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The G20’s payments roadmap will not succeed if there are no international regulatory and data collection standards, and transparency measures. The coming year could be pivotal for everyone in the multi-layered cross-border payments chain.
The G20 Roadmap for Enhancing Cross-Border Payments report describes the complexity of the cross-border payments ecosystem as multi-layered. Financial Stability Board (FSB) explains this as being “made up of a wide variety of end-users, payment service providers (PSPs), and infrastructures, all of which leads to fragmented and heterogeneous potential data sources”.
This multi-layered payments ecosystem, which includes several PSPs in conjunction with the lack of regulatory and data harmonisation across jurisdictions, leads to friction in cross-border transactions.
The cross-border payments landscape has gone through rapid change over the past few years driven initially by the focus of the G20 to make its payments programme a priority in 2020 and encouraging collaboration from international bodies across the world. This was spearheaded by the FSB, which set out the aims of the G20 through the development of 19 key objectives with the focus on “achieving cheaper, faster, more transparent and accessible cross-border payments”.
According to the FSB report, cross-border payments are still facing the following key challenges:
- High transactions costs;
- Low speed in end-to-end processing times;
- Limited access for users accessing PSPs and PSPs accessing payment systems and other arrangements; and
- Limited transparency about costs, speed, processing chains, and the payment status for end-users and PSPs alike.
PSP market is shrinking because of de-risking
The challenges outlined by the FSB are experienced by many PSPs in the UK and across the world.
PSPs, particularly those sending payments to developing countries, are considered high risk and, therefore, are de-risked by the banking industry. This means that PSPs experience bank account closures and are unable to access other banking arrangements.
Nevertheless, PSPs understand the market and through their connections facilitate access to specific corridor countries. They can offer lower transaction costs and increased delivery speeds of payments. However, with the decrease of PSPs in the market due to de-risking, users face limited access to PSPs and, in return, an uncompetitive service.
One of the key reasons for de-risking is that the operational cost of compliance related to those payments is high, whilst the return on investment is very low. In particular, cross-border remittances are low value and high volume, increasing the operational and compliance costs for PSPs and, in turn, for banks. The payment and banking industry must abide by regulatory anti-money laundering regulations, which require processes and systems to be in place that demonstrate compliance with the know your customer (KYC) and source of funds rules.
Within this multi-layered industry, reducing the compliance complexity and identifying the source of data has been proven to be difficult and complex.
The multiple layers in a transactional chain involve parties residing across different jurisdictions. Each jurisdiction conforms to its own set of regulatory requirements. The lack of regulatory harmonisation means that the set of data is different, which results in heterogeneity and a lack of data transparency because of the multiple parties involved.
According to industry bodies and influential individuals who responded to the FSB’s report “there is often a trade-off between the cost and speed of cross-border payments and the measures taken to ensure their security and regulatory compliance”.
In summary, the lack of compliance transparency of the involved parties within the multi-layered transactional chains, the lack of level playing field in data sets and the lack of harmonisation of compliance requirements, leads to friction in cross-border payments and the development of cross-border efficient infrastructure.
These challenges proliferated because of the Russia-Ukraine war that decreased the risk appetite of the banking sector, which in turn has affected cross-border payments, with medium- and high-risk countries feeling the most impact.
With high interest rates, inflation and recession, there is a need to resolve the aforementioned issues through collaboration among jurisdictions and relevant institutions. This would establish common approaches, a level-playing field across jurisdictions and interoperability of infrastructure and systems that would assist access to markets across the globe and, in turn, benefit prosperity, trade and growth.
What do the next 18 months look like?
The next 18-24 months will be determined by whether the FSB publishes its proposed rules to harmonise regulation across jurisdictions. The proposals were due in 2022 to create an international standard, but the industry is still waiting on these measures that are likely to set the foundations that shape the activities over the coming two years.
Furthermore, the rapid expansion of digital currencies with the potential alignment of cross-border payments and recent failings like FDX has had a profound impact on future strategy. As a result, with high inflation, financial instability and the cost of living crisis, the focus by the FSB has turned to ensuring that current vulnerabilities are kept in check and the financial systems remain robust to weather the storm. This was initially acknowledged during the G20 Presidency held by Indonesia and will be a focus for the Indian G20 Presidency for 2023.
While the FSB continues to monitor the 19 core objectives that were set at the start of the journey with some of these objectives requiring radical change, recent global events have required new initiatives that will seek to enhance the cross-border payment roadmap without losing sight of the key fundamentals. The FSB has published three key priorities, which are:
- Increased cooperation with the private sector operators;
- Developing a comprehensive framework for the regulation, supervision and oversight of crypto asset activities and markets; and
- Working to address financial risks from climate change through enhancements to climate-related disclosures including transition to net zero, data accountability and responsibility, vulnerabilities assessment, regulatory and supervisory policy.
Through these initiatives, harmonisation has extended beyond the need for common regulation to the international markets working closer together. The whole financial services sector must now ensure that systems and procedures, which are key to cross-border products, do not repeat the failings that emanated from the financial crisis in 2008.
What should the industry do now?
The FSB report defines a roadmap of KPIs and metrics to be shared by PSPs. To achieve these metrics, organisations within the chain and across the board must work together and collaborate.
All governments should ensure that business data is collected according to AML standards frequently so that PSPs have up-to-date Know Your Business data, reducing the risk of fraud and money laundering.
Regulators worldwide should also come together to agree on a common regulatory and compliance framework and supervisory approach for PSPs. A common approach should include data privacy requirements so that it is possible for payers and payees to share the necessary identification data.
In addition, regulators should incentivise banks to support PSPs that provide cross-border payments and remittances by clarifying the necessary compliance requirements and setting a transparency agenda.
In turn, banks should be transparent about their compliance policy requirements so that PSPs know in advance what these requirements are. Transparency is necessary to ensure continuity of business operations, proactive management and operational resilience. Further, transparency will enhance and support collaboration while also openly setting expectations.
PSPs, meanwhile, should be open to technological advancements to streamline their compliance operations and should not discount the necessity of these systems to execute their business.
Lastly, but not least, technology firms and vendors should keep up-to-date with regulatory requirements, as well as industry standards and challenges so that they can provide an optimum service.
The Payment Association’s Cross Border Project, through feedback from its members during 2022, aimed to ensure awareness of the FSB’s objectives while also driving change by influencing and working across the industry within the UK and globally alongside EPA Asia, The Institute of International Finance and EPA EU.
The working group has set out objectives for 2023, which support the development of cross-border payments with a specific focus on key corridors and influence, as well as educating and collaborating across industry bodies. The objectives aim to drive the change needed to harmonise regulation, support the need for transparency, encourage proactive actions from the industry and offer better products to consumers.