Faster, less costly, and more transparent cross-border payments was the focus of a session titled, “Faster Payments in a Cross-Border Economy,” during this year’s Payments Canada Summit. The session featured insights from Elena Whisler, Senior Vice-President of Sales and Relationship Management at The Clearing House, and Andy Schmidt, Vice-President and Global Banking Industry Lead at CGI. It was moderated by Orlando Vanin, Director of Business Development at CGI. Read on to learn about efforts to improve cross-border payments.
To arrive at international destinations, today’s cross-border payments rely on complex networks of bilateral relationships between financial institutions. Throughout the cross-border payments life cycle, money must change hands several times, be thoroughly screened for various types of compliance requirements, and undergo currency conversion—incurring fees all along the way. The entire process is complicated and expensive.
Cross-border payments are initiated for various reasons by various types of financial institution customers, ranging from individual consumers to large corporations and even central market infrastructures. Cross-border payments can—and should—be faster, ubiquitous and more transparent while simultaneously reducing associated costs and risks. Technology and interoperability can promote and support the successful implementation of faster, lower-risk, and more transparent cross-border payments.
Speed and transparency
Demand by not only consumers and businesses, but also by global organizations, has really highlighted the need for faster and more transparent cross-border payments, says Elena Whisler. She notes that the Committee on Payments and Market Infrastructures (CPMI) within the Bank for International Settlements (BIS) has a program for cross-border payments, whose objective is to safely and securely expedite the settlement of international payments while also making the process more economical, predictable, and accessible.
End-to-end simplicity and transparency are the greatest opportunities for cross-border faster payments. The banking industry has moved from traditional brick-and-mortar centers—that were the norm up until a few years ago—to digital offerings with their bits and bytes and corresponding advantages. Financial institutions now face a growing demand to leapfrog how payments are processed currently and to remove friction while strengthening the global economy, which has been supported by the traditional finance industry for the past several decades.
In today’s world of high customer expectations—including the need for immediacy and information sharing—can the finance industry support a more transparent and faster cross-border payment experience? According to Elena, the answer is a resounding yes. She contends that both financial institutions and network operators already are taking steps to introduce speed and transparency in existing systems and infrastructure with offerings like SWIFT GPI and SWFIT GO.
Simultaneously, newly-developed initiatives are already showing signs of being viable alternatives for financial institutions and their customers. The Immediate Cross-Border (IXB) proof of concept—a joint project of The Clearing House (TCH) and EBA CLEARING, in conjunction with SWIFT—is a great example of how the market can leverage existing regional instant payment systems for cross-border payments. Further, TCH is actively working to connect its RTP® real-time network and CHIPS high-value network to real-time and high-value networks in other countries and regions. These types of efforts increase the critical mass and transparency of cross-border payments, Elena suggests.
In addition to the IXB proof of concept, there are a few other initiatives worth noting:
The Central Bank of Italy runs the TARGET Instant Payment Settlement (TIPS) system, which is based on SEPA Instant Credit Transfer (SCT Inst). Participants can withdraw liquidity from their TARGET2 accounts and deposit it in their dedicated TIPS account for settling instant payments, and TIPS also allows settlement in currencies other than the euro, including the Swedish Krona.
BIS’s Nexus initiative is used by the faster payment networks in Singapore and Thailand to enable participating banks to send faster cross-border payments using just the telephone number of the recipient.
Technology
Andy Schmidt agrees and reminds us that the pandemic further promoted the sharing of information. The “Dude, where’s my payment?” model promoted advances in technology that virtually connects us worldwide, including the ability to obtain banking information more easily. Andy further proposes that “digital currency—whether CBDC, Bitcoin, or even NFTs—will become part of the fabric of payments, making it a lot easier to add new payments capabilities.”
While the industry in the U.S. looks to start small and focus on mid-market, lower-value retail transactions, the goal certainly is to address the needs of larger corporates and enable faster, higher-value transactions to flow across borders. This can be achieved regionally between the U.S. and Canada in North America by linking real-time and/or high-value rails and globally between the U.S. and Europe through partnerships with the EBA Network and SWIFT.
There are multiple benefits to linking domestic payment networks:
Speed and 24x7x365 availability that is innate in each domestic offering
Lower cost of cross-border payments through faster payment networks combined with the elimination of any need for financial institutions to establish correspondent accounts (as a result, they can offer cross-border payments in countries where they have no presence or correspondent banking relationships)
Inclusivity based on the fact that most faster payment networks connect all financial institutions in a country, and some also offer access to non-bank payment providers
Transparency and certainty by eliminating correspondent banking chains and ensuring fees and foreign exchange rates can be presented to customers upfront prior to payments being executed
Safety and security by leveraging each domestic payment network’s strong risk management mandates
The discussion still rages on as to whether a spoke-and-hub approach versus direct connectivity between different faster payments networks is the better alternative. Bilateral connections may work well when connecting only a few participants; for example, a direct connection between TCH RTP, FedNow, and Canadian RTR would require only three connections to ensure transactions between the U.S. and Canada could happen in seconds as opposed to hours or days.
However, if the goal is to connect the more than 20 faster payments networks worldwide, more than 230 individual connections would be required to link all of these networks in a bilateral direct connectivity scheme (versus one individual connection between each scheme and a central hub responsible for rerouting traffic as needed).
And why should we care? By the end of 2020, the top 10 markets worldwide for faster payments processed, on average, 5.7 billion transactions monthly. At that time, Pix, the Brazilian instant payment network, was reported to have processed 1.3 billion transactions for the entire year (around 2% of the top 10 market volume). Fast forward to 2022, PIX was reported to have processed more than 2.3 billion transactions in the month of September alone—a whopping 176.9% increase in the volume of transactions processed when compared to initial volumes following the network’s launch in 2020.
In contrast, by the end of June 2022, SWIFT had processed nearly 2.4 billion transactions for the year—an average of 400 million transactions monthly—with an estimated average transaction amount of US$45,000.
With faster payment networks increasing per-transaction limits to USD $1 million, who is to say that in five years it might not become limitless? It’s not difficult to see how customers of financial institutions might clamor for their financial institutions to offer them faster cross-border payments options, especially when one considers the hefty fee associated with international wire transfers.
However, before they can offer faster cross-border payments, financial institutions need to join their country’s domestic real-time payment network(s) (e.g., TCH RTP, FedNowSM, PIX, EBA Network, etc.) and then proceed with enabling faster cross-border payments. CGI payment experts are helping them with both efforts.
If you’d like to learn more about cross-border faster payments or CGI’s work in this area, contact orlando.vanin@cgi.com.
