In recent years, the Reserve Bank of India has been proactively trying to internationalise the rupee and its payment systems. This is a long journey but firm steps are now being taken. In mid-July, for instance, the RBI and the Central Bank of the UAE entered into two significant memorandums of understanding related to the use of local currencies for cross-border transactions, and the interlinking of respective payment systems. The objective is to promote the use of the rupee and the UAE dirham bilaterally and to promote fast and cost-effective cross-border fund transfers. However, the statement also included the following: “Exploring the linking of payments messaging systems.”
With the attention mostly on cross-border transfers, the internationalisation of India’s Structured Financial Messaging System (SFMS) went unnoticed by most commentators. It is often forgotten that transfers and messaging are distinct processes. A payment transaction involves two key elements: the exchange of financial messages between the banks, and the actual transfer of funds. Within India, both the National Electronics Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) are fund transfer platforms, which are first validated by a secure message sent through SFMS. Hence, transfer payments and messaging systems, although linked, should not be confused with each other.
The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is widely used as the messaging system for international payments. Note that SWIFT is just a messaging system like SFMS that provides secured financial messages to financial institutions. It neither monitors nor manages the transfer of funds; that process is separately executed by banks using different platforms.
As an illustration of an international payment, SWIFT messages between remitter and beneficiary banks will first authenticate various details. After confirmation, the transfer of funds between the banks gets initiated through VOSTRO and NOSTRO accounts. Here NOSTRO account is a domestic bank’s account maintained by a foreign bank whereas VOSTRO account is the same foreign bank’s account maintained by the domestic bank. The settlement of the entire process takes 2- 3 business days as per the mutual agreements between the counterparties.
Operationalised in 2001, SFMS provides secure financial message services to domestic banks and financial institutions within India. Around 250 members use SFMS either through a thick client or cloud-based systems.
The SFMS platform was only used domestically till now. However, it has the capacity to be internationalised owing to its advanced capabilities. In fact, SFMS is at par, if not better, than SWIFT on messaging standards, messaging capabilities and cost. Our research found that a SWIFT member has to pay annual charges of around $130,000-140,000 which includes connection charges, traffic and usage charges. There are additional charges as well. In contrast, as per our estimates, if SFMS gets internationalised and takes all other charges into consideration (membership fee, exchange rate fees, money laundering screening charges, etc.), the internationalised version would cost less than half of SWIFT.
Moreover, SWIFT currently uses MT (Message Text) Standards and has initiated a shift to the International Organisation of Standardisation 20022 (ISO 20022). The entire migration process will take 2-3 years. In contrast, SFMS already supports ISO 20022 which is superior to MT standards in terms of consistency and storage of data. They are also inter-operable. So, any country that wishes to use SFMS can continue using MT standards and is not required to convert to ISO standards. Moreover, SFMS provides certain additional message types for interbank transactions such as Letters of Credit which can be used by foreign banks as well. SWIFT is only now building this capability.
In short, India’s SFMS is both cheaper and technically more capable than SWIFT. Perhaps it should be exported independently of efforts to internationalise the rupee and popularising Indian payments platforms. It can be used by partner countries for domestic payments, and once more countries accept it, for international messaging. Given that it is interoperable with SWIFT, they can co-exist easily. This would enhance the resilience of global financial architecture but making it less dependent on a single messaging system.
Sanyal is Member, and Verma is Young Professional, Economic Advisory Council to the Prime Minister