The global finance world has been undergoing massive transformations fuelled by technology advancements, changing customer needs, and the tremendous growth of international trade. As global trade continues to expand at an unprecedented rate, more businesses and individuals rely on cross-border payments.
Cross-border payments interoperability refers to the ability of different payment systems and networks to work seamlessly with one another across national borders, enabling the efficient and secure transfer of funds between individuals, businesses, and financial institutions from different countries.
Achieving cross-border payments interoperability requires collaboration between payment systems, networks, and financial institutions. It involves adopting common standards and protocols, improving infrastructure, and enhancing regulatory frameworks to ensure that cross-border payments are secure and efficient.
Changes in the world of cross-border payments in the past 5 years
Recently, there have been numerous improvements in the technical side of cross-border payments. SWIFT has introduced Swift GPI, the adoption of ISO20022, laying the foundation for innovation and building a frictionless future. The introduction of CBDCs (Central Bank Digital Currencies) which could streamline cross-border payments. DLT (Distributed ledger technology) though not new, has become more well-known since the introduction of Bitcoin. The potential for newer digital assets like digital currencies and tokenized assets to alter the global financial playfield is increasing.
Challenges in cross-border payments
- Lack of interoperability between different payment systems – Cross-border messaging is still challenging, with only 70 countries said to have adopted the ISO 20022 messaging standard. It presents a big interoperability issue as the information format of the payer, and the payee PSP (payment service provider) end up being different, demanding manual translation from machine to machine. All of this makes cross-border payments expensive and cumbersome.
- Exchange Rates and Fees – The value of currencies fluctuates, and the exchange rates are never steady. It can make cross-border payments very expensive. Quite often, the values could have altered in the duration between when a transaction is initiated and settled.
- Legal and Compliance issues – The divergent legal systems across countries pose a legal risk for cross-border payments. Several checks protect the transacting parties from fraud, financial crimes, scams, and other risks. These are often laborious, time-consuming compliance checks, differing from region to region, and could lead to declined payments.
- Data Privacy: Several countries and states have stringent data protection laws to safeguard customers’ sensitive information. The General Data Protection Regulation (GDPR) applicable in the EU and UK and the California Consumer Privacy Act (CCPA) are the privacy policies that limit access and use of customer data. Banks and payment systems need to ensure that their businesses comply with these data laws for cross-border payments, making interoperability even more challenging.
Making cross-border interoperability more conducive
The key to overcoming these challenges of cross-border payments lies in establishing a more conducive interoperable environment using common standards that allow financial institutions to communicate seamlessly amongst themselves, powered by the latest technological advances. Many innovations are emerging globally in this regard. Below are some of the notable ones:
- Using existing domestic payment networks of two countries, connecting these domestic networks enables fast and secure cross-border funds transfer. Singapore’s PayNow and Thailand’s Promtpay are integrated, and money transfers happen within seconds, while the links must be enlarged, and more and more banks from different regions must create their own links to their FPS system. Similarly, Singapore’s PayNow and India’s UPI are also integrated. Other pilot programs are rapidly progressing to establish connections are Singapore’s PayNow and Malaysia’s DuitNow, Philippines InstaPay and Malaysia’s DuitNow, and more.
- The Immediate Cross-Border Payments (IXB) is a pilot initiative collaboration from the USA’s TCH (the clearing house), EBA in EU, and SWIFT to facilitate Euro-US dollar transactions. This pilot service will primarily utilize RT1 (real-time gross settlement payment system) in Europe, real-time payment systems RTP® in the United States, along with certain key SWIFT components and the IXB solution. The IXB can be a real game changer for instant cross-border payments globally when more currencies are added.
- NEXUS from the BIS innovation hub is a model for connecting multiple domestic payment systems into a cross-border network. In 2022, a working prototype was built and tested by BIS, which indicated that connecting domestic instant payment systems multilaterally is technically feasible. ASEAN-5 (Singapore, Malaysia, Thailand, Philippines, and Indonesia) have agreed to use Nexus as a framework for multilateral payment connectivity. It envisages that Nexus could eventually be implemented globally by involving other central banks beyond Asia in this development.
- A global interlinking solution is also feasible as CBDCs (Central Bank digital currencies) develop; they can be integrated seamlessly with existing payment systems. It is also possible to connect disparate CBDCs to achieve successful cross-border transactions using Distributed Ledger Technology and with standard payments infrastructure.
Building it together
International cross-border payments are, without a doubt, a growing market, estimated to reach a value of nearly 250 trillion USD by 2027. There is a greater need for a more agile and accessible environment for seamless cross-border payments, which puts the focus on interoperability. Since G20 Leaders endorsed the Roadmap for Enhancing Cross-border Payments in 2020, three interlinked priority themes emerged: ‘Payment system interoperability and extension’ is a key theme. Subsequently, there are promising outcomes in silos. However, banks, countries, and the industry must make specific changes and embrace innovation for a brighter payment future. Specific actions are being driven in pockets and globally – the goal of establishing a globally interconnected network of fast payment systems that enable individual and business users alike to remit funds quickly, conveniently, and at very low cost is around the corner.
About the Author
Dinesh Kumar, a Lead Business Consultant with the Temenos Business Unit, is an expert in the areas of Business Analysis, Data Analysis and Testing. He is well versed in the areas of payments, core banking and master data management, while closely tracking the banking industry’s advancements in these areas as well.
Originally Published in Times OF India