Cross-border payments are vital to the overall global payments infrastructure. But while new initiatives and payments technology innovations have emerged in recent years to move cross-border payments forward, multiple obstacles remain in place and new ones are quickly becoming more apparent.
A new AFP Payments Guide, explores the cross-border payments infrastructure. It features an in-depth look at a new plan by the G20 to and the Financial Stability Board (FSB) to strengthen and modernize that infrastructure.
IMPROVING CROSS-BORDER PAYMENTS
In an August 2020 report, the Bank for International Settlements (BIS) described cross-border payments as critical for economic growth, trade, development and financial inclusion. But it also noted that these payments are generally “slower, more expensive, less transparent and less accessible than domestic payments.”
It is for these reasons that the G20 has made improving cross-border payments a top priority, asking the FSB to develop a roadmap to address systemic issues. The Committee on Payments and Market Infrastructures (CPMI), a division of the BIS, has also been asked to support the effort. The roadmap was released in three stages throughout 2020, after which the actions are to be implemented. The first report on the progress of the roadmap will occur at the G20 Summit in October 2021.
Stage One of the FSB’s roadmap, delivered to the G20 in April 2020, is an assessment of the existing arrangements and challenges in the cross-border payments infrastructure. Enhancing this system requires addressing frictions in current processes, including:
- Fragmented data standards or lack of interoperability
- Complexities in meeting compliance requirements
- Different operating hours across time zones
- Outdated legacy platforms.
Some public sector initiatives have sought to address these frictions. Corporate treasurers will be pleased to hear that the G20 and the UN have set targets to reduce the cost of sending international remittances and have launched workstreams to make it happen. Additionally, central banks have taken up interlinking projects between individual national and regional payments systems, such as TARGET2, which offers real-time gross settlement services between Eurozone and non-Eurozone countries.
The FSB noted that technological innovation has the potential to build on existing cross-border and domestic payments or to create entirely new ecosystems. Additionally, internet-based infrastructures have provided opportunities for new systems from nonbanks.
However, the FSB also acknowledged that new technology always comes with new risk. The board stressed that any financial innovation needs to be accompanied by measures to address those risks, including a detailed analysis of the operational soundness, legality and consistency of new solutions, and whether additional oversight is needed for these services to come to fruition. The FSB noted that, for example, recent private sector proposals to create stablecoins—cryptocurrencies that are backed by stable assets such as fiat money or commodities—for payment purposes raise questions about regulation and impacts on monetary policy.
The FSB also stressed that public authorities have a duty to work with the private sector to find new opportunities and address the challenges. In particular, the board urged central banks to broaden their focuses beyond domestic or regional payments systems and address the challenges of cross-border or cross-currency payments.
Moreover, cross-border and cross-currency payments occur through a multilayered set of networks, which range from traditional correspondent banking models that settle across the ledgers of participating banks, to more recent entrants like blockchain that settle transactions across a single, distributed ledger. As such, any roadmap that seeks to encompass these diverse platforms will have to take multiple approaches and time horizons into account.
“Some building blocks that form part of the roadmap, which may be shorter-term actions, should benefit a number of different types of existing arrangements,” the FSB said. “Other building blocks, which may be more medium-term, may go beyond adjustments to existing arrangements by proposing actions that should eventually improve the structure of the system and cover all identified frictions, but would take longer and face greater uncertainties in their development.”
BUILDING THE GLOBAL ROADMAP
In Stage Two of the FSB’s process to improve cross-border payments, delivered to the G20 in July, the CPMI identified building blocks upon which it believes public and private sector work could improve the multipart network. Each of these 19 building blocks was divided into five categories; focus areas A-D look to enhance the current ecosystem while focus area E focuses on emerging infrastructures.
- Commit to a unified public and private sector vision. This focus area attempts to assuage the concerns of the many public and private sector stakeholders that make up the cross-border payments landscape. Through a common vision and coordinated targets, the CPMI aims to eliminate political, regulatory and operational issues.
- Coordinate on regulatory and oversight frameworks. Building blocks in this group address the challenges that stem from the multijurisdictional nature of cross-border payments by establishing international rules and standards. The CPMI noted that while much of the focus has been on technology when it comes to removing friction around cross-border payments, disparate regulations, legislation and oversight have also been key obstacles.
- Improve existing infrastructures to support the requirements of the market. The goal of this focus area is to address technological and operational improvements that can be made to domestic and international payment infrastructures. Doing so could potentially reduce problems caused by different operating hours, long transaction chains, high funding costs, access regimes, and weak competition. Rather than try to make every system the same, the CPMI aims to identify specific areas in these infrastructures where improvements could reap the most benefits.
- Increase data quality and straight-through processing by enhancing data and market practices. Poor data quality and limited standardization of data exchange make cross-border payments more difficult to process, and affect their speed, price and transparency. Adopting common message formats, including Legal Entity Identifiers (LEIs) and common protocols for data exchange, reduces complexity in the process and can improve the compliance process.
- Explore the potential role of new payment infrastructures and arrangements. In recent years, technology providers and banks have joined forces to build new payment infrastructures outside of traditional rails. This focus area will likely go on longer than the others as it attempts to gauge the impact that these new infrastructures—many of which are still in the proof-of-concept phase—could have on the cross-border payments landscape.
Stage Three of the FSB’s plan, which it developed with the CPMI and other relevant organizations and released in October 2020 at the G20 Summit in Riyadh, Saudi Arabia is the actual roadmap. As stated previously, the FSB will provide a report to the G20 at the 2021 summit, and every year after. In addition to updating the G20 on the progress of its initiatives, it will also be an opportunity to set new timelines and consider adjustments.
The plan sets “ambitious but achievable goals and milestones,” allowing for flexibility as needed. That adaptability will be essential as technology continues to advance and new challenges emerge.
The roadmap aims to encompass a variety of approaches and time horizons in an attempt to address the diversity of disparate payments systems. It sets out goals at the global level that may also need to adapt over time to reflect local conditions and implementation capacity. The FSB encourages individual jurisdictions to publicly disclose the actions they plan to take to meet the roadmap’s goals.
One of the first actions is to set more specific quantitative targets for addressing the four challenges inherent in cross-border payments—cost, speed, transparency and access. These targets will be monitored and publicly reported over time. The first results will be reported to the G20 Summit in October 2021.
Going forward, the FSB said that each of the actions related to the focus areas will be carried out by the groups specified within them, according to their own work processes. Progress of the roadmap will be monitored by the FSB’s Cross-Border Payments Coordination group.
A full timeline of actions related to each of the identified building blocks is available at the end of the roadmap document.
For further insights, download The Changing Face of Cross Border Payments, underwritten by MUFG Union Bank.