Cross-border B2B transactions generated about $125 billion in revenue in 2018, leading more FIs and FinTechs to seek to update their infrastructures and better serve the needs of this sizable and growing sector. Business clients want fast, transparent payment methods that can easily convert currencies, but traditional correspondent banking tools are not always in line with today’s demands. Modern automation technology has helped provide more streamlined cross-border transfers by reducing the number of intermediary players needed, enabling quicker data processing and more. Plenty of obstacles remain, however, including the lack of common standards for developing and governing technologies like distributed ledger technology (DLT). If provided, such policies could better support secure interoperability between different DLTs.
This month’s Deep Dive explores how infrastructure improvements have led to greater speed and service for cross-border payments, and where further developments are still needed.
Businesses typically turn to their banks for all of their financial needs, but these institutions may use traditional transaction methods that are more expensive and time-consuming, such as international wire transfers made through correspondent banking. FIs looking to compete against other PSPs need to innovate and improve their offerings by developing their own technologies or partnering with third parties that can help them integrate with faster payment rails.
Correspondent banking requires FIs to maintain relationships with many banks in different countries, but reducing that number of partners can accelerate international payments processes. Earthport, an FI that focuses on cross-border transactions, does this by allowing banks and money transfer organizations to interface with only Earthport for cross-border payments.
Cross-border payments can be streamlined and sped up by leveraging modern tools like DLT, which can complete transactions within minutes. BBVA, Standard Chartered and Yes Bank, among other FIs, have joined Ripple’s RippleNet DLT network to take advantage of these faster payments and also to leverage it for messaging and settlement.
Standardization and Solution Adoption
Financial services providers want to be able to quickly and easily adopt solutions that grant their customers access to in-demand payment rails. This implementation process can be a challenge, but it can be simplified with application programming interface (API) integrations. FinTech Payment Rails offers its business clients a global payments solution with an API that can access local real-time payment networks, enabling businesses to move their payments more quickly by using these infrastructures.
Encouraging greater adoption of common messaging and data exchange standards, such as ISO 20022, is also important in helping to further simplify the space. Big players like SWIFT are migrating their offerings to this standard, and many new infrastructures are being built around it. Such moves are expected to reduce the costs companies incur when they enter the international payments space, while also providing payers with more precise and consistent data about payees and invoice details. ISO 20022 also supports straight-through processing, which reduces the amount of manual data entry financial service providers have to conduct, enabling them to automate more of their processes. This can lower costs, and some providers may use these savings to offer lower foreign exchange rates.
ISO is also planning to release several standards for blockchain and DLT, which may help advance these technologies. Blockchain tools require clear legal regulations, technological standards and governance and liability standards to enable greater use. ISO’s standards include terminology and concepts, security risks and vulnerabilities, privacy and personally identifiable information and more, and some are expected to be released in 2020 and 2021. These can be helpful in various ways – for example, terminology standards could help ensure that different DLT systems define permissions in the same manner, thus enabling them to securely interoperate.
There are still some difficulties, however. The standards space currently lacks unity, as ISO membership does not equally represent all nations. Also, other entities, such as the Internet Engineering Task Force and World Wide Web Consortium, have standards of their own that affect blockchain.
FIs, FinTechs and other players are adopting or integrating advanced payment infrastructure technologies to cater to businesses’ needs for fast, streamlined international transactions. Players in the space are examining how to encourage the easy implementation and management of new solutions and upgrades, but work remains to be done to remove frictions.