Developments in cross-border payments and the evolving landscape

In 2020, the G20 launched its Roadmap for Enhancing Cross-Border Payments focussing on goals around speed, transparency, cost and access. Progress on this roadmap is leading to change across the cross-border payments industry, from new standards to innovative solutions.  

This blog looks at some of the key trends, especially around linking domestic payments systems and Swift improvements. The various distributed ledger (DLT) solutions in this space will be explored in the future. 

A look at the current situation 

Swift: While the speed of cross–border payment processing has vastly improved with the advent of SWIFT GPI, it still varies to a large degree depending on the payment corridor, currency and compliance controls in different geographies, opening times of local market infrastructures and more, leading to delayed and expensive payments.   

Large global/regional banks’ own networks: Large global/regional banks, for certain currencies and corridors, do not use the Swift network but instead leverage their reach across countries and process cross–border payments as “local” through the domestic payments schemes in the countries, thus reducing time and cost. 

Fintech payment providers: Specialist fintech providers like Wise, Nium, AirWallex use models such as “pre-funding” – smart routing to identify the quickest settlement path among other things – to process international payments with higher speed and reduced cost. 

 Building blocks shaping up the new models of international payments 

The G20 roadmap has identified various building blocks which can be leveraged by the alternate cross–border payment models. The key initiatives are: 

(A) Standardisation of data exchange mechanisms and messaging standards

1. ISO 20022 harmonisation: The widespread adoption of ISO 20022 messaging standard has built the foundation but differences in adoption by domestic payment schemes is impacting straight-through processing, automated reconciliation, and efficiency of economic crime checks. The Committee on Payments Market Infrastructures (CPMI) has defined harmonised data requirements for ISO 20022 messages covering the end-to-end cross–border payment chain. The SEPA One–Leg–Out Instant Credit Transfer (OCT Inst) scheme, which defines a standard for processing of the EU leg of the cross-border payments as instant payments, is aligned to the CPMI standard. UK CHAPS will also align to the CPMI standard by the end of 2025.
2. API standards: CPMI is working with the industry on harmonisation of the API framework/standards used by the different domestic market infrastructures for payment submission/amendment, tracking, enquiries and investigations and more, with the aim of enabling easier adoption by new entrants as well as regional/global banks. 

(B) The extension and alignment of operating hours of the central bank RTGS systems across jurisdictions could speed up cross-border payments, improve liquidity management and reduce settlement risk. The Bank of England (BoE) is exploring extending the UK RTGS system operating hours to around 23 hours a day. 

(C) The alignment of legal, regulatory, and supervisory frameworks to reduce source of frictions in cross-border payments. Through its Payment Services Directive (PSD3) directive the EU is aiming to harmonise the framework for non-bank PSPs to access payment systems. The Financial Action Task Force (FATF) is looking at the standards around the effective application of anti-money laundering (AML)/counter-terrorist financing (CFT) rules across jurisdictions. 

 Alternate models for cross-border payments  

Alternate models of making international payments are emerging which aim to reduce the cost, improve speed and provide better access to payment systems, thus enabling progress on the G20 roadmap targets for cross–border payments.     

(A) Payment system interoperability through interlinking of domestic/regional payment systems 

There are broadly two mechanisms being adopted: 

1. Bilateral linking of domestic payment schemes:

In a bilateral link, participants in a domestic payment system can directly reach all participants in the foreign payment system enabling the bilateral exchange of payments. There are many successfully implemented examples of this, mainly in ASEAN countries – PromptPay in Thailand and DuitNow in Malaysia, UPI in India and PayNow in Singapore, to name a few.   These links are being established between countries having a strong bilateral relationship and high payment volumes between them. Although this model may be simple to implement as a “one-off” between two countries, it is less scalable to implement across multiple countries due to additional costs and the effort involved per linkage for both the payment system operator and the participants.  

2. Multilateral linking of domestic payment schemes:

This model enables participants in a domestic payment system to directly reach participants in other foreign domestic payment systems through a multilateral link between the domestic payment systems of the different jurisdictions. An example of this is Project Nexus, run by BIS, which has done a proof of concept to connect the Eurosystem’s TIPS instant payment system with Malaysia’s RPP and Singapore’s FAST system, and has plans to link various domestic payments in Asia. On paper, this looks a better model than bilateral linkages but would need a significant effort not just on the technical integration front but also to align the regulatory/compliance policies across various jurisdictions. Hence in reality, a wider adoption of this model is quite a distance away.    

(B) Common platforms in a geographical area/regional level

In this model, participants can reach each other directly across jurisdictions through a single, integrated technical platform. The classic example of this approach is the Eurosystem–owned T2 (RTGS) and the TIPS (Instant) platforms, which enable the Europe–wide SEPA schemes based on the monetary union of most countries in Europe with a common currency. The platform has now also been expanded to support Swedish Krona.

Another example is the Buna scheme in the Arab region, which successfully supports six currencies and has a scheme for cross-currency payments.  

(C) Swift improvements 

Swift Go is a service for processing low value international payments, enabling retail consumers and business SMEs to provide a transparent client experience through predictable processing fees and execution times. “Swift Go” leverages the Swift GPI rails and is hence a good option for Swift GPI banks to offer low value cross–border payments to compete against the alternative fintech providers offering remittance services.  

(D) Blockchain/DLT-based cross-border payment solutions 

There are various blockchain–based initiatives in the industry providing alternative solutions for cross–border payments with a focus on wholesale payments – e.g. Partior, a DLT–based network and Fnality system, to name a few.  

What does this mean for banks?  

There is lot of innovation happening in the cross-border payments space, leading to multiple alternative solutions – each at different stages of maturity and adoption. We do not expect that in the immediate future there will be a “single” solution being commonly adopted worldwide.  

Bilateral payments system inter-linkages do enable banks to provide better experience and lower cost to the end customer, but multiple such implementations are leading to a high cost for banks. Some countries, like Australia, prefer a multilateral payment system linkage but this model is a long way away from mass adoption. 

“Swift Go” is a good alternative for banks to offer low value cross–border payments to retail consumers and business SMEs leveraging their existing Swift GPI rails without huge additional investment.   

The various DLT cross–border payment solutions based on blockchain are focussed on wholesale payments and more so actively being trialled by the large global/regional banks and central banks. 

With the rapidly evolving payment landscape, banks will have to ensure that they have a modern payments technology foundation which enables them to be agile in adopting/leveraging the different alternative cross–border payment models. Contact us   if you would like to know more about how our payments solution IPF enables banks to build a strong technology foundation or how Icon’s business and technology architecture consultants can prepare you for this evolving landscape.