With FinTech driving innovation and competition in the cross-border payments space, governments can no longer afford to ignore changing and heightening demands for greater speed, transparency and efficiency in global transactions.
By its very nature, the market of cross-border payments presents a significant opportunity for financial authorities around the world to collaborate as they make it easier for money to move between each others’ markets. In a recent report, the Bank of England (BoE), Bank of Canada (BoC) and the Monetary Authority of Singapore (MAS) took advantage of this by presenting a collaborative assessment of key opportunities for cross-border payments, including how corporate payments might be improved.
“The ability to make secure and efficient payments is key to the strength of the financial system, and important for consumers and businesses,” reflected Victoria Cleland — Bank of England’s executive director for banking, payments and financial resilience — in a statement announcing the report, “Cross-border interbank payments and settlements: Emerging opportunities for digital transformation.”
She continued, “Many national payment systems are benefitting from considerable innovation and change,” adding that cross-border payments “totaled 1.8 times global GDP in 2016. … They are at the center of the international finance system, enabling trade, investment and money transfers. This report, which is itself a great example of international collaboration, provides a foundation that will enable further exploration of how innovation could improve this crucial aspect of finance.”
For their report, the financial authorities examined high-value, cross-border corporate payments as an area of the market that needs particular improvement. Working with HSBC, the authorities assessed contributions and feedback from corporates and commercial banks to discuss current pain points, potential future capabilities and various use cases of global payments and settlements.
A lack of transparency, delays in payment processing and a lack of 24/7 service availability emerged as the top-three pain points for corporate payers transacting across borders. While individual markets and solution providers may be able to address these key pain points, the BoE, BoC and MAS emphasized the importance of collaboration — not only between market authorities, but among corporate end users, commercial banks and central banks.
“There is significant room for improvement in the cross-border payments space,” said Scott Hendry, Bank of Canada’s senior special director of financial technology, in another statement. “Major changes are being proposed by current service providers, as well as startups that regulators need to research to better understand.”
Commercial banks have a particularly heavy burden when pushing for improvement in the cross-border payments market, including the cost and complexity of integrating new technology and infrastructure, the responsibility of ensuring their correspondent banking partners have sufficient liquidity to complete payments, and the high costs of the traditional correspondent banking model.
It’s not surprising then that, despite regulatory efforts, the number of correspondent banking relationships continues to decline, threatening corporate cross-border payment capabilities. Industry players have warned for several years that correspondent banking is on the decline, yet the drops continue.
Reuters reported earlier this month that the Financial Stability Board (FSB) counted a 4.1 percent decline in the number of correspondent banking relationships in 2017 compared to the year before. Analysts pointed to regulatory and compliance burdens, including Know Your Customer (KYC) and Anti-Money Laundering (AML) checks, as a key factor behind financial institutions’ (FIs’) pull away from correspondent banking. Yet, according to the FSB, the trend can be halted and possibly reversed through the clarification of regulators’ expectations on global FIs.
“To be effective,” said Alexander Karrer, FSB correspondent banking group chair, “these need to be implemented in practice by national authorities and banks.”
In another statement, MAS’ Chief FinTech Officer Sopnendu Mohanty also emphasized the role in collaboration to improve cross-border payments.
“Payments infrastructure[s] have rapidly improved over the last few years. Domestic transfers can now be completed almost instantly and at low cost,” Mohanty stated. “With this as an aspirational benchmark, there is a huge opportunity to improve cross-border payments. This collaborative effort by the central banks and financial institutions across the three jurisdictions helps us identify gaps and areas of improvements in cross-border payments, and sets the foundation for further technical experimentation.”