Faster, cheaper, more transparent and comprehensive cross-border payment services would bring widespread benefits to citizens and economies around the world.
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What are cross-border payments?
Cross-border payments are financial transactions where the payer and the payee are in different countries. They cover wholesale and retail payments, including remittances.
Cross-border payments can be made in many different ways. Bank transfers, credit card payments and alternative payment methods such as e-wallets and mobile payments are the most common ways to transfer funds across borders today.
The two main types of cross-border payments are:
Cross-Border Wholesale Payments: These are usually transactions between financial institutions to support the activities of the financial institution's customers or its own cross-border activities (such as lending and borrowing, currency exchange and trading in shares and debt instruments, derivatives, commodities and securities).
Governments and larger non-financial companies also use wholesale cross-border payments for large transactions generated by importing and exporting goods and services or trading in financial markets.
- Cross-Border Retail Payments: These are usually between individuals and companies. The main types are: person to person, person to company and company to company. These include remittances, mainly money sent by migrants to their countries of origin.
Why cross-border payments matter
In recent decades, the increased international mobility of goods and services, capital and people has contributed to the economic importance of cross-border payments. The value of cross-border payments isit is estimated to increasefrom nearly $150 trillion in 2017 to over $250 trillion in 2027, an increase of over $100 trillion in just 10 years.
Factors that have intensified in recent years include:
- manufacturers are extending their supply chains across borders
- cross-border asset management and global investment flows
- international trade and e-commerce
- migrants sending money as part of international remittances
These trends have increased the demand for cross-border payments and the need for end-users to access cross-border payment services that are as efficient and secure as comparable domestic services. In particular, remittances play an important role in low- and middle-income economies and in some cases become the main source of financing for development.
Revenue growth and expansion are also driving interest in competitiveness in this market. In response, new, innovative business models and participants emerge.
How do cross-border payments work?
Currencies are circular systems. Domestic payment systems have traditionally not been directly linked to those of other countries, so when transferring between two jurisdictions, the currency is not physically transferred across the border.
International banks, on the other hand, maintain accounts for their foreign counterparts and have their own accounts with their foreign counterparts, which enable banks to make payments in foreign currency. Funds are not sent abroad. Instead, accounts are credited in one jurisdiction and charged in the other. Other payment service providers such as fintechs and remittance agents use this interbank network to provide payment services to businesses and individuals.
For example, in Figure 1, Bank A will send a message to Bank B requesting payment to a customer. Bank B will then credit the end customer's account with funds from the account maintained by Bank A with Bank B.
Figure 1: A simple cross-border payment using accounts held at each bank
The payment message sends an instruction to debit the account in Bank A and credit the account in Bank B.
However, there is no direct relationship between each bank, so they sometimes have to transact through an intermediary, the "correct" bank. This is the bank that provides accounts for Bank A and Bank B if they are not directly related. This is called correspondent banking and is an essential component of the global payment system for cross-border transactions.
Figure 2: Cross-border payment using a correspondent bank
Bank A and Bank B do not have accounts with each other, so they use the bank where they both keep accounts - the correspondent bank.
The more intermediaries involved in a cross-border transaction, the slower and more expensive it will be. For currency pairs with large payout volumes (for example, USD to GBP) the chain is usually shorter. However, conversions between currencies with lower payment volumes involve more correspondent banks. The more correspondent banks are involved, the longer the transaction takes and the higher the costs at each stage of the chain. The totality of payment flows between one country and another is referred to as the "national corridor" or "payment corridor".
Figure 3: Cross-border payment using the network of correspondent banks
The less popular a currency pair is, the more correspondent banks will be called upon to make payments, with costs and delays at every step.
Each bank in the network will charge processing and exchange fees, payment messages will have to be checked against local financial crime requirements, and each bank will have to update balances on beneficiaries' incoming and outgoing accounts. national payment systems that are only open during normal business hours. The sender's bank should have enough cash to cover the unknown costs until the payment is completed.
What are the main challenges for cross-border payments?
Cross-border payments lag behind domestic payments in cost, speed, access and transparency. Typically, making a payment from one country to another is more difficult than making a similar payment within one country. In some cases, a cross-border payment can take several days and can cost up to 10 times more than a domestic payment.
