The world of cross-border payments has undergone a remarkable transformation over the past year. The proliferation of new payment providers, upgrades to legacy payment market infrastructures, and interlinkages of domestic real-time payment systems in regions such as APAC and the EU have accelerated that transformation, which are borne out by data. According to a recent Juniper Research report global B2B cross-border payments will exceed $40 trillion by 2024, representing a 9% increase from $37 trillion in 2022. These advancements have revolutionized the cross-border payment experience, enabling businesses to conduct transactions more efficiently, securely, and cost-effectively.
Recently, Bottomline hosted a series of digital payments modernization strategy workshops in Mongolia and Thailand, where industry leaders and experts gathered to discuss the challenges and opportunities in cross-border payments. I also had the opportunity to participate in a panel discussion at The Asian Banker Future of Finance Summit in Bangkok which focused on the transformation in cross-border payments and liquidity management. The valuable insights and perspectives gathered have shaped the key thrust of this article, covering challenges in cross-border payments, industry breakthroughs, and the future of cross-border transactions with Central Bank Digital Currencies.
The Challenges Faced in Cross-Border Payments
While cross-border payment dynamics have accelerated, it is not without challenges. Banks and financial institutions in APAC have identified several significant barriers, as revealed in Bottomline's The Future of Competitive Advantage in Banking and Payments Report 2022. The report calls out major concerns such as maintaining nostro accounts (29%), trapped liquidity in the system (22%), lack of transaction visibility (22%), slow or unknown payment arrival times (15%), and data quality or loss (12%). But these obstacles have solutions. Many issues around lack of visibility, unknown arrival, and poor data quality can be solved by ISO 20022, which is built into SWIFT gpi. As for the costs of nostro accounts and trapped liquidity, these can be solved by using multi-lateral platforms such as Visa B2B Connect.
Compared to the EU, the APAC region has unique challenges due to its diverse range of currencies. On average, banks in the Asia Pacific region maintain 58 Nostro accounts, incurring annual maintenance costs exceeding $1.7 million. The growth of B2B cross-border payments in APAC has contributed to the increased complexity of these transactions, which heavily rely on correspondent banking relationships. This over-reliance hinders visibility into payment status, costs, and certainty, while the traditional payment process lacks predictability regarding arrival times and the net amount received after currency exchange calculations and deductions.
Furthermore, the ever-changing regulatory landscape presents additional challenges for cross-border payments. Regulations governing international financial transactions are subject to constant updates and modifications, necessitating vigilance and adaptability from banks and financial institutions. These regulations can impact the efficiency and certainty of cross-border payments, creating complexities and uncertainties for businesses operating in global markets. Recent economic sanctions imposed on Russia due to the Ukraine-Russia conflict serve as a stark reminder of how geopolitical events can swiftly influence regulatory environments. This volatility highlights the need for agile and flexible payment networks and solutions that can seamlessly navigate changing regulatory landscapes.
Examining the case of Mongolia further emphasizes the tangible challenges in cross-border payments and underscores the importance of adapting alternative payment rails during geopolitical crises or regulatory changes. The lack of correspondent banking relationships in Mongolia has resulted in higher foreign exchange costs due to limited global agency bank competition for Mongolian banks and their customers. In a region characterized by exotic currencies and trapped liquidity, the strategic utilization of multi-lateral platforms and intelligent routing becomes imperative for operational efficiency, particularly considering the complexity and reliance on correspondent banking relationships in the growth of B2B cross-border payments.
Breakthroughs in the Payments Industry
To address the challenges faced by the global banking industry in cross-border payments, several key solutions have emerged that significantly improve efficiency, reduce costs, and enhance operational effectiveness.
Adoption of Alternative Payment Rails: One such solution exploring and implementing alternative payment rails, such as Visa B2B Connect. Leveraging platforms like Visa B2B Connect offers numerous benefits for cross-border payments. Firstly, it enables businesses to reduce the cost of maintaining nostro accounts, as transactions are settled directly between participating entities. This reduction in reliance on correspondent banks saves costs and enhances liquidity management and payment visibility. By leveraging innovative payment rails, businesses can streamline their cross-border transactions, improving operational efficiency and reducing friction in the payment process.
Migration to ISO 20022: Another crucial step towards enhancing interoperability and streamlining cross-border transactions is the migration to ISO20022. This international standard for financial messaging provides a common platform and standardized dataset, facilitating seamless data exchange and interoperability among different payment systems and infrastructures. The adoption of ISO 20022 holds immense value, particularly in regions like Southeast Asia, where digital payments are projected to experience significant growth. By adopting a common data format, financial institutions can enhance transparency, reduce errors, and improve the overall efficiency of cross-border transactions. The standardized dataset enables faster and more accurate transaction processing, ultimately benefiting businesses and customers alike.
Digital Transformation and Cloud Migration: A comprehensive digital transformation strategy, including cloud migration, can bring numerous advantages to cross-border payments. Cloud-based infrastructure offers scalability, agility, and improved security, enabling financial institutions to handle increased transaction volumes, adapt to changing market conditions, and meet evolving customer demands. Cloud-based solutions also provide robust data management capabilities, allowing real-time monitoring and analysis of cross-border payment flows. By leveraging cloud technology, financial institutions can enhance their operational capabilities, reduce costs, and improve risk management, ultimately delivering a seamless and secure cross-border payment experience for businesses and customers.
The Emergence of Digital Currencies; Shaping the Future of Cross-Border Payments
The emergence of digital currencies, particularly Central Bank Digital Currencies (CBDCs), represents a ground-breaking leap forward in transforming the future of cross-border payments. CBDCs offer several advantages, including a more resilient payment landscape, real-time cross-border payments, faster and cheaper transactions, and initiatives led by central banks. CBDCs create a secure and efficient payment system that meets the needs of the digital economy, providing faster, cheaper, and more efficient payments while reducing the risk of private payment systems failing. By interlinking CBDCs from different countries, cross-border payments in multiple currencies can be significantly improved, enabling real-time 24/7 transactions, and eliminating delays and costs associated with correspondent banking networks.
Moreover, the adoption of CBDCs drastically reduces processing time, benefiting both banked and unbanked individuals. Various central banks, particularly in Asia, are at the forefront of CBDC innovation, actively engaging in collaborative projects to explore the vast potential of digital currencies for cross-border transactions. In this regard, the multi-CBDC arrangement project, mBridge, involving China, Hong Kong, Thailand, and the UAE, has successfully facilitated over $22 million in CBDC-based transactions between twenty commercial banks, serving as a testament to the potential of cross-border payments using wholesale CBDCs. As Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department for the International Monetary Fund, said at a meeting in June: “As money, CBDCs provide safety. As infrastructure, CBDCs bring interoperability and efficiency among private networks for digital money and assets.”