Setting a new course in payments

The ‘longitude’ issue was so pressing that the UK government offered inventors £20,000 to solve it. Over the subsequent decades, innovators devised complex machines to crack the riddle. In the end, humble carpenter John Harrison claimed the prize with an elegantly simple solution: a clock that remained accurate at sea. Navigators could use it to compare local time to London time and therefore calculate longitude.

London-based start-up RTGS.global likes to reference this famous story. It says the twenty-first century is facing its own global trade challenge: cross-border payments. RTGS.global believes that, like Harrison, it has devised a simple way to improve it. Its version of the marine chronometer? Atomic settlement.

The problem is that these transactions are frequently slow, opaque and expensive. According to the BoE, a single payment can take up to 10 days and incur a 10% fee. In an era of real-time, low-cost domestic transfers, this is anachronistic.

The cause of the friction is the correspondent banking system that underpins most cross-border payment flows. In this set-up, partner banks in different countries hold local ‘nostro’ accounts with each other. When a customer wants to send money, the two banks just arrange to debit and credit their respective accounts.

However, only the biggest banks are correspondent banks and, therefore, smaller banks rely on larger partners to conduct cross-border transactions for them. Add to this the many different (and frequently manual) bank processes, local regulatory rules and different time zones, and you end up with those 10-day delays.

The industry recognises the issue. In June 2020, the G20 asked the Financial Stability Board (FSB) and the Bank for International Settlements to develop a cross-border payments road map. The aim was to improve the speed, access, transparency and cost of international payments by 2030. Progress has been slow. In October 2023, for example, the FSB reported that the proportion of retail services that make cross-border funds available to the consumers in an hour stood at 42% against a target of 75%.

Some regions are faring better than others. Initiatives such as the Continuous Linked Settlement system and Swift GPI have improved payment speed and clarity for banks in some developed countries. However, in the emerging Bric economies, the challenges remain.

Which brings us back to RTGS.global’s solution. It consists of an immutable cloud-based ledger that keeps a record of liquidity pools in multiple currencies. When two parties want to transact, the system verifies that there is sufficient liquidity on both sides, locks it down, checks the conditions are met and then settles/records the trade.

The key advantage is the elimination of settlement risk. Money is only exchanged in this ‘payment versus payment’ (PvP) scenario if both parties have sufficient funding.

RTGS.global has been working on its platform for four years. It says the solution was made possible by recent technological advances – namely the combination of reliable global connectivity and easily accessible cloud platforms. Its own solution is based on Microsoft’s Azure SQL Database ledger.

The company’s original vision was to build a new financial market infrastructure for wholesale money exchange. Here, the system would lock in liquidity for monies held in central banks. That project is ongoing. However, in 2023 there was a slight change of direction: the company began testing new payment corridors in developing economies. First, it ran a pilot with MDO Humo in Tajikistan and Credo Bank in Georgia, and later with Tajikistan-based Alif Bank and Bank Arvand and Montenegro’s Universal Capital Bank.

Then, in October 2024, RTGS.global revealed a solution tailored specifically for payment service providers (PSPs). PSP innovators such as Revolut and Wise have already done much to improve cross-border payments over the past decade. They created their own real-time payment networks connecting multiple countries to reduce the cost of transactions. But RTGS.global contends that, after years of competition and consolidation, PSPs cannot compete on price anymore. They need to differentiate by speed of delivery, transparency, security and accessibility. RTGS.global believes they face three main barriers to success:

• Cost. PSPs must pre-fund foreign accounts, which requires accurate forecasting of volumes. But forecasts are prone to errors and when discrepancies occur, PSPs must quickly source emergency funds. They have to fund expensive credit lines to mitigate these shortfalls.
• Access and integration. It is a technical challenge to integrate with multiple correspondent banks, each with their own proprietary application programming interfaces (APIs). The process is time-consuming, resource-intensive and expensive. And the complexity increases with each additional relationship.
• Liquidity. PSPs typically maintain relationships with multiple providers to mitigate risks. They must constantly monitor and move money between them. Managing these dispersed funds is challenging for treasury managers, given multiple cut-off times and incompatible payment rails.

RTGS.global claims its PSP atomic settlement solution tackles all the above challenges with a combination of ‘just-in-time’ funding, simple integration (using standardised ISO20022 API messages) and pooled liquidity. PSPs that sign up receive a single network account through which to offer retail and corporate customers instant money transfers 24 hours a day, 365 days a year.

“The other big difference relates to funds. With wholesale FX, you have to hold funds in central banks. It is a non-negotiable. But we realised payments institutions would be happy to use segregated accounts that sit on commercial bank funds because the money is coming in and out so quickly, and the volumes are smaller. So the proposition evolved out of those conversations, and the level of interest has gone through the roof.”

To test its PSP solution, RTGS.global sent €100 via the traditional correspondent method. The process took three weeks and only €52 arrived. Via the RTGS.global platform, the transaction was instant and the entire sum was received. It also tested an ‘out of banking hours’ payment across to two institutions in the UK and Australia. This completed in seven seconds.

RTGS.global has now signed a pilot agreement to test the concept with money transfer specialist Opal, which moves money between 12 mostly Eastern European countries. Opal says its rationale for signing up was to deliver payments to new territories without the need to open new subsidiaries or apply for its own licences.

RTGS.global claims to have reached agreement in principle to deliver on 12 currencies, including the dollar and the euro. Hubble says: “Having currencies will help us to create numerous payment corridors. This will give PSPs and neo-banks the opportunity to provide instantaneous settlement globally and get payments out significantly quicker than they do now. All of this becomes a reality in early 2025.”