tinued to be visible as TARGET sub-par-ticipants, the US bank might have beencompelled to leave the TARGET system,or might have been compelled to ceasebusiness dealings with the German bank,and not just in payments: the latter wouldhave seriously affected liquidity in worldcapital markets, and the former wouldhave contradicted Central Bank policythat very large interbank flows be directlyvisible in Real-Time Gross Settlement(RTGS) clearing systems and not hiddenin the flows of an intermediary. An exam-ple of that policy in action was the Bankof England’s requirement that anothermajor US bank become a direct CHAPSmember and not clear through one of thelarge UK banks.

The message from the US authorities isvery clear: ‘Don’t deal with any banks orcustomers that have dealings with Iran’.

The scope of that definition is likely tobe wide, meaning ‘Don’t have dealingswith … ’: … banks that have Iranian enti-ties as customers; … banks that have cus-tomers whose beneficial owners includeIranian entities.

The definition of ‘dealings’ could gothrough several levels beyond the first one,eg:

• participating in the same clearingsystem or association (such asTARGET);

• sending/receiving payments to/frombanks that have outlawed customers;

• making or receiving such paymentsoneself; and

• relaying to customers electronic state-ments that may contain evidence thatthe other bank has credited or madepayments across the account on whichthe counterparty is an Iranian.

This last one is affecting a situation wherea bank relays electronic statements (egSWIFTMT940) on an account at anotherbank to their own customer, where theother bank is in a non-FATF country, andthe MT940 forwarding bank cannot besure that all the payments going across thataccount had been subject to screening tothe same level as within an FATF country.

Making such accommodations as open-ing accounts for the customers of the cor-respondent in ‘our’ country and relayingMT940 on that bank have become part ofthe reciprocity mix, but here again thereare regulations impacting on the freedomof banks to make those accommodations.

Correspondent banking has historicallybeen based on non-interference in otherbusiness lines pursued by the other bank,and non-intrusion into their choice ofcustomers. In future, it appears that certainbuyers of services will require assurancesfrom a seller that put the relationship on adifferent footing. The relationship changesto being much more like the relationshipbetween a multinational corporate and abank: ‘reciprocal business’ changes to‘ancillary business’, ie part of the price ofcredit, under the legal limitations applyingto any bundling of an obligation to buyextra services with an offer of credit.

FOUR- OR SIX-BOX MODELThe major area of attack on the traditionalCorrespondent Banking model comessimply from price and competition. One

Correspondent banking business model

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has become used to the Four-Box Modelin which banks’ intermediation andmutual trust is key:

• Box 1: Debtor;• Box 2: Debtor’s bank;• Box 3: Creditor; and• Box 4: Creditor’s bank.

These ‘business actors’ appear without failin the business process models producedduring the design of ISO20022 XML pay-ment messages in Universal ModellingLanguage (UML).

Cross-border payments between debtorand creditor not only required these twobanks, but also their currency correspon-dents, resulting in a Six-Box Model.

The Six-Box Model contains significantrevenue potential, and limited recourse forthe customers to complain if they wanttheir money to get to the other end.The main sources of revenue are:

• BEN charges — deductions from theprincipal amount of the payment ateach stage, leading as well to a businessknown as Benededuct Rebate, wherethe correspondent that is eligible totake the deduction shares part of thededuction back with the remitter’sbank;

• OUR charges — intermediary agentspass back fees to the remitting bank fordebiting to the remitter;

• funds float and value-dating adjust-ments; and

• sharing/rebates between bank partici-pants.

The debtor, or remitter, has no right ofdispute on the OUR charges once theyagreed to have the payment made; theremitter will be unaware of deductionsfrom proceeds as BEN charges.

The creditor, or beneficiary, has noright of dispute over the fees they pay —

BEN deductions — as the right to takethem was conferred on the banks by theremitter.

Figure 1 is an example of the role ofcorrespondents and SWIFT in a six-BoxCross-border payment.

The direct payment order (MT103)ensures that the beneficiary bank is awareof the payment on the same day that thecover moves. Then the cover is movedthrough the US$ correspondents of thetwo banks, and advised to the beneficiarybank by MT910.

The order to move the cover is madeusing a SWIFT202 COV, but the coveractually moves through the CHIPS clear-ing, which does not use SWIFT messages.

