Cross-border payments are the lifeblood of global trade. They fuel the import and export of goods and services, facilitate commodities and equities trading, and are vital to improving financial inclusion in the world’s poorer countries. So why are they still hampered by settlement delays, high fees, and inefficiencies that block the path to business expansion in new markets?
The value of cross-border payments is estimated to increase from almost $150 trillion in 2017 to over $250 trillion by 2027, a jump of over $100 trillion in just ten years. Cross-border payments can cover wholesale and retail purposes, from large-scale multi-million dollar government, corporate or financial institution transactions that circumnavigate the globe to individual remittances to neighbouring countries. They’ve evolved from paper-based bank and wire transfers to cards, instant credit transfers, e-money and mobile wallets. In our increasingly interconnected and digital world, in theory, they should be as convenient and as frictionless as domestic payments.
However, cross-border payments remain beset by the same old problems. A lack of interoperability between various national payment systems necessitates international banks and payment providers acting as intermediaries and correspondent banks to facilitate FX conversions and settlements. The more intermediaries involved in a cross-border transaction, the slower and more expensive it becomes. In some cases, a cross-border payment can take several days and cost up to 10 times more than a domestic payment.
Transactions can also be delayed when they travel through different time zones and different clearing house operating hours, which can cause trapped liquidity. Compliance and security checks can also slow down cross-border payments, as each transaction needs to adhere to AML/KYC requirements. Then there is the fact that many banks and payment providers are still relying on legacy technology platforms designed for scheduled batch processing, which are struggling to keep up with the pace and volume of cross-border and real-time payments, as evidenced by a slew of high-profile payment system outages around the world in recent weeks.
Some progress has been made in tackling these frictions. Introducing the ISO 20022 messaging standard will help reduce the problems of fragmented and incomplete messaging data carried with cross-border transactions. ISO 20022 will improve the clarity and speed of transaction data and help overcome the interoperability issues between different clearing systems.
But there is still much more work to be done. This is why the Bank of International Settlements (BIS) and the G20 are prioritising cross-border payment efficiencies and tackling these frictions by exploring blockchain and decentralised solutions, CBDCs and interlinked payment systems worldwide.
The launch of Project Rialto by the BIS in June 2024 is an exciting development. It explores using modular FX components combined with wholesale CBDCs as settlement assets to improve FX settlement for instant cross-border payments. A collaboration between the BIS and the central banks of Singapore, France, Italy, and Malaysia, Rialto’s focus on FX is timely, as FX accounts for around 60% of P2P payment costs and as much as 97% of P2B payments and exposes transaction participants to liquidity and settlement risks.
The modular possibilities of Rialto could also cross over into Project Agorá, the cross-border payment project run by the BIS in collaboration with the central banks of France, Japan, the UK, and some entities in the private sector. Project Agorá is considering tokenising wholesale central bank money and commercial bank deposits on programmable platforms. If its results show potential, this project could transform cross-border payments by integrating tokenised commercial and central bank deposits. It promises fast atomic settlements, eliminating settlement delays experienced currently. Smart contracts underpinned by blockchain can essentially allow for programmable money that can be adjusted for interest rate moves, for example. Security will also be improved, as tokenised assets reside in tamper-proof ledgers that remove the risk of fraud and improve transparency.
Then there is the multi-phase Project Nexus, being run under the auspices of the BIS with a view to connecting several instant payment systems across Asia with a mission to achieve cross-border payments at scale. Nexus is the first BIS payments project that’s moved to a successful go-live. Phase Four is underway, which will see the central banks and domestic payment system operators of Malaysia, the Philippines, Singapore and Thailand collaborating with the Reserve Bank of India to extend the use of India’s Unified Payments Interface (UPI), which has enjoyed stellar uptake since its launch in 2016. Project Nexus has the potential to connect a market of 1.7 billion people globally, enabling them to make instant payments across borders as easily as domestically.
Ultimately, with these projects and the continued push by the private sector to create even more innovative solutions, we could very well be on the verge of realising the full potential of cross-border payments. However, improving their speed and efficiency requires collaboration between countries and public and private entities.
We’ve already had tantalising glimpses of the future of cross-border payments; now is the time to work together to make those visions a reality.
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