‘Beneficiary banks’ a major choke point in cross-border payments process

Cross-border payments

Only one in three cross-border payments are processed and delivered by ‘beneficiary banks’ to customers within the expected five-minute timeframe, with processing times within some institutions blowing out to multiple days, data from global payments initiative SWIFT gpi has revealed.

A survey of SWIFT gpi payment data, collected by global central banking authority the Bank for International Settlements (BIS), found that the cause of the delay is largely due to an abundance of capital controls.

Whilst stressing that the delay was attributable to multiple interrelated (often country-level) factors, the BIS found that, on average, banking institutions in countries with “substantial capital controls”, many of which are still reliant on manual interventions, were often unable to process payments in a prompt fashion.

“Capital controls remain an integral part of a country’s policy toolkit to limit the spread of international economic disturbances,” the BIS wrote.

“However, such restrictions typically involve burdensome compliance processes and other manual interventions due to documentation requests and balance of payments reporting, which in turn increase processing time at the beneficiary bank [those at the receiving end of a cross-border payment] before funds can be released to the end customer’s account.”

The BIS also found that, unsurprising, longer offline hours at ‘beneficiary banks’ tended to increase payment processing time. It also, more often than not, coincides with a higher reliance on batch processing by the receiving institution.

“More offline hours not only limit the time during which banks process payments but are also correlated with the use of batch processing, that is, the extent to which banks execute payments in batches at specific times during the day rather than on a transaction-by-transaction basis.

“Both effects cause delays and increase time spent at the beneficiary leg.”

The BIS calculates offline hours by the number of consecutive hours in which the bank does not confirm transactions during a regular business day.

The timeline of a payment made through the SWIFT gpi standard can be split into three legs: the originator, the in-flight and the beneficiary leg. If there are no intermediary banks or Financial Management Information Systems (FMIS) involved, in-flight time is effectively zero.

Across the entire three-point payments journey (from originating bank to intermediary to beneficiary bank), the total average payment processing time was calculated at eight hours and 36 minutes; the median was only one hour and 38 minutes.

The beneficiary leg, it was found, represented the vast bulk of the delay for cross-border payments through SWIFT.

Up to 20 per cent of transactions faced a delay of upwards of 12 hours due to bottlenecks at the beneficiary end. A little under two out of three cross-border payments were processed within four hours by end receivers.

Around one in three SWIFT payments were settled at or within five minutes at the beneficiary end.

Slow transaction times at the beneficiary end were also correlated with a number of country-level variables, in particular a country’s Gross National Income, but also the number of banks, a high Euler-Hermes risk rating, and limited web server infrastructure per capita.

“[In] the slower beneficiary regions such as Northern Africa and Southern and Central Asia, the beneficiary leg is by far the most time-consuming part of the average payment route,” the BIS wrote.

While the BIS found that additional intermediaries on a payment route can potentially extend the time spent at the in-flight leg, this extension is marginal compared to the time potentially spent at the beneficiary leg.

“[The] minimum and lower quartiles of time remain close to zero regardless of the number of intermediaries.

“In most cases, especially when only one or two intermediaries are involved, the intermediaries are global correspondent banks that have streamlined and automated their processes to add little to no time to the in-flight leg.”

Close to 70 per cent of payments moved through the in-flight leg within five minutes, with the vast majority (90 per cent or more) transferring in under four hours.

Curiously, the size of the time zone difference between the originator and beneficiary banks, the volume of payments to the beneficiary country, the payment amount and whether it involves a currency conversion also had a negligible impact on total cross-border payments processing time, the BIS said.

However, the direction of an international payment did appear to have some impact: “payments sent ‘with the sun’, that is, from east to west, tend to be faster than payments sent in the opposite direction”.

Data for the survey was compiled by the BIS from transactions made via the SWIFT gpi protocol, offering “a granular level” measure of payment processing times.

“Every payment on SWIFT gpi has a unique end-to-end transaction identifier (UETR) which allows us to measure the time from when the originating bank forwards the payment instruction until the beneficiary bank credits the end customer’s account.”

The data consisted of approximately 20 million transactions covering 141 countries and dependent territories worldwide. This represents 48 per cent by volume and 56 per cent by value of all cross-border payments on SWIFT.

The full BIS report can be accessed here.