Four messages are needed to completethe payment: three payment messages andone information message, so there is alevel of cost latent in this method ofmaking payments.

The food chain of the Six-Box Modelthus involves a lot of players, and they allwant to eat. The tools and techniques arebased on TT Telex Transfer:

• one payment per message;• settlement goes though the currency

RTGS system; and• settlement is delivered in central bank

money.

All those elements bring with them a cer-tain level of cost, which is fine for thebanks if the revenues justify it and the reg-ulations allow it. That enables the continu-ation of an intermediated world, which ismore secure than the debtor sending cashdirectly to the creditor.

But the question that has to be asked iswhether this solution is too heavy duty formany cross-border payments in a glob-alised world.

Do the new tools and techniques retaintoo many characteristics and assumptionsof the old?

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The Four-/Six-Box Model permeatesthe banking sectors ‘new infrastructuraldevelopments’ around ISO and MX,namely:

• UML — the business process basis ofISO20022;

• ISO20022 physical XML messages; and• SWIFT MX.

These infrastructural developments under-pin all the new payments schemes andservices coming out of the banking indus-try, directly or indirectly through SWIFT:

• SEPA Rulebooks and MessageImplementation Guides;

• SEPA Clearing and Settlement Model(CSM);

• SWIFT Worker Remittances; and• Global Payments Framework.

The hypothesis of this paper, and one hasto admit that it is quite early in the life-

time of these new offerings to collectdefinitive evidence, is that these develop-ments derive from an ingrained assump-tion of the validity of the Four-/Six-BoxModel, which in turn is based on anassumption of the continued applicabilityof vertical integration of the paymentsbusiness, which is the historical model.

The vertically integrated market con-centrates power in the hands of a smallnumber of very large suppliers, who arethen able to share the substantial revenuesvia allocations within their own businessmodel, or with parallel large players in dif-ferent geographical markets, ie correspon-dent banks.

In the banking industry, the existence ofparallel large markets defined by geogra-phy and currency permits such a model topersist, but it is immediately threatenedwhen currency markets merge, as into theeuro, even if there were no further regula-tory moves to force the market onto a dif-ferent model.


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Figure 1 Role ofcorrespondents andSWIFT in a Six-Boxcross-borderpayment

Client of Barclays London wants to pay USDto client of Commerz Frankfurt

COMMERZ 103

BARCLAYS

SWIFT

BONY NEW YORK

DR BARCLAY'S $ ACCOUNT


VERTICAL INTEGRATION OF THEPAYMENTS BUSINESS

Under the vertically integrated model,banks own and run the entire value chainthrough its different layers, as shown inFigure 2.

• Banks own the access channel — a pro-prietary electronic banking or webchannel.

• Banks formulate the data standards andcommunications protocol themselves orvia their cooperatives — internationallyvia SWIFT or domestically via a bank-ing association.

• The communications networks arebank in-house or SWIFT, or tightlyconnected to a local clearing house (egin the past, Etebac in France, tightlylinked to CFONB data standards andthe SIT clearing).

• Clearing houses are either run by theCentral Bank (who only allow banks tobe direct members) or are run andowned by the major banks in the coun-try concerned (eg BACS in the UK).

• The security methodology is bank-pro-prietary or taken from a small universeof IT vendors and, in the latter case, it isthe bank that controls the distributionto the users.

The EU Vision for the future market

structure of payments is quite different: itis away from vertical to horizontal integra-tion. Under this model, the layers are sep-arate market spaces, each containing acompetitive landscape of its own. It is per-fectly possible to act in only one layer.Restrictive practices are illegal, where aplayer or players in one layer can combineto either exclude new entrants or use theirmarket dominance in one layer to distortcompetition in another.

In the EU market model, only two areasof activity are the unalterable preserve ofbanks:

• activities requiring a full bankinglicence (as opposed to a PI or eMI); and

• RTGS clearing membership.

This new market model is fully reflectedin the EPC Design Model for Payments inFigure 3. It shows:

• the layering — a big change from thestatus quo;

• more layers and a more complex modelthan for cards; and

• in principle, a lot of space for non-bank‘horizontal’ players.

