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An official from the Bank for International Settlements (BIS) has disagreed with a Federal Reserve governor’s views on the value of bilateral instant payments linkages for cross-border payments.
Speaking at the Open Banking Expo in London, Maha El Dimachki, head of the BIS Innovation Hub Singapore, made a case for bilateral instant payments linkages as a stepping stone towards multilateral linkages.
As covered by Vixio, the BIS Innovation Hub is currently leading Project Nexus, an effort to connect the instant payment systems of India, Malaysia, Thailand, Singapore and the Philippines within a single network.
Responding to a question from Vixio, El Dimachki said that preexisting bilateral linkages between these countries were the “inspiration” for moving towards a multilateral linkage, with help from the BIS.
She also said that there is little reason for jurisdictions to reject bilateral linkages preemptively, as the experience of building them naturally lends itself to building multilateral linkages.
“The benefit of the experience of these countries that have done bilateral linkages has been invaluable in how we’ve developed Project Nexus,” said El Dimachki.
“And unless they were tested, we wouldn’t be able to take the learnings from that experience and apply it to the multilateral approach.
“So, at the very least, I think it was necessary in the evolution of Nexus.”
The problems with bilateral links
El Dimachki’s comments contrast with those of Christopher Waller, a member of the Federal Reserve Board of Governors, who in August this year made a speech criticising bilateral linkages as costly, overly complex and difficult to scale.
“Today, certain countries have established bilateral links between domestic fast payment systems, primarily to support remittance payments,” he said.
“These arrangements demonstrate that linkages are technically possible and that legal and compliance issues can be addressed.
“Yet each link is unique and requires resource-intensive negotiation and alignment between parties. Establishing bilateral links across the globe simply will not scale.”
Waller added that the Federal Reserve’s own experience with automated clearing house (ACH) linkages showed how difficult the bilateral model is to develop and maintain.
Having provided bilateral ACH linkages between the US and Canada, and the US and Europe, for more than 20 years, Waller complained that every arrangement required “bespoke” agreements with correspondent banks and service providers.
Preparing for multilateral linkages
El Dimachki addressed some of these concerns in her presentation at the Open Banking Expo.
For example, she acknowledged the difficulty of scaling up bilateral networks across the globe, as suggested by Waller.
If two countries wish to link their instant payment systems, only one link is required, she said.
If three countries wish to link up, three links are required.
But if 20 countries wish to link up, 190 links are required.
And if 70 countries wish to link up, 2,415 links are required.
“Bilateral interlinking is not scalable,” she said. “Every link requires a complex technical integration and multi-party legal negotiation.”
However, pockets of jurisdictions could prepare themselves more effectively for joining a multilateral linkage, such as Nexus, by experimenting with bilateral linkages on a smaller scale.
In the case of Nexus, the rulebook outlines a single standard for instant payment systems to connect to the network, which reduces complexity.
Moreover, each instant payment needs to integrate to Nexus only once to access all participating countries, and no additional work is required when a new country joins the network.
In June, for example, as covered by Vixio, India became the first country outside ASEAN to join Project Nexus, which had begun with only four participating countries.
El Dimachki said that Nexus’ ambition is to expand globally, and to offer a comprehensive suite of solutions for cross-border payments, including features such as confirmation of payee.
