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A Singaporean central banker has lamented the current state of cross-border payments as "not fit for the 21st century", arguing that innovation is urgently needed to tackle speed, cost and friction issues.
Speaking at the Sibos fintech conference in Amsterdam, Ravi Menon, managing director of the Monetary Authority of Singapore (MAS), said that cross-border payments have a long way to go to meet the challenges of an integrated global economy.
“Payments is the life blood of the modern economy,” he said. “Payments connectivity, especially across borders, is a key ingredient for digital connectivity, financial inclusion and economic integration.
“The current state of cross-border payments is slow, costly, opaque and inefficient, relying on an archaic network of correspondent banks.”
In Q1 2021, according to the World Bank, the average cost of sending $200 across an international border was 6.4 percent of the total transfer value.
That is more than double the target of 3 percent by 2030, as outlined in the United Nations (UN) Sustainable Development Goals.
In Q1 2021, the World Bank also found that the most expensive region to send money to was Sub-Saharan Africa (8 percent), and the least expensive was South Asia (4.6 percent).
As Menon pointed out, such high fees are “painful” for market participants, whether they be migrant workers sending money home or small businesses tapping into e-commerce markets abroad.
“Solving the cross-border payments problem will yield gains in both economic efficiency and financial inclusion,” he said.
Interlinking: a new foundation for cross-border payments
Under Indonesia’s leadership in 2022, the G20 has made it a priority issue to address the inadequacies of the cross-border payments market.
In a statement published in July, Bank Indonesia governor Perry Warjiyo said the G20 has also agreed to work with the Financial Stability Board (FSB) on “expanding cross-border initiatives” through to 2027.
“Payment system interlinking is being developed comprehensively, including protocol harmonisation for data exchange as well as monitoring roadmap implementation," Warjiyo added.
At Sibos, Menon discussed potential models that could help bring cross-border payments into the 21st century, the first of which, channelling Warjiyo, was the interlinking of faster payment systems.
With more than 60 jurisdictions worldwide having already launched a faster payments system, which represent more than 90 percent of global GDP according to VIXIO analysis, many of these jurisdictions have already begun implementing cross-border linkages.
Menon highlighted the quick progress of Singapore’s PayNow, which launched the world’s first bilateral instant payments linkage with Thailand’s PromptPay in April last year, and is currently working on linkages with India’s Unified Payment Interface (UPI) and Malaysia’s DuitNow.
These markets are vital corridors for cross-border flows. For example, remittances between Singapore and Malaysia alone totalled S$1.3bn ($900m), according to the MAS.
However, although faster payment linkages may offer a strong product-market fit on a bilateral basis, connections would significantly benefit from a multilateral model.
“As one of our industry partners put it,” noted Menon, “three countries require three bilateral links, but 20 countries require 190 bilateral links.”
Menon said the Bank for International Settlements (BIS) Innovation Hub in Singapore is currently working on a multilateral solution to link up multiple faster payments systems in multiple jurisdictions.
Launched in July this year, the BIS’ Project Nexus may facilitate rapid scaling-up of retail payment system connectivity, and may help to increase speed and reduce costs significantly from their current baseline.
As noted by the BIS, Project Nexus aims to enable cross-border payments to be cleared in less than 60 seconds at any time of day and on any day of the year, with fees per transaction within the long-term 3 percent target.
Menon said the MAS believes that Project Nexus will be a key enabler of the Association of Southeast Asian Nations’ (ASEAN) vision to build a shared payment infrastructure by 2025.
Although linking faster payment systems may solve frictions in cross-border payments, Menon said another solution will be required to solve frictions in cross-border settlements, where correspondent banks are still heavily involved.
Enter CBDC, private stablecoins
Menon’s solution to the settlements problem is to introduce a common platform for multiple wholesale central bank digital currencies (CBDCs).
“A common ledger utilising distributed ledger technology can potentially act as the global settlement layer for participating banks,” he said.
“Wholesale CBDCs, which are direct liabilities of central banks, are well suited to be used on such a distributed ledger to support simultaneous settlement, or the exchange of two linked assets in real time.”
In such a network, participating commercial banks will be able to transact with foreign counterparties without going through correspondent banks.
This could be achieved by banks exchanging wholesale CBDC directly with one another, and thereby reducing settlement time and cost.
Again, the BIS Innovation Hub is already exploring the potential of a multi-currency settlement network at centres in Switzerland, Hong Kong and Singapore.
Finally, Menon suggested that securely-backed stablecoins or tokenised bank deposits issued by private-sector entities could also offer an alternative form of faster and cheaper and faster cross-border payments and settlements.
“Unlike private cryptocurrencies, whose prices fluctuate wildly, these digital currencies are suitable as payment instruments on distributed ledgers, as they combine the advantages of tokenisation with the reliability of fiat currencies,” he said.
Noting that these private-sector initiatives are “beginning to scale”, Menon mentioned Circle’s USD Coin and Paxos’s USDP by name as leading candidates.
“They have achieved near real-time 24/7 settlement and lower cost, with interesting programmability features,” he said, pointing out that “Visa has integrated popular stablecoins into its payment services, allowing users to make international payments in USD Coin”.