The EPC Design Model for CardSchemes in Figure 4 reflects the cardsmarket as it is now, already layered, with

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HorizontalVertical = Bank

Customer access systems

Operation and data centres

Own backbone

ShareholdingsDirect membershipsSub-memberships

Correspondents

Acquistion

Processing

Communications

Clearing andsettlement

Activites requiring Banking Licence or Payment Institution Licence

Processors of non-licensed activities

Swift ISPs BT Radianz

PEACHes ACHs Net settlements Banks

Final settlement activities:● Direct RTGS membership● Banks

Direct SWIFTaccess

Bank-ownedchannels Mobile Social networks

Figure 2 Verticaland horizontalintegration in thepayments business


plenty of space for non-banks such asMastercard, Visa and First Data, to have animportant position in one or more layers.

COLLAPSE OF TRADITIONALCOMPARTMENTS OF PAYMENTPRICINGThe upshot of this reorganisation of themarket model, new entrants, increasedcompetition and all the other negative ele-ments for incumbent suppliers that wouldemerge from a market analysis based onPorter’s Five Forces is a collapse of the tra-ditional compartments of payment pricing(see Table 1).

The compartmentalisation was firstbetween domestic and cross-border.Domestic payments would have a high-

value/urgent option, and a low-value/non-urgent option. The latterwould cost pennies; the former wouldcommand a premium, up to perhapsGBP15, e20 or USD25.

Cross-border payments could only bedone via SWIFT, meaning they default tohigh-value/urgent execution and pricing.The absence of a low-value/cross-borderservice propped up the pricing model.Cross-border payments would typically becharged as a percentage of the face valuewith a high minimum (eg e20) and nomaximum. A typical percentage would be1.5 per mille, meaning e1,500 on a pay-ment of e1,000,000. On a payment ofe100, the fee would have been e20 beforeEU Reg 2560/2001.

Services such as Eurogiro and Tipanet


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Figure 3 EPCdesign model forpayments in theSEPA

Source: EPC

Table 1: Traditional payments pricing model

Local Cross-border

Low-value Pennies No circuit availableHigh-value £10 $$$$$


started to put an option and a price intolow-value/cross-border, with some limita-tions, but that box is becoming fuller, withSEPA, Global Payments Framework andnon-bank initiatives putting a price in thatbox, which then undermines the otherprices.

The pricing, at least in the SEPA, col-lapses onto the anchor point of low-value/domestic, because of the principle(first embedded in EU Reg 2560/2001) ofequality of price for domestic and cross-border euro payments. Initially, there werequalifications — it had to be a basic pay-ment, up to e12,500, with IBAN+BIC.Now the SEPA Migration End Date regu-lation removes the amount threshold, aswell as abolishing Central Bank Reportingfor SEPA payments, so that there really isno price point at which the legacy modelof 1.5 per mille � face value can becharged.

Once that price point is removed, thepricing model is based on thecurrency/destination pair, with euro pay-ments in the SEPA being priced at thelevel that previously applied to domestic.

Member state currency payments madewithin the SEPA can command a slightpremium, but then it is open season on allother combinations such as:

• USD payment in the SEPA;• EUR payment with one leg outside the

SEPA; and• a payment in any currency not that of a

member state.

The compartmentalisation of price wassupported in the past by the limitations ofelectronic banking offerings. Here theground is also moving. Table 2 shows howa corporate customer used to find it easyto get multibanking in their own country,and then to access services abroad, butwith a tie-in to using the network of thebank offering the electronic bankingaccess. But what they could not get wasmultibanking across multiple countries inone system.

ISO20022 and SWIFT CorporateAccess put an option in the Multi-coun-try/Multi-bank box. That then enablesaccess to the revised pricing matrix, with-

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Source: EPC

Figure 4 EPCdesign model forcards in the SEPA


out electronic banking issues getting in theway and frustrating the move to the lay-ered market. In this area, it is the bankswith their own network of branches thathave the most to lose. SWIFT CorporateAccess allows a company to bypass aCitibank Milan and deal direct with majorItalian banks: the limitations around elec-tronic access acted as a defence to thefranchise of the branch. It is ironic that it isSWIFT, owned by the banks, that is actingas a bypassing enabler, especially sinceCitibank, the only bank in SWIFT’s Tier 1price category, has such a powerful voicein SWIFT and supplies its chairman.