The G20 made strengthening cross-border payments a priority in 2020. This work included identifying cross-border payments challenges resulting from a number of frictions in existing processes and developing a set of building blocks to address them. The main frictions are:
Fragmented and truncated data formats
Payments are made using messages sent between financial institutions to update the sender's and receiver's accounts. These payment messages must contain sufficient information to confirm the identity of the parties to the payment and to confirm the legitimacy of the payment. Data standards and formats vary greatly between jurisdictions, messaging systems, and networks.
For example, some formats only allow Latin characters, and some formats allow more data than others, meaning that names and addresses in other writings have to be translated, leading to discrepancies in the exact spelling. This makes it difficult to set up automated processes, causing processing delays and increasing technology and personnel costs.
Advanced compliance check processing
The uneven application of regulatory regimes to control financial sanctions and crime means that the same transaction may need to be screened multiple times to ensure that parties are not exposed to illicit funding.
Banks may use a variety of sources to perform checks, which can lead to payments being incorrectly flagged (for example, when entity names are similar to names in sanctions or financial crime databases). This complexity increases with the number of intermediaries in the chain, as the input data provided for prior checks may not contain the information required for checks under other national systems. This makes the design of compliance checks more expensive, hampers automation, and leads to payment delays or rejections.
Limited opening hours
Bank account balances can only be updated during the hours when primary billing systems are available.
In most countries, the operating hours of the primary billing system generally follow the normal operating hours in that country. Even where extended working hours have been introduced, this has often only been done for certain critical payments. This causes delays in the clearing and settlement of cross-border payments, especially in corridors with large differences in time zones. This causes delays and also means that banks must hold enough cash to cover the unknown cost of the potential exchange rate, which fluctuates during this period, increasing the total cost of the transaction. This is called trapped fluidity.
Older technology platforms
A significant part of the technology supporting cross-border payment systems remains on older platforms created during the first migration of paper-based payment processes to electronic systems.
These platforms have fundamental limitations such as reliance on batch processing, lack of real-time monitoring, and poor data processing performance. This leads to delays in settlement and trapped liquidity. These constraints affect domestic operations, but become an even greater obstacle to achieving cross-border payment automation when different legacy infrastructures have to work together. The requirement to connect to legacy technology can be a barrier to entry for new business models and technologies.
High cost of financing
To enable quick settlement, banks must secure funding in advance, often in multiple currencies, or access foreign exchange markets. This creates a risk for banks, which will have to set aside capital to cover it. meaning that the capital cannot be used to support other business. Uncertainty about the timing of receipt of funds often leads to over-financing of items, which increases costs.
Long trade chains
These frictions make it costly for banks to maintain relationships in each jurisdiction. This is why the correspondent banking model is used, but it results in longer transaction chains, which in turn increases costs and delays, creates additional funding needs (including covering unexpected fees charged throughout the chain), repeated validation checks, and the potential for data collection to be broken in during your journey.
There are significant barriers to entry for businesses wishing to provide cross-border payment services. End-users sending payments also find it difficult to accurately estimate payment initiation costs, making it difficult to assess the value for money offered by different providers. These barriers can raise prices for end-users and businesses and limit investment in modernizing cross-border payment processes.
Why have cross-border payments improved more slowly than domestic payments?
Cross-border payments are by definition more complex than purely domestic payments. These include many, and in some cases numerous, intermediaries, time zones, jurisdictions and regulations.
While domestic payments in many jurisdictions have improved and many more initiatives are in the pipeline, cross-border payments are lagging behind.
Other elements that cause friction include:
- capital control
- documentation requests
- balance of payments reporting
- other compliance procedures that may result in significant delays in payments
The multidimensional nature of these challenges also means that international cooperation is needed to improve cross-border payments.
What is being done internationally to improve cross-border payments?
Improving cross-border payments has been identified as a priority for the 2020 G20 Summit, which will provide a significant global impetus to address this long-standing and complex issue.
The G20 asked the Financial Stability Board (FSB), in cooperation with the Commission on Payments and Market Infrastructure (CPMI) and other standard-setting bodies, to coordinate a three-step process to develop an action plan to improve cross-border payments (see Figure 4).
