8 October 2020
A debate on the development of cross-border payments: searching for a pragmatic and collaborative approach
The share of cross-border payments is growing. Not surprisingly, banks are exploring ways to make the system of cross-border payments more profitable and easier. Victoria Cleland, Executive Director for Banking, Payments and Innovation at Bank of England, Diane Reyes, Global Head of Liquidity and Cash Management at HSBC and David Watson, Chief Strategy Officer at SWIFT, answer questions in this blog that are raised during Sibos 2020. “I am not sure if cross-border payments will ever be as strong as domestic payments.”
We have seen many changes in cross-border payments over the past 3 to 5 years, but what major challenges remain?
Cleland: “Cross-border payments are very important, but compared to domestic payments they are slower, more expensive, less transparent and less easily accessible. More and more people are moving around the world, so we need to improve the situation. I am not sure if cross-border payments will ever be as strong as domestic payments. There are more complications, such as much longer transaction paths and the fact that they go through different time zones with often inconsistent system opening hours and multiple compliance checks. In addition, there is the data problem, as it turns out that 60 percent of cross-border payments require manual intervention. So, there is a lot to solve and the price is high. Some remittance payments can cost 20 percent of the value of that payment. Good improvements have been made, for example SWIFT gpi (the new standard in global payments), but we still see that less than half of the payments are settled in 24 hours. If we improve transparency, speed and cost, it will make a big difference for citizens worldwide, it will help economic growth and ultimately global development.”
What impact does COVID-19 have on cross-border payments?
Cleland: “Cross-border payments represent an enormous value. In 2017 it was 150 trillion dollars and is expected to increase by 100 trillion dollars in the next 10 years. During the pandemic, I saw in the UK, where I look at the payment systems, a reduction in the number of cross-border and domestic payments, but the number of cross-border payments is picking up faster than the number of domestic payments. Outside the UK, you see global remittance rates falling by 20 percent. But the fact that the number of cross-border payments is decreasing in difficult times does not mean that we do not have to solve the problems. When we recover from the pandemic, it is important that the payment systems are there for us to support and remove friction. It should in no way be seen as a hindrance.”
What could help banks improve cross-border payments?
Reyes: “I think banks really want cross-border payments that are as fast, secure and reliable as domestic payments. Customers don't distinguish between a cross-border or a domestic payment, they just want to move their money from point A to point B. A big challenge we experience is the lack of consistency. It would be useful if supervisors had a consistent approach to cross-border payments. Think about how we use national payment systems; what are the rules and cut-off times? The data associated with each payment is vital, so the adoption of ISO 20022 should be instrumental and help us all meet common data standards. I believe that we have a much better chance of success if central banks are involved. They play a key role in fostering innovation.”
We talked about building blocks such as the payment standard, how is SWIFT positioned when it comes to these building blocks?
Watson: “We want to help facilitate the network and communities on this journey. What's essential for us is our role around standards: that's an important task for us today and in the future. I think we can do more in the area of standards. Frictionless cross-border transactions are driven by the ability of all of us to interact with each other in a very simple and very easy way. We want to help facilitate the further development of innovation in the ecosystem by the banks and other direct members, while at the same time having backward compatibility with the way we do things today. We want to preserve the benefits we have, but also improve and exploit new opportunities. We can't play this role alone; we have to work together.”
What progress do you think banks will make from now until 2025?
Reyes: “I think we can make significant progress in the next 5 years, but I think it's wise to take a pragmatic and collaborative approach. If we know that 80 percent of cross-border payments come from 3 currencies – the dollar, the euro and the pound – and we can align our standards in these three jurisdictions while solving most of the pain points for cross-border payments, we will make a huge step forward.”