PAYMENT SERVICES DIRECTIVE ANDSEPA TOGETHER CLEAR AWAY THECOMPARTMENTS IN THE PRICINGMODELOn a regulatory level, the combination ofSEPA and the Payment Service Directive(PSD) have served to undermine and kickaway the props under the pricing model:

• Transparency and the requirement forclearer and more consistent informationupfront on charges, with separate charg-ing for remitter and beneficiary by theirbanks alone — the SHA or sharedcharges model.

• The requirement that all-in chargesmust be quoted at both ends, with nopass-backs of charges (as would occurunder the OUR charging convention)or deductions (as would occur underBEN).

This has reduced the number of reconcili-ation errors for corporates, caused by theamount received being different from theamount expected in the accounts receiv-able list, and has eliminated the chase-ups,investigations and the extra accountingentries for charges.

The net result is lower charges on in-scope payments, at the risk of highercharges for out-of-scope payments.

Euro direct debits are in-scope, andoriginators can look forward to the elimi-nation of interchange fees. The SEPA EndDate Regulation effectively abolishes mul-tilateral interchange fees on direct debitsfrom 2012. While on paper they can per-sist until 2017 for ‘national direct debits’under the SEPA scheme, they are abol-ished from November 2012 for cross-border direct debits under the SEPAscheme. Originators, eg in France, wouldrespond to the delay by sending theirdirect debit collections into Francethrough a Belgian bank from November2012, making them cross-border collec-tions on which no fee can be charged,rather than submit them in France asnational collections and be charged thefee.

As regards the other historical incomesource in cross-border payments — float— that is now also controlled. For euroand member state currency paymentswithin the SEPA, there is the followingregime:

• Payments must be completed by D+1end-to-end.


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Table 2: Electronic banking services availability model

Single country Multi-country

Mono-bank Yes Via Global BankMulti-bank Public standards (Multicash, CFONB) XXXXX


• There can be no back-valuation ofdebits or forward valuation of credits.

At most, a bank can enjoy one day of floatcompared with possibly three or four dayspreviously and split between several banksin the chain. Now the one day is availableto the remitting bank only. The beneficiarybank cannot enjoy any float at all, andindeed must make all euro payments andany national member state currency pay-ments available immediately to the benefi-ciary, ie not just add them to the ledgerbalance and the value-dated balance, butallow the beneficiary immediate use offunds. Only on cross-border member statecurrency payments can the bank allow adelay in availability to close of business,but still giving the beneficiary today’svalue.

These developments inevitably result ina change to the future compartments ofpayment pricing in the EU/EEA, as laidout in Table 3. The lowest pricing will befor euro payments in the SEPA, and therewill be a differentiation only betweenurgent (settled on D) and non-urgent (set-tled on D+1).

For member state currency payments,the same differentiation applies, and it canbe anticipated that the item price will beslightly higher.

Of course, even this model is under-mined as soon as a scheme like FasterPayments is introduced: settlement on D,including where D is a non-business day,and basically free of charge.

Then there is the only bucket in which

pricing is not controlled, and banks willattempt to earn out of that in terms ofboth float and fees. Central BankReporting, if it exists at all, will only applyto this ‘Rest of the world’ bucket. But cus-tomers need to take care: ‘Rest of theworld’ will mean destination or currencyor both:

• USD paid from Stuttgart to Miami cer-tainly

• but also USD paid from Stuttgart toLyon.

Results for the FI business in EuropeThere simply is not enough money on thetable in the Eurozone to feed all the play-ers in the food chain of a Four-BoxModel, let alone a Six-Box Model. Thenew regulations and directives eliminatethe loopholes for customer charging, andthe SMED explicitly demands that pricesdo not increase. The SMED abolishesCentral Bank Reporting, so there is nolonger a price point, even at e50,000.Absolute interest rates are low, reducingthe value of lying balances.

Contrast this with the situation wherebanks were permitted to share out pay-ments revenue among themselves, andagree remuneration either by fees or byleaving lying balances to accrue notionalinterest as a credit against service fees(known as compensating balances or bal-ance offset).

Banks do not want to have liquiditytied up as balances earning this notionalcredit to pay service fees, so direct pay-

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Table 3: Future payments pricing grid for a bank operating in the SEPA

Currency/destination D D+1 D+2

EUR/SEPA e10 e0.20 N/AEU or EEA member state/SEPA e20 e2.00 N/AAll other combinations N/A N/A 0.15% with minimum e40


ment of service fees will displace thatmodel. The question then is how muchmoney the remitting bank has in order topay service fees.

