On the journey to fast and low-cost cross-border payments (not yet at the destination)

Joanna Wisniecka

August 10, 2023

Joanna Wisniecka

Impetus to improve cross-border payments

Whether you are deep in the cross-border payments space or have sent (or tried to send) a cross-border payment, you know these are not as easy as paying for your morning coffee or sending money to a local friend for last night’s dinner. Domestic payments have become faster, if not instant, and low cost, if not free. Regardless of the use case, personal and business cross-border payments are generally slower and more expensive than domestic ones.

Global policy efforts are increasingly focused on addressing the speed, cost, and other challenges of cross-border payments. International bodies like the G20 and Financial Stability Board (FSB) have committed to multiple tangible actions through the Roadmap for Enhancing Cross-border Payments. Practical experimentation and innovations have proliferated.

Private sector players have not been sitting idle with notable innovations made in the long-standing approaches to cross-border payments.

Why cross-border payments are challenging

A cross-border transaction starts with an end user (person, business, or government) in one country and finishes with an end user in another. It starts under the laws and regulations of the sender’s country and finishes under potentially quite different laws and regulations of another; for example, there may be differences in approaches to compliance screening related to Anti-Money Laundering and Combatting the Financing of Terrorism (AML/CFT) that lead to delays. It typically starts in one domestic payment system with its own rules, requirements, and hours, and finishes in another (more on dedicated cross-border payment systems in a bit). And cross-border payments are often initiated in one currency and completed in another, which requires foreign exchange (FX) conversion. These complexities and frictions contribute to slower the speed and higher cost of cross-border payments.

The evolving cross-border payments landscape

Correspondent banking and Money Service Businesses (MSB) have for years played a key role in enabling cross-border payments. Banks form a web of commercial, bilateral ‘correspondent’ relationships that enable cross border payments by each correspondent bank maintaining an account on the other bank’s books and relying on the SWIFT messaging system to affect transfers. Cross-border payments are executed through credits and debits in these accounts, with no funds actually moving across borders. MSBs have long offered a competing approach to facilitating cross-border payments by establishing direct contractual relationships with senders and receivers. MSBs obfuscate the complexity of cross-border payments, but ultimately leverage existing infrastructures to complete payments. Typically, an MSB will maintain bank account balances in each of the countries it services; they may avoid needing to prefund these accounts (which adds to cost) by relying on the ebb and flow of payments to maintain sufficient balances. Examples of MSBs include long-established players Western Union and MoneyGram as well as new(er) organizations such as Wise, Remitly, among many others.

In recent years, new approaches have emerged that focus on evolving the underlying payment systems or rails (sometimes affectionately referred to as the ‘plumbing’ of the financial system). Two general models being implemented are centralized cross-border payment systems and decentralized linkages of domestic payment systems. Centralized systems have a single set of rules that govern participation and typically, rely on a single central operator to process payments amongst countries in a particular geography. Two examples of centralized cross-border payment systems are Buna, which supports a number of use cases in the Arab region, and TCIB, which enables instant P2P payments for Africa’s SADC region.

On the other hand, decentralized linkages connect two (bilateral) or more (multilateral) existing domestic fast payment systems through contractual agreements and typically rely on domestic payment systems for clearing and settlement. Two examples of a bilateral linkage are Thailand’s PromptPay connection with Singapore’s PayNow and India’s UPI connection with Singapore’s PayNow. Project Nexus is an example of a multi-lateral linkage that is a project of the Bank for International Settlements Innovation Hub (BISIH) Singapore Centre.

The landscape is evolving, but how far have we really come?

Cross-border payments are becoming faster

Innovation in SWIFT’s services is having a marked impact on correspondent banking over the past few years by increasing the speed of cross-border payments between banks. (SWIFT’s innovations go beyond speed and include increased transparency in payment flow and fees.) Specifically, the introduction of SWIFT gpi, a set of rules that bank participants can opt into through service level agreements, is the driver of these improvements. The increase in speed of payments (which previously took longer than a day and potentially several days) has been notable: nearly 50% of gpi payments are credited to end beneficiaries within 30 minutes, 40% in under 5 minutes, and almost 100% of gpi payments are credited within 24 hours.[1] MSBs are also contributing to speeding up payments. For example, as of June 2023, 57% of transfers through Wise were instant (and 94% within 24 hours); instant transfers were less than 10% in early 2018.[2]

SWIFT and MSBs have sped up payments largely working within the constraints of existing payment rails. Meanwhile, the rails are increasingly supporting faster payments. We are talking about cross-border payments here, but the design of domestic payment systems also matters. More domestic fast payment systems are being implemented globally that operate 24 x 365 (eliminating incompatibilities in operating hours between domestic systems). The centralized and decentralized cross-border payment systems being implemented are also being designed to support instant credit to the receiver; this is perhaps stating the obvious in the case of a decentralized system that links two domestic fast payment systems. These implementations are also starting to address other sources of payment delays by bringing efficiencies to compliance screening. Both Buna and Nexus are incorporating tools into their design to facilitate screening. 

Cross-border payments remain expensive

Cross-border payments are more expensive than domestic payments, and often, significantly so for underserved corridors. Recent data from the World Bank on cross-border remittances points to stubbornly high (and even increasing) cost to end users. Higher cost of cross-border payments is partly due to the need to exchange one currency for another (and potentially more) in its journey from sender to receiver. Banks and MSBs also have liquidity management costs associated with maintaining balances in accounts in multiple currencies. Compliance requirements and counterparty due diligence add cost too. 

Downward pressure on cost of cross-border payments will increase as digitization and payments to accounts and wallets increase. MSBs have long provided broad customer reach especially for P2P payments, such as remittances, through widespread brick and mortar locations where customers can send and receive funds in cash without holding an account. Cash payouts come with higher cost to the end user; the cost of digital remittances may be as much as 3 percentage points less than non-digital. And MSBs are increasingly digitizing. Ria Money Transfer recently noted that 35% of its payouts are now into digital channels.

It’s too early to tell how centralized and decentralized payment systems will contribute to reducing costs, but some are integrating services that are designed to enable greater competition for FX rates. Buna offers a FX marketplace where providers compete on rates and the Nexus model enables a similar service. (Ripple was an early pioneer of the FX marketplace.) Some of these systems are also designing for less costly settlement approaches. The intent to lower the cost of cross-border payments is explicitly driving the design of these newer systems. The test will be whether they attract sufficient participants and volumes to realize these goals.

What does all this mean for those who enable cross-border payments?

As frictions in the rails continue to be addressed (this won’t happen overnight), cross-border payments should continue to become faster and less costly. This will have a number of implications for incumbents and new players. Stay tuned for our thoughts on this in the next Payments Views post by my colleague Bethany May.


[1] SWIFT website: https://www.swift.com/our-solutions/swift-gpi/about-swift-gpi/fast-transparent-and-trackable-payments#:~:text=SWIFT%20gpi%20lets%20you%20make,are%20credited%20within%2024%20hours

[2] Wise Q2 2023 Mission Update on Speed: https://wise.com/gb/blog/mission-update-q2-2023-speed

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