On the sidelines of the G20 event in Bali last month, a memorandum of understanding was signed by the Bank of Indonesia, Bank Negara Malaysia, Bangko Sentral ng Philipinas and the Monetary Authority of Singapore to strengthen and enhance co-operation on payment connectivity and support faster, cheaper, more transparent and inclusive cross-border payments. The agreement aligns with a broader G20 initiative that was launched in February 2020 when finance ministers and central bank governors asked the Financial Stability Board to co-ordinate a roadmap to enhance cross-border payments.
WHAT ARE THE CHALLENGES?
The Financial Stability Board called out a number of challenges that have impeded cross-border payments in the past, including:
- high cost,
- low speed,
- limited access and
- limited transparency.
For corporate treasurers, these challenges will feel quite familiar, particularly for those who operate in multi-national businesses. Domestic payments are much less complicated. Within Australia, when you pay either a corporate or an individual, payments are addressed using a BSB and account number, a card number or a PayID.
Expand that scope to international payments and things become much more complex. Firstly, each country has its own rules and regulations. Secondly, the method used to address a beneficiary will differ from country to country. Take, for example, IBANs (International Bank Account Numbers), which can be used in many countries across Europe and the Middle East, but not in Australia. Then there is the inconvenient fact that the beneficiary bank will likely not have a relationship with your bank. To overcome this, banks created correspondent banking relationships, which are used to connect involved parties through a trusted chain of relationships.
All this assumes, of course, that the beneficiary actually has a bank account – which an estimated 1.7 billion people globally do not.
SOLVING THE CHALLENGES WITH TECHNOLOGY
SWIFT reported processing an average of 42 million payments and security transactions per day last year. Established in 1973, SWIFT (the Society for Worldwide Interbank Financial Telecommunication) has grown to connect over 11,000 banks around the world. The organisation has a number of initiatives underway which will help tackle some of the challenges called out by the Financial Stability Board. These include SWIFT GPI (Global Payments Innovation), which provides end-to-end tracking, SLA dashboards, reference data and cut-off times. Another initiative is the global uplift of SWIFT messaging from the MT standard to ISO20022 under the CBPR+ program. CBPR+ will provide enhanced data associated with cross-border payments. So large is the co-ordination effort under CBPR+ that the program is scheduled to run until the end of 2024.
ENTREPRENEURS SEE OPPORTUNITY
SWIFT isn’t the only organisation trying to solve the cross-border challenge. Around the world, many have identified that APIs, virtual accounts and partnerships can all be used to reduce the cost and improve the speed and visibility of cross-border payments. Other activity underway in Australia includes:
- Fintech entrepreneurship – whether it be onboarding, sanctions checking, KYC, FX or money movement, innovative fintechs are solving the problem one piece at a time. Some cross-border solutions avoid moving money by maintaining a pool of funds in supported countries, simulating a shift of money by apportioning part of those funds as required. Other solutions leverage the atomic transaction attributes of Distributed Ledger platforms to mitigate counterparty risk.
- The Reserve Bank of Australia participated in Project Dunbar, a Central Bank Digital Currency project, alongside the South African Reserve Bank, Bank Negara Malaysia and the Monetary Authority of Singapore to test cross-border settlement using a Central Bank Digital Currency.
- AusPayNet has set up a Cross-Border Payments Advisory Council consisting of the major banks, financial institutions, the Reserve Bank and Treasury to focus on the speed and regulatory oversight, improving the existing payment infrastructure and data quality in response to the G20 initiative.
- Australia’s real-time payments platform will be enhanced to support the carriage of additional data through the domestic leg of an international transaction. This information will assist financial institutions in performing due diligence and screening obligations promptly.
FORTES FORTUNA ADIUVAT
Australia has a relatively mature payments system and a comparably low population of unbanked people. As a result, most consumers and businesses have cross-border payment options available to them today. The question is, do those services meet the speed, cost and transparency expectations of customers who increasingly operate in a real-time domestic payments environment?
As discussed in this article, cross-border payments are inherently more complex than domestic transactions – and they come with an increased risk profile. This detail might resonate with payment experts, but it won’t appease curious customers in the event that competitors can engender trust and deliver solutions that address the challenges called out by the G20.
Interested in learning more about the state of cross-border payments around the world? Read more on the global status quo in this article by Peter Theunis and Adrian Bugaian's take on the development in Asia.