• CASH MANAGEMENT, TECHNOLOGY

    A new era for payment validation

09 December 2021

As payments become increasingly fast, minimising fraud risk and ensuring visibility is gaining importance. flow explores how the faster payments space is evolving and how pre-validation will help financial institutions and corporates

Digital sales are booming – and the shift of both corporates and consumers onto online platforms has elevated expectations of rapid, seamless services by banks that are available 24/7, 365 days a year. Faster payments are a central element of these expectations with adoption having accelerated over the past few years. The Covid-19 pandemic acted as a further catalyst for change.1

On the back of this newfound reliance on digital payments, the global market saw a 41% surge in real-time payment transactions from 2019 to 2020, according to a new report from ACI Worldwide and GlobalData.2 Globally, more than 56 countries are now live with domestic real-time payment schemes3 –up from just 14 countries as recently as six years ago.

But for financial institutions (FIs), corporate clients and consumers to benefit from this trend, faster payments also require new tools when it comes to minimising fraud risks, maximising efficiency, and providing visibility into payments. flow looks at how industry initiatives such as SWIFT’s new Beneficiary Account Validation (BAV) can help with that.

The story so far

Previously, the cross-border payments industry was encumbered by a multitude of inefficiencies, making transactions unpredictable and untraceable – with little transparency on the fees involved. To address this, SWIFT gpi was launched in 2017 for high-value cross-border payments enabling banks to provide corporate treasurers with a real-time, end-to-end view of the status of their payments, including confirmations when payments have been credited to beneficiaries’ accounts. At its launch, use of the service was limited to a small group of global transaction banks. Now, almost 90% of all cross-border payments are sent by SWIFT gpi, made in around 150 different currencies, and banks send the equivalent of more than US$420bn in value via gpi each day.4

In response to the financial institution community’s wish for the gpi service to be extended to include lower-value payments, SWIFT announced a new service for low-value cross-border payments called SWIFT Go in October 2020. Although still in its pilot phase, the service is supposed to bring speed, predictability, and end-to-end transparency to small and medium-sized businesses (SMEs) who pay suppliers overseas and for consumers sending money to family or friends internationally. In fact, ten banks are already live with SWIFT Go, including Deutsche Bank, representing 41 million low-value cross-border payments a year.5

Bringing security and accuracy to payments

As payment processes have accelerated, the need to orchestrate the checks and balances around them accordingly has come to the fore. It is important that payments not only go fast, but also that they go to the right people, safely and accurately.

The unprecedented challenges of 2020 have brought many changes, including a new predominantly working-from-home environment, a rise in e-commerce and an increased need to live life online. Fraudsters have been quick to capitalise on this shift, tailoring scams to fit changing lifestyles. However, the banking industry has been working to protect customers from fraud and a UK Finance/LexisNexis report noted it had prevented £1.6bn of unauthorised fraud losses in 2020, equivalent to £6.73 in every £10 of attempted fraud being stopped.6

And banks continue to bring in new tools to tighten controls. These advances include rapid account pre-validation services for payments, designed to confirm the instructed payee is indeed the intended recipient before a payment is sent.

Marc Recker“The pre-validation service will add significant value to our financial institution clients, building on the positive gpi client experience already in place"
Marc Recker, Managing Director and Global Head of Product, Institutional Cash Management, Deutsche Bank

Chief among these is the SWIFT BAV service, which enables clients to verify payee account details before a payment instruction is sent. This means that participating banks can ensure clients’ payments are being sent to the intended beneficiary using the correct account details, by validating the information via SWIFT. The service enables banks to both issue a request for verification by the beneficiary bank and respond to these requests from other banks – helping to create a secure and efficient cross-border payments system where all parties can send payments with greater confidence. See Figure 1.

Figure 1: Summary of SWIFT BAV process

Source: https://www.swift.com/our-solutions/global-financial-messaging/payments/payment-pre-validation

“We firmly believe the pre-validation service will add significant value to our financial institution clients, building on the positive gpi client experience already in place. BAV addresses an extremely important pain-point in cross-border payments and will help increase straight-through processing (STP) ratios while reducing fraud and exception handling,” notes Marc Recker, Managing Director and Global Head of Product, Institutional Cash Management, Deutsche Bank.

