By Megan Doyle
The report, Cross-border retail payments, is published by the Committee on Payments and Market Infrastructures (CPMI). CPMI is part of the Bank for International Settlements (BIS), an organization owned by the world's major central banks including the U.S. Federal Reserve.1 Drawing on a survey of nearly 100 established and newer payment providers, the CPMI report analyzes the challenges associated with cross-border payments. It highlights the need for solutions that provide increased speed and transparency along with lower costs, and calls for a push toward multiple interoperable back-end payment systems to meet the differing needs of large corporations, small businesses, and individuals.2
"Safe and efficient cross-border payments are vital for growth and financial inclusion. The emergence and use of cryptocurrencies across borders signals to central bankers that our current payment systems are too expensive and slow. Action is needed to put better arrangements in place," according to CPMI Chairman Benoît Cœuré.3
The increase of international trade, internationalization of production, and cross-border e-commerce suggest that demand for cross-border payments will continue to grow.4 But payments sent from one country to another are often costlier, slower, and less transparent than domestic payments. This may be partly because cross-border payments are more complex, involve more risk, and more rules than domestic payments.5 But according to the CPMI report, "the difference [between cross-border and domestic wire-transfers] can often feel disproportionate."6
The report notes that small and large companies tend to emphasize different problems with cross-border payments. Large corporate users, which tend to make high-value international wire transfers, note a lack of transparency, including transparency of FX rates. Smaller businesses, which usually send smaller payments, also experience transparency problems, but they place a much higher priority on concerns about access to services and the costs of sending cross-border payments.7
User expectations have risen as businesses and consumers have become accustomed to faster, cheaper, and more convenient domestic payments. According to the CPMI report, these rising expectations create a large and growing demand for international cross-border payment systems that offer improved speed, convenience, transparency, and cost.8
This has helped drive innovations in cross-border payment front-end systems, which are improving the users' experience through mobile technology, e-wallets, and e-commerce. In addition, users often have a choice when selecting a front-end payment service provider. This choice, however, "is not mirrored in that of the back-end clearing and settlement methods available," according to the report. Instead, the majority of cross-border payments still go through traditional correspondent banks, which settle payments and execute foreign exchange transactions.
The report highlights this disconnect between the innovation in payment front-end providers and the traditional methods used for back-end settlement. CPMI notes that correspondent banks have traditionally fared best with a low volume of high-value transactions; today's growing volume of lower-volume transactions can bog down traditional correspondent banking networks.9 The report suggests this problem could be solved if more choices were available for the back end, improving efficiency by "matching different users to providers that focus on their needs."10
New alternatives for back-end settlement are emerging with the potential to improve the overall efficiency of cross-border payments, according to the report. These include interconnections between domestic payment infrastructures, expansion of closed-loop proprietary systems across borders, and peer-to-peer payments based on blockchain, also known as distributed ledger technology (DLT).11
However, the report notes that these alternative payment systems are mostly still nascent, and the extent to which they will provide viable solutions for the entire cross-border payment process remains to be seen.12 For example, linking domestic payment infrastructures could provide an alternative to correspondent banking, but so far many of these schemes have failed to meet expectations, according to the report – which adds that interconnected payment systems can exacerbate legal, technical, and operational risks. Peer-to-peer DLT is still in a nascent state and presents technical, legal, and regulatory obstacles that may take time to overcome.13 Proprietary closed-loop systems, however, seem to be quickly progressing, and can promote speed of cross-border payments by eliminating middlemen, the report adds.
CMPI also says the market is currently fragmented, with non-interoperable systems emerging independently. The report calls for a push toward multiple interoperable alternatives to benefit the cross-border payments landscape as a whole. "Properly overseen and interoperable back-end clearing and settlement arrangements could improve the efficiency of the cross-border retail payments market and create further momentum when it comes to front-end innovation and competition, ultimately further improving end user experience," according to the report.14
Users' expectations of cross-border payment services have increased as they have become accustomed to faster, cheaper, and more convenient domestic payments. While rising expectations have driven innovation in front-end cross-border payment systems, back-end settlement is still largely handled by traditional correspondent banking networks. CPMI calls for the development of quicker, cheaper, more transparent and interoperable cross-border payment systems that provide users with choices based on their differing needs.
Megan Doyle is a business technology writer and researcher based in Wantagh, NY, whose work focuses primarily on financial services technology.
1. “About BIS – overview,” Bank for International Settlements; https://www.bis.org/about/index.htm?m=1%7C1
2. Cross-border retail payments, Committee on Payments and Market Infrastructures; https://www.bis.org/cpmi/publ/d173.pdf
3. “Choice and diversity are the key to quicker, cheaper cross-border retail payments,” Bank for International Settlements; https://www.bis.org/press/p180216.htm
4. Cross-border retail payments, Committee on Payments and Market Infrastructures; https://www.bis.org/cpmi/publ/d173.pdf
5. “Choice and diversity are the key to quicker, cheaper cross-border retail payments,” Bank for International Settlements; https://www.bis.org/press/p180216.htm
8. Cross-border retail payments, Committee on Payments and Market Infrastructures; https://www.bis.org/cpmi/publ/d173.pdf
9. “Choice and diversity are the key to quicker, cheaper cross-border retail payments,” Bank for International Settlements; https://www.bis.org/press/p180216.htm
10. Cross-border retail payments, Committee on Payments and Market Infrastructures; https://www.bis.org/cpmi/publ/d173.pdf