‘There’s no one system that can solve the problems across the B2B payments landscape’: Goldman Sachs’ Hari Moorthy on what lies ahead for B2B payments

B2B payments are evolving. 

Moving away from check payments and leaning toward electronic transactions is perhaps one of the most recognizable trends within the B2B payments ecosystem. However, these changes are likely a long way from making the system more efficient.

The Clearing House launched its real-time payments (RTP) network in November 2017 to bring real-time payments, a type of electronic payment that allows for the immediate transfer of funds between two parties, to the U.S. The RTP network is open to all federally insured U.S. depository institutions and is accessible to financial institutions that hold close to 90% of U.S. demand deposit accounts (DDAs) – and the network currently reaches 65% of U.S. DDAs.

Despite the advent and growing reach of the RTP network, often described as the check-killer, 3.3 billion checks were processed in 2022. And while writing checks may be less popular than it used to be, 55% of Americans still wrote a check in the past year.

“We will continue to process more checks than electronic payments and wires even today. If we add this up across the globe, we end up having this problem returning in multiple different dimensions and there is no easy answer,” said Hari Moorthy, COO of platform solutions and global head of transaction banking at Goldman Sachs, at Tearsheet’s The Big Bank Theory Conference, recently held in New York.

Even though many services are being introduced to facilitate B2B cross-border payments, stumbling blocks still exist. The progress being made to facilitate easier cross-border payments is important, but there remains much work to be done. This issue primarily stems from the fact that there are no interoperable common standards for international payments, according to Moorthy.

A quick history: What makes B2B payments complex and the role of SWIFT

The lack of standardization and complexity across B2B cross-border payments goes back many years in history when every country, government, and society developed its individual payment rails, systems, and processes.

Later, in order to enable international transactions from one system to another system, the SWIFT messaging network introduced a smoother way to transfer international money via a SWIFT transfer. SWIFT is now 50 years old, and has been the standard backend system to move money among banks across the globe – used as an intermediary between institutions for multiple functions including brokerage, banking, and stock transactions.

However, a SWIFT payment can take anywhere between 1 to 5 working days to complete. When the sender and recipient banks do not have a direct agreement, correspondent banks prolong the process. Bank holidays, weekends, and schedules can also delay the time of the transfer processing, among other factors.

According to Moorthy, this gives rise to a number of major technical and operational challenges. First and foremost is the unidentified time period when the money will arrive. The second problem – keeping surplus liquidity in the system – stems from the ambiguity of the first problem, because of which corporations and individuals keep excess money in their bank accounts.

“We keep three years of excess dollars in the banking system in anticipation of payments, what could otherwise be deployed for productive commerce use,” he said.

Between the time when a payment is initiated on the SWIFT network to the day it is completed, the money involved in the transaction can’t be used by either the sender or the receiver. It motions across banks step by step for multiple debits, creating frictional liquidity.

“We are also actually slowing the economic growth for very many good reasons,” added Moorthy.

Since SWIFT was developed in 1973, SWIFT now comes across as a complex, a highly manual, and super difficult system for banks to operate, which impedes B2B payments.

Besides, SWIFT cyber fraud has been on the rise since 2016, exposing banks to growing payment messaging fraud. Since fraud tactics are becoming more sophisticated, fraudsters can siphon away thousands of dollars from the network more than they could a few years ago, according to Moorthy.

Pushing forward…

Supporting the idea of new payment rails and remodeling existing ones may be the way forward in enabling interoperability across different payment systems.

In the words of a payments expert: “The idea of global macro-harmonization is still utopian.”

While companies and businesses are finding a growing number of use cases of open banking, an absolute harmonization to create global standardization and a single common regulatory supervisory agenda for cross-border transactions is unlikely to take shape in the immediate future.

However, as regulators and industry work through the challenges to get some minimum standards around security, messaging, and greater interoperability, the payments industry and countries willing to collaborate in enabling borderless payments rails can seek a common ground based on shared interests and explore the potential role of new infrastructures and arrangements.

“In order to place new proper standards in the system, we need global government bodies, banks, private institutions, and technology companies to work together,” added Moorthy.

“There's no one system that can actually solve this problem because it is way too complex for a single solution. But if there is no collectivism here, we will never see that future.”