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A US central banker has expressed doubts as to whether bilateral faster payments linkages can solve cross-border payments challenges, pointing to scaling and implementation difficulties.
Speaking at the Global Fintech Fest in Mumbai, Federal Reserve Governor Christopher Waller discussed how public and private-sector entities can work together to meet the targets of the G20 roadmap on cross-border payments.
“Today's consumers and businesses can generally send a payment anywhere in the world, but they all seem to want faster and cheaper global payments, just like we always want faster flights and cheaper airfares,” he said.
“However, I am not entirely convinced that interlinking arrangements will necessarily deliver on those goals.”
Waller began by arguing that faster cross-border payments are likely to expose more financial institutions to fraud and other types of financial crime.
“Not all frictions that slow payments down are bad,” he said. “Certain frictions are purposely built into the global payment system for compliance and risk-management reasons.
“Slowing down the speed at which payments are cleared and settled helps banks prevent money laundering and counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments.”
Challenges of implementation
In addition, Waller said the technical, legal and compliance challenges of bilateral faster payments linkages do not lend themselves to solving global cross-border payments issues.
“Even when technological connections are in place, payments may not actually be instant as they traverse across systems, because of domestic variations in ISO 20022 implementation,” he said.
“To send an ISO message seamlessly from one country to another across a technical link, operators need to coordinate and align on common practices.”
ISO 20022, the global messaging standard that allows for richer, structured financial information to be carried with payments, has the potential to drive efficiency and reduce fraud and errors in cross-border payments.
However, as covered by Vixio, differences in ISO 20022 implementation across payment systems and financial institutions mean that new layers of complexity can be introduced to payments transactions.
These complexities may even require third-party data management services to move ISO 20022 information from one entity to another.
Nonetheless, Waller acknowledged that a growing number of jurisdictions have already established bilateral links between domestic fast payment systems, primarily to support remittances.
“These arrangements demonstrate that linkages are technically possible and that legal and compliance issues can be addressed,” he said.
“Yet each link is unique and requires resource-intensive negotiation and alignment between parties. Establishing bilateral links across the globe simply will not scale.”
Another solution is possible
Waller said that, in the near to medium term, the Federal Reserve will be focusing on driving domestic adoption of FedNow, its new faster payments system, which was launched last year and now has almost 1,000 participating banks on its network.
However, he also said the Fed will continue to investigate the feasibility of both bilateral and multilateral interlinking of faster payments systems for cross-border payments.
Given the challenges of establishing bilateral arrangements with multiple partners, other central bankers have also voiced their support for multilateral networks.
Ravi Menon, managing director of the Monetary Authority of Singapore (MAS) from 2021 to 2024, said that Singapore’s cross-border payments ambitions are currently moving from bilateral linkages to multilateral networks.
In 2021, Singapore and Thailand became the first two jurisdictions to launch a bilateral payments linkage, connecting Singapore’s PayNow to Thailand’s PromptPay.
The city-state has since launched similar linkages with India and Malaysia, but its central bank acknowledges the limitations of the bilateral model.
“Setting up bilateral payment linkages is time-consuming and resource-intensive,” said Menon. “We are thus moving into the third phase — building multilateral real-time payments connectivity.”
The MAS is working with the BIS Innovation Hub on Project Nexus, a common blueprint for how countries can integrate their real-time payment systems into a single cross-border network.
“If it works, it will make PayNow globally interoperable much faster,” said Menon.
Project Nexus initially began as a collaboration between the five ASEAN nations of Singapore, Indonesia, Philippines, Malaysia and Thailand.
In July, however, as covered by Vixio, India became the first non-ASEAN country to join Project Nexus.
At the time, Puneet Pancholy, chief general manager of the Reserve Bank of India (RBI), said that although India will continue to benefit from bilateral faster payments connections, a multilateral approach will provide further impetus to expand the reach of India’s payment systems.
