There’s no question technology plays a powerful role in enabling the movement of payments around the world. With access to a smartphone, individuals can purchase goods, pay bills, communicate with friends and family who are miles away, and more. Businesses can easily pay remote teams and partners and securely accept payments from virtually anywhere in the world. The efficiencies and problem-solving possibilities seem endless.
By Alicia Krebs & Jesse McWaters, Mastercard.
Yet, as the pace of technological innovation quickens, technology’s ability to facilitate faster, cheaper, and safer cross-border payments is limited by differences in national regulatory, supervisory, and oversight frameworks; central bank operating hours; access to central bank payment systems; and national data protection, privacy, and localization requirements. While much less exciting than flashy new technologies, it is these deeply entrenched barriers that – absent public sector action to address – will act as a fundamental limiter on the ability of new technologies to enable faster and more efficient cross-border payments. That means that in order to achieve the ambitious goals of the G20’s Roadmap, the public and private sectors must advance together.
The price of different requirements
Differing national requirements and inconsistent implementation of global standards not only slow down the payments chain but may create barriers to economic growth and financial inclusion. Governments should be working to address frictions inherent in cross-border payments, but too often the opposite seems to be the case. For example:
- Increasingly stringent anti-money laundering and know-your-customer rules often add country-specific requirements through which transaction data must be aligned.
- Certain governments continue to create and maintain data localization requirements that limit or outright prohibit the export of certain data. These regulations slow and add to the cost of cross-border payments, averaging around 6.4% of the transaction amount as of 2021 according to World Bank data.
- Limited operating hours of central bank payment systems, coupled with time zone differences, may give rise to liquidity and settlement risks if settlement is not available at certain times of the day.
By leveraging Swift gpi data, the Committee on Payments and Market Infrastructures (CPMI) found that prolonged processing times for cross-border payments tend to occur in low and lower-middle income countries. The median processing time for a cross-border payment to North America is approximately 12 minutes, compared to an average of more than 22 hours for many North African countries. For some of the slowest routes, processing can exceed two days. As the CPMI report emphasizes, the key barriers to faster processing times are not related to differing levels of technology development. Instead, longer processing times are partly attributed to capital controls and related compliance processes; weak competition (as measured by number of banks); and limited operating hours of beneficiary banks.
National and international headway
Despite these headwinds, there is growing evidence at the national and global levels of public sector efforts to make cross-border payments faster, cheaper, and safer.
Once launched in 2024, the Bank of England’s RTGS system renewal will expand operating hours and reduce the cost to non-bank intermediaries for joining, while strengthening end-to-end risk management.
Buna, the multilateral cross-border payment system established by the Arab Monetary Fund (AMF), now enables 100 financial institutions and central banks across 22 states in the Arab region to send and receive payments in Arab and key international currencies in what it describes as a “cost-effective, risk-controlled, and transparent environment.” Interoperability is a foundational part of the system.
The adoption of ISO 20022 messaging by 2025 promises to harmonize the way in which cross-border payments are communicated, ensuring consistency in messaging through detailed and structured data. However, as CPMI cautions, variability in how ISO 20022 messaging is deployed could undercut any gains in transaction speed or efficiency.
Messaging standards are key, as they are the language in which any transaction system works. Without a harmonized language, interoperability will suffer. As such, attention must be paid to differences in message versions, market practice rules, and business or payment models adopted by each jurisdiction, or risk adding to the existing complexity.
Progress depends on collaboration
The progress being made to facilitate easier cross-border payments is important, but there remains much work to be done. Further progress in simplifying secure cross-border payments requires the public and private sectors to work together.
As a global entity that manages payments across more than 210 countries and territories, Mastercard knows how challenging it can be to make cross-border payments faster, cheaper, and safer. It’s why we share our knowledge with public sector partners and will continue to do so as the G20 Cross-Border Payments Roadmap enters its next phase of work: so that we can move forward and, together, reduce the barriers that stand in the way of more efficient transactions.
The views expressed on these pages are those of the authors and/or the institution they represent, and not necessarily those of Swift.