Reducing manual efforts

The solution uses a real-time Application Programming Interface (API) to check the existence of beneficiaries using key account details, validating the end beneficiary before executing the actual payment. The use of APIs also allows for the service to be plugged into existing processes on the corporate client side, including supplier onboarding or vendor management.

This has the potential to significantly reduce time spent by both banks and corporates on the management of fraudulent payments and payments made with incorrect details. When payments fail due to incorrectly entered payment details it can be time-consuming and labour-intensive to resolve. For a start, there is a delay while the payment is run through clearing, so the rectification process can only begin once the bank is notified of the failure. At this point, the bank has to reach out to the client to let them know. The client then needs to respond to the bank and then contact its own client to confirm the correct payment details. What’s more, returning the payment to the client and initiating and new, correctly addressed, payment, incurs further costs.

When banks and clients go through this process multiple times throughout the course of a year, it can add up to a significant amount of avoidable inefficiency. “For instance, one of our clients this year was interested in the BAV solution because it had a significant volume of payments rejected in the just one quarter in 2021 due to incorrectly entered payment details,” reports Recker. With the migration to ISO 20022 – the new global messaging standard – minimising time-consuming manual intervention will become even more important.7

Jose-M Buey“We are pleased to see that more banks are choosing to go live with the SWIFT BAV solution, with Deutsche Bank among the early adopters”
Jose-M Buey, Global Head of Core Platforms and Accounts Solutions, Deutsche Bank Corporate Bank

The service is already live with a handful of banks, including Deutsche Bank. “We are pleased to see that more banks are choosing to go live with the SWIFT BAV solution, with Deutsche Bank among the early adopters – and the first to roll out the service on a global basis,” said Jose-M Buey, Global Head of Core Platforms and Accounts Solutions, Deutsche Bank Corporate Bank, when the bank launched its own service in November 2021.

Solutions such as SWIFT’s BAV service have an important role to play in the development of the faster payments ecosystem – addressing a longstanding pain-point for corporates and banks alike in the cross-border payments space while increasing STP rates. However, it will take a coordinated effort from the correspondent banking industry for the service to reach its full potential, with the reach and coverage of the service dependent on widespread adoption.


Sources

1 See also “Reimagining the future of payments” at flow.db.com
2 See https://bit.ly/3IrYykB at go.aciworldwide.com
3 See https://bit.ly/3pFOY4O at fisglobal.com
4 See also “SWIFT gpi: a progress report” at flow.db.com
5 See also "SWIFT Go: Low value payments rethought" at flow.db.com
6 See https://bit.ly/3pBCX0b at ukfinance.org.uk
7 See also "Guide to ISO 20022 migration: Part 4" at corporates.db.com

Stay up-to-date with

Sign-up flow newsbites

Choose your preferred banking topics and we will send you updated emails based on your selection

Sign-up Sign-up

Subscribe Subscribe to our magazine

flow magazine is published twice per year and can be read online and delivered to your door in print

Subscribe Subscribe

YOU MIGHT BE INTERESTED IN

CASH MANAGEMENT, TECHNOLOGY

SWIFT gpi: a progress report SWIFT gpi: a progress report

As SWIFT’s gpi initiative approaches its fifth anniversary, many of its original goals have been achieved since the 2017 launch while more recent fine tuning has enhanced the service. What’s next on the agenda? The flow team reports

SWIFT gpi: a progress report More

CASH MANAGEMENT, TECHNOLOGY {icon-book}

Reimagining the future of payments Reimagining the future of payments

The pandemic has accelerated the pace of change over the past year and bank-led merchant solutions are among the responses to a huge shift in payment methods and the boost to e-commerce, reports Helen Sanders

Reimagining the future of payments More

CASH MANAGEMENT

CBDCs and the impact on cross-border payments CBDCs and the impact on cross-border payments

A growing buzz around central bank digital currencies (CBDCs) is seeing proofs of concept and pilots worked on by many central banks across the world. As these schemes gain traction, Deutsche Bank’s Bradley Lonnen, Alexander Bechtel and Marc Recker outlined in a webinar how CBDCs could transform cross-border payments

CBDCs and the impact on cross-border payments More