Figure 4: The three-step process defined by the G20
Assessment (Phase 1): The FSB, in coordination with relevant international organizations and standard setters, assessed existing cross-border payment arrangements and identified frictions/challenges.Published in April 2020.
Building Blocks (Phase 2): CPMI has developed a set of 19 elements to improve the current global cross-border payment arrangements and address the frictions identified in Step 1. These elements are grouped into five thematic areas: (i) Commitment to a Common Society - A Private Vision to Improve Payments cross-border; (ii) coordination of regulatory, supervisory and supervisory frameworks; (iii) improving the existing payment infrastructure and arrangements to support the requirements of the cross-border payments market; (iv) improving data quality directly through processing, improving data practices and the market, and (v) exploring the potential role of new payment infrastructures and solutions.Published in July 2020.
Action Plan (Phase 3): The FSB, in coordination with the CPMI and other relevant international organizations and standard setters, developed an action plan to deliver the elements identified in Step 2.Published in October 2020.
Reports from each stage of the G20 initiative are:
What are the next steps?
The Step 3 roadmap outlines actions to improve cross-border payments and the authorities responsible for progress, with the CPMI owning/co-owning 11 of the 19 building blocks. The FSB, through the Cross-border Payments Coordination (CPC) Team, co-chaired by the Bank's Deputy Governor for Financial Stability and the Governor of the Reserve Bank of South Africa, coordinates all activities outlined in the Action Plan as appropriate and monitors and informs the G20 and public about the progress of the action plan.
Every year, the FSB presents a consolidated progress report to the G20. The first one waspublished October 2021. In October 2021, the FSB also published the seriesglobal quantitative targetsimproving the cost, speed, transparency and access to cross-border payments - endorsed by the G20. These objectives set the ambition for the work of the Action Plan and ensure accountability.
Since strengthening cross-border payments is a multidimensional task, close cooperation between jurisdictions and between the public and private sectors is required. In particular, the involvement of the private sector, sharing knowledge and practical experience to shape policy as well as achieve change, is crucial to support the practical implementation of the Action Plan.
What are we doing to help address friction in cross-border payments?
From the very beginning, we actively supported the G20 initiative to strengthen cross-border payments. In particular, we provided excellent support through the CPMI, chaired by the Bank's Deputy Chairman for Financial Stability (Sir Jon Cunliffe). And also through the CPMI Cross-Border Payments Working Group, which led the work of Phase 2 and is chaired by the Bank's Executive Director for Banking, Payments and Innovation (Victoria Cleland). Sir Jon Cunliffe and Victoria Cleland are currently Chairs and Vice Chairs of the Program Coordination Board, overseeing the work led by the CPMI to implement the Action Plan.
We are also committed to implementing the actions identified in the Stage 3 Action Plan and are actively participating in the international process of implementing the Action Plan. A complete improvement in cross-border payments can only be achieved through coordinated action, so we will continue to work with the UK public and private sectors as well as international actors to deliver on the actions set out in the Action Plan.
A refurbished model is already underway in the UKReal-time gross settlement service (RTGS).. These improvements will not only improve national payments but also provide the technical capacity to achieve some of the improvements included in the roadmap. We are also actively involved in researching the role of new innovations, such asCentral Bank digital currenciesin the financial system.
- Rowing together to increase cross-border payments - interview by Victoria Cleland
- CPMI Cross-Border Payments Program (bis.org)
- Working together to increase cross-border payments - speech by Victoria Cleland (November 2021)
- The New Dawn of Payments - Victoria Cleland Interview (June 2021)
- Cross-border payments - innovation in a changing world - interview by Victoria Cleland (October 2020)
- Article Bank Overground: What are we doing to help individuals and businesses make faster and cheaper cross-border payments? (September 2020)
- CPMI Video by Sir Jon Cunliffe (Chair of CPMI and Deputy Governor of the Bank of England): Strengthening Cross-Border Payments - Elements of a Global Action Plan (July 2020)
- Sir Jon Cunliffe in the Financial Times: Cross-border payment systems have been neglected for too long (July 2020)
For more information on the Bank's policy in relation to the G20 cross-border payments initiative, please contact the cross-border payments team:BPI-FOF-CBP-TEAM@bankofengland.co.uk.
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This page was last updated on January 31, 2023