Sanjeev Sanyal Explains: Why India's Financial Messaging System Is An Export-Ready Solution For The World

In recent years, the Reserve Bank of India (RBI) has been actively pursuing the internationalisation of the rupee and its payment systems, but amid the spotlight on cross-border transactions, a significant development in India's Structured Financial Messaging System (SFMS) went relatively unnoticed.

The SFMS, operationalised in 2001, serves as a secure financial messaging platform for domestic banks and institutions within India.

In a recent article, Economic Advisory Council to the Prime Minister (EAC-PM) members, Sanjeev Sanyal and Young Professional Nisha Verma, has said that the SFMS has untapped potential to be used for international messaging and payments.

In a notable stride towards this goal, the RBI, in mid-July, inked two crucial memorandums of understanding with the Central Bank of the UAE.

These agreements aim to promote the bilateral use of the rupee and the UAE dirham, and facilitate fast and cost-effective cross-border fund transfers between the two countries.

Additionally, the statement also included “exploring the linking of payments messaging systems.”

It is essential to differentiate between fund transfers and messaging systems, as they play distinct roles in payment transactions.

In India, the National Electronics Fund Transfer (NEFT) and Real Time Gross Settlement (RTGS) serve as fund transfer platforms, which are first validated through SFMS, which provides secure financial messages to the banks.

The Society for Worldwide Interbank Financial Telecommunications (SWIFT) is widely recognised as the messaging system for international payments.

However, it is crucial to understand that SWIFT, like SFMS, is purely a messaging system, not responsible for managing or monitoring fund transfers.

The actual transfer of funds is executed by banks using various platforms, including VOSTRO and NOSTRO accounts.

The settlement of the entire process takes 2- 3 business days as per the mutual agreements between the counterparties.

With approximately 250 domestic members currently using SFMS through thick client or cloud-based systems, it has a robust foundation for international expansion.

In fact, SFMS stands at par, if not superior, to SWIFT in terms of messaging standards, capabilities, and cost.

According to research conducted by Sanyal and Verma, while SWIFT members face considerable annual charges, SFMS offers a more cost-effective alternative.

"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," they added.

The estimated cost of internationalising SFMS, including membership fees, exchange rate charges, and money laundering screening, amounts to less than half of SWIFT's charges, according to the research by Sanyal and Verma.

Moreover, SFMS already supports ISO 20022 standards, which are more consistent and offer enhanced data storage, unlike SWIFT that is is still in the process to transition to the same standards.

"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," they said.

Additionally, SFMS offers certain extra message types for interbank transactions, such as Letters of Credit, which are yet to be fully developed in SWIFT.

Sanyal and Verma further argued that 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," they said.

The interoperability of SFMS with SWIFT allows for a seamless coexistence of both systems, reducing the dependency on a single messaging platform and enhancing the resilience of the global financial architecture.