Cross-border payments: Key developments reshaping the landscape for banks

The payments landscape is undergoing significant change. Today’s customers increasingly expect new levels of speed and convenience in payments, and more than ever this also extends to cross-border payments. And with more retail customers, SMEs and corporates doing cross-border payments, customers are looking to hold their money at banks that can service these payments efficiently.

Today, many customers use non-banks for payments like remittances to family members back home, while some actively avoid using their banks because of high fees and poor FX rates. This often requires customers to transfer money from their bank account to a wallet and holding funds in the wallet. Banks, meanwhile, need to address the challenges involved in managing correspondents and funding currency accounts.

With a long history of inefficient processes, high costs and lengthy delays, cross-border payments are particularly ripe for improvement. While there are a number of developments in play, we believe that three areas of activity are particularly significant and could impact the types of payment solution that banks use. These include the actions being taken to connect different countries’ immediate payment schemes, develop alternative rails to Swift, and achieve the targets set by the G20.

In this article, we take a closer look at these developments and the opportunities they present for banks to address longstanding inefficiencies.

1. Connecting immediate payment schemes to support cross-border payments

Immediate payments – also known as instant payments or real-time payments – offer numerous benefits for businesses, consumers and banks. And with immediate payments becoming more ubiquitous, recent years have seen increasing efforts to interconnect different immediate payment schemes, so that people can send immediate payments overseas.

Some of the most significant developments include:

• Connecting real-time payments in Singapore and Thailand. In 2021, Thailand and Singapore connected their real-time retail payment systems, PromptPay and PayNow. This enables customers of participating banks to transfer funds between the two countries within minutes using just a mobile number – thereby supporting faster and more convenient cross-border remittances. A number of other real time payment schemes have subsequently followed suit. Further, QR codes have been combined with real-time payments to enable merchant purchases across countries.
• Extending the reach of India’s UPI system. In India, efforts are underway to connect UPI (Unified Payments Interface) – India’s real-time instant payment system – to other markets. For example, Indian travellers in the Middle East can use UPI to make payments using QR codes. Likewise, UPI is building connections with central banks in countries such as Singapore, Thailand, Malaysia and Indonesia to facilitate cross-border retail payments. We’re also starting to hear discussions about efforts to connect UPI with the US and Europe.
• Interconnecting domestic scheme via Project Nexus. Also significant is the Project Nexus initiative from BIS Innovation Hub, which aims to interconnect domestic immediate payment schemes such as Malaysia, Singapore, Philippines, India and Thailand. The idea is that users can connect to the participating countries via a single connection, rather than having to manage multiple bilateral connections with each country. Many in the industry are watching this initiative closely in order to monitor its progress and determine how best to use it in the future.

Developments such as Nexus offer significant opportunities to improve the speed, cost, transparency and accessibility of cross-border payments. However, there are also certain constraints to consider, including country-specific guidelines, regulations and the handling of exceptions, which could prove challenging in some markets.

2. Exploring the opportunities presented by alternative rails

We are currently working with a number of banks that are seeking alternative options to Swift for payments in certain remittance corridors – for example, by working with money transfer organisations (MTOs).

In short, an MTO offers a way to make payments to a particular country, or for a particular segment of customers within that country. There are a number of well-established examples of this model, including Visa Direct, Wise, Western Union and MoneyGram, as well as distributed ledger technology (DLT)-type providers, many of which provide an alternate delivery method.

Connecting to an MTO may prove challenging for some banks, as most now require the use of APIs. However, it is possible to connect to some MTOs via Swift.

What’s interesting about some of these alternate rail providers is that they have been able to join local clearing schemes in certain countries. This means they do not have to rely on using a particular bank for clearing, but can clear directly through the scheme itself, and consequently provide a better service.

Some of the models used by MTOs include the following:

• Direct connection. A user could log directly onto the MTO’s website in the UK, and transfer money directly to a beneficiary bank in Singapore. The MTO could support this using its existing local immediate payment scheme connection.
• Indirect connection. In other countries, the local bank connects to the MTO. The bank can therefore send its customers payments to offshore beneficiaries that the MTO can service through a local partner bank or scheme.

While there is some overlap between these scenarios, the net result is that banks that lack correspondent relationships in certain countries are better able to make payments to beneficiaries in those countries.

In addition, some banks use specialist correspondent banks (like Citbank’s WorldLink or HSBC’s Global Disbursements solution) in order to access exotic currencies, or enable payments to countries where they don’t have a correspondent relationship. Typically, these banks are willing to forego the FX margin they would otherwise get in order to retain their customers’ business.

3. Achieving the G20 targets for cross-border payments

The third key trend revolves around the G20 targets for enhancing cross-border payments.

In 2020, the Financial Stability Board (FSB) developed the G20 Roadmap, a multi-year programme designed to enhance cross-border payments. The Roadmap includes targets across four key areas of cost, speed, access and transparency. Where speed is concerned, 75% of cross-border payments will need to be credited to the beneficiary within one hour by the end of 2027.

As such, the G20 targets have prompted banks to look more closely at how they can support both incoming and outgoing payments more efficiently. This includes making sure that other systems within the bank are readily available.

In order to process payments and credit them to customer accounts within one hour, banks will need rapid access to compliance checking and fraud checking systems, and may also need to obtain FX rates. As such, banks need to be able to coordinate the processing of multiple actions, and confirm to overseas initiating parties that the relevant actions have taken place.

The need for 24/7 availability

In a number of countries, many large domestic banks now have 24/7 access to their core banking systems or accounting systems. But this can be more challenging for foreign banks that mainly deal with corporate business and have historically operated only on weekdays.

For example, if an inbound Swift message comes in at the weekend or overnight, banks need to be able to confirm that the payment has been received and credited to the customer’s account. However, some payments may need to be sent onward to another local bank via the RTGS, and may be held back by the opening hours of the local real-time gross settlement (RTGS) scheme.

In practice, a number of countries are starting to extend the opening hours of their RTGS schemes in order to provide more flexibility. But instead of pushing payments through the local RTGS scheme, many banks are now looking to redirect these types of lower value transactions through local immediate payment schemes, which generally have 24/7 availability, and are therefore better placed to support transaction processing within one hour.

Transparency and cost

As well as targeting speed, the G20 roadmap also includes targets around transparency and cost. Again, banks need efficient systems in order to give clarity over the costs and FX fees they have applied to a payment, and provide status updates when particular actions have taken place.

Where Swift payments are concerned, status updates can be accessed via the Swift GPI tracker. But as other payment methods rise to the fore, banks increasingly need to be able to achieve tracking across a wide range of different payment types, including payments made via immediate payment schemes and alternate rails.

Conclusion

The payments landscape is evolving rapidly – and in the cross-border payments space, industry efforts to interlink immediate payment schemes, develop alternate rails and meet the G20 goals are presenting opportunities to make payments cheaper, faster and more transparent. Imagine being able to add an alternate rail quickly because you see a market for sending specific payments to a new region, or adjusting your pricing or FX margin to meet market fluctuations.

While the opportunities are significant, inefficient legacy systems can hold banks back. To keep pace with the latest developments, banks need to adopt solutions that are flexible enough to meet evolving customer expectations, drive automation, stay up to date with regulatory change, harness new revenue opportunities from existing customers, and attract new business.

Don’t hesitate to contact us if you have any questions.