The textbook answer would be a rise indirect clearing, with the clearing infra-structures substituting the role of a corre-spondent. That would result in aThree-Box Model if both the debtor’sbank and the creditor’s bank belonged tothe same infrastructure.

But it is a Four-, Five- or Six-BoxModel if they do not. The SEPA CSMpermits many types of clearing and settle-ment mechanism, and this model wasdeveloped because of the difficulty in cre-ating even one PEACH (Pan-EuropeanAutomated Clearing House).

EBA STEP2 qualified as a PEACH,because all banks were accessible throughit — but only indirectly. A group of bigbanks, such as Nordea in Denmark, tookon the loss-making role of acting as aSTEP2 Gateway Bank to secondary banksin Denmark for low-value euro payments.This arrangement could not persist intothe true SEPA era, where reachability isdefined by direct membership of a CSM.

Now there are three or four leadingmulti-country CSMs — EBA STEP2,Equens, STET — as well as many single-country ones (Iberpay, SIBS, NETS) —and the reachability of banks will increas-ingly depend on the interoperability ofthese CSMs.

Infrastructures have replaced correspon-dents within the Four-Box Model inEurope. In other words, the self-same Four-Box model, or worse, that existed in the oldworld has been reached, but without themoney to pay for it. At least this new modelrecognises that there is no reciprocity to beshared around, but on the cost side, themodel is still far too expensive.

Banks will not want to allow a Four-or-More Model for very long, but even therethe SMED has something to say: banks

must allow new-entrant Payment ServiceProviders equal access to CSMs, and noone can tell anyone else which CSMs theyshould join in order to get paid.

Result for the FI business outsideEuropeOutside the SEPA, there is still plenty toplay for, with less regulation and morespace for competition; again though, thetarget will be filling the box that is ‘Lowvalue–Cross-border’. Customers will notwant all their payments to go throughhigh-value circuits with the attendantcost.

The battleground is Remittances, andin that space there are a series of bankingsector initiatives, to contrast with initia-tives coming from non-banks.

The principle banking sector initiativeis SWIFT Worker Remittances, derivedfrom ISO20022 XML and, as a result, aclose relative of the SEPA Credit Transfer.

The Global Payments FrameworkAssociation is another initiative based onthe same foundations, as it intends to useISO20022 XML as the lingua francabetween different national ACH systems,including NACHA, but also includingSEPA.

Non-bank initiatives in the same spacewould include the service set of Visa andMastercard, well-embedded remittanceservices such as Western Union andMoneygramme, and then the newer busi-ness models such as Paypal and the M-Pesaservice, which uses mobile phone credit asthe remittance currency.

As an illustration of the equation ofPrice+Performance=Value, the output ofa simple exercise used in LyddonConsulting’s ‘Euromoney Course CaseStudy on Low-value Payment Options’ isused in Table 4. This case study markedinitiatives on three very basic indicators ofperformance, added in the price, to get anassessment of value.


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The indicators of performance were:

(i) time/effort needed to get to a pointwhere the sender makes their first pay-ment;

(ii) time/effort needed for the sender tomake a subsequent payment; and

(iii) ease for the beneficiary to get themoney.

The four examples used were:

(i) Russlav Bank Worker Remittances as aCase Study in the application ofSWIFT Worker Remittances;

(ii) Global Payments Framework;(iii) Western Union; and(iv) M-Pesa.

The material used was the marketing flyerof each service.

The audience in the course was prima-rily from the Middle East and Asia/Pacific,and so could be regarded as an authorita-tive audience in terms of familiarity withthe customer needs.

The group dispelled one illusion:Western Union and M-Pesa are not signif-icantly cheaper than the bank options, andthey are certainly not free. Where theyscored was by a large lead in all three areasof performance, caused by the lack of needfor a bank account at both ends, and theresultant lower threshold onKYC/KYB/AML at the start, for everysubsequent payment and both ends. Price

was the same, but given the lead in per-formance, they add far more value thanthe banking sector options.

CONCLUSIONS ON BANKINGSECTOR LOW-VALUE PAYMENTOPTIONSThe low-value payment options nowbeing deployed by the banking sector aretoo much tied to the Four-/Six-BoxModel, and there is not enough money onthe table to feed all the players in the foodchain.

