Fed Governor: Some Cross-Border Payment Frictions Are Necessary

When it comes to cross-border payments, there are necessary and unnecessary frictions.

That’s according to Federal Reserve Governor Michelle Bowman, who discussed the challenges facing cross-border payments Thursday (Feb. 15) during a speech at the BCBS-FSI High-Level Meeting for Africa in  Cape Town, South Africa.

“As one who values efficiency, I am generally supportive of opportunities to address unnecessary frictions,” Bowman said. “However, when considering frictions related to cross-border payments, some are necessary while others may not be necessary.”

There are “public policy tradeoffs and operational realities” that need to be considered, she added, as some of these frictions may stem from policy choices and safeguards designed to protect transactions and the system as a whole.

She used the example of compliance requirements. While these rules add complexity, especially in cross-border payments, it is a complexity that stems from the ability to apply various compliance frameworks in different jurisdictions, she said. 

“With this in mind, we can consider ways to encourage more consistent implementation of rigorous international standards and continue to support the development of new technologies and solutions that help automate processes, reduce costs and promote effective safeguards across jurisdictions,” Bowman said.

Her comments come at a time when cross-border payment volumes are reaching new heights, as PYMNTS wrote last month, thanks to a corresponding jump in global trade.

“Swift payment volume now averages roughly 45 million transactions per business day as more companies sell and transact across borders,” that report said. “The rising tide of international trade and cross-border transactions means businesses must look abroad to maximize growth and access the greatest number of customers.” 

In addition to cross-border payment friction, Bowman’s speech also focused on instances in which the Fed has offered clarity on what she described as “a framework of responsible innovation” for financial inclusion.  

For example, the central bank issued an interagency statement in support of banks engaging in small-dollar lending.

“This guidance underscores the importance of financial institutions offering small-dollar loan products to consumers and small businesses that support successful repayment outcomes and that avoid continuous cycles of debt due to rollover and reborrowing,” she said. 

A separate statement dealt with the use of alternative data in credit underwriting, clarifying that with a customer’s consent, a bank can use alternative data, like checking account balance activity, to determine a borrower’s creditworthiness.

“In both cases, timely guidance has sought to support responsible innovation and leverage the cashflow information on deposit accounts to meet their customers’ needs,” Bowman said.