It is the author’s opinion that the ITapproach from the banking sector is alsoflawed, in the sense that ISO20022 is lux-urious: it contains many fields and options.Its original concept as a superset of datainto which any clearing system’s datasetwould fit as a subset characterises it as aRolls-Royce approach.

The very large number of characters inISO20022 messages has to translate atsome level into a cost-to-process that ishigher than shorter messages, as well as ahigher cost-to-transmit. Not only that, thevery flexibility inherent in XML risksconverting the payment chain into a gameof Chinese whispers, where each link addsits own flavour and interpretation. This, inturn, would impact STP and the numberof R-messages.

By contrast, Visa messages in principleand M-Pesa messages in practice are SMSmessages, rigidly dictated from the centre

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Table 4: Results of Lyddon Consulting’s ‘Euromoney Course Case Study’ on low-value payment options

Option First payment Next payment Reach to Bene Price Sum

Western Union ☺ ☺ ☺ ☺ ☺M-Pesa ☺ ☺ ☺ ☺ ☺Russlav Bank L L L ☺ LGPFA L L L ☺ L


in terms of how to process them and howto respond. On paper, the EPC MessageImplementation Guidelines are meant tohave the same impact, but the decen-tralised approach to putting them intopractice as well as the diffuse CSM intro-duce a major space into which deviationcan inculcate itself.

CONCLUSIONWithin the SEPA, the applicable regula-tions reduce the money on the table,compel banks to be directly reachable, andinfer direct clearing within a Three-BoxModel as being essential to achieving thetarget performance at minimum cost. TheSEPA CSM does not deliver the basis ofthe cost model and, instead, promises a sit-uation where STP levels are modest andR-messages increase compared with thelegacy clearings. A single and properEuroACH is therefore vital and is at theopposite end of the spectrum from onewhere correspondents are required.

While all this is going on and tram-melling the banks into a huge migrationeffort to move to a high-cost model, otherpayment options within the SEPA willhave an open season.

Outside the SEPA, the role for a corre-spondent still exists on paper, with theSWIFT Worker Remittances Model,GPFA and so on, but the inherent cost andperformance of that model is rendereduncompetitive by both the IT approach(ISO20022 XML) and the regulations onbank accounts and payments —AML/KYC/KYB. PayPal, M-Pesa andsimilar solutions are regarded by the cus-tomers as delivering far better perform-ance for the same price.

The futureDoes this mean, then, that the ‘PaymentsBusiness’ is not a business at all? If pay-ments is an obligatory capability for a bank

holding customers’ bank accounts, it ishighly regulated, the product ishomogenised and there is no money in it,how can it be regarded as a business?

Or is it that Retail Payments can nolonger be classed as a business, at leastwithin the SEPA?

SWIFT used to be about internationalpayments, primarily interbank ones andprimarily — in consequence — high-value ones. SWIFT was therefore con-tained in just one box in the PricingModel — high-value/cross-border, theone with the most money in it as a func-tion of the payment’s face value.

Through the mechanism of ISO20022,SWIFT has gained market entry intolow-value/cross-border — via the adop-tion of ISO20022 by the EuropeanPayments Council for SEPA, and thenthrough GPFA and SWIFT WorkerRemittances.

SEPA also progressively obtains marketentry for SWIFT into low-value/domes-tic, as Eurozone countries migrate offlegacy data formats onto ISO20022.

The original pair of SWIFT MT100and SWIFT MT202 were the directreplacement for the two telexes that com-prised an international transfer:

• telex from LBI Antwerp to BOLSAManaus to pay a USD L/C availment toa coffee exporter referencing‘LC212/1981 Ets Demeire NV,Keyserlei 761 2de verdieping,Antwerpen’; and

• telex to USD correspondent LBI NewYork to debit LBI Antwerp and creditBOLSA Manaus referencing ‘Cover LCref 212/1981’.

As such, the business model in which themessages operate is inherent to the mes-sages themselves, and that is a high-value/cross-border model, with analogouscosts embedded in it — and revenues to


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pay for the costs of the two banks andtheir correspondent(s).

With alternative methods emerging andhigh regulation on the banks, the second-generation methods of the banking sector

are competitive on neither cost nor per-formance, and this gravely threatens thebanks’ revenue streams, which are nolonger there in either the manner or thequantity to be parcelled out as reciprocity.

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