Cross-border payments are riddled with complexity and lack the regulatory framework and standards to ensure the instant, seamless performance and competitively priced offerings that today’s banking customers have come to expect.

Ripe for a revolution, it’s attracting numerous new ‘disruptive’ players and, as the market becomes increasingly crowded, the question is who will be best placed to solve current issues and build confidence? And does the answer lie with central banks?

Where are current solutions falling down?

The majority of today’s cross-border settlement relies on Correspondent Banking agreements to provide ‘local accounts’ that allow funds to be transferred between parties in different countries.

While this model provides a solid mechanism to move money, there are a number of shortcomings that fail to meet customer expectations. These include lack of transparency, longer processing times and high costs due to the involvement of multiple parties and trapped liquidity. At the same time, increased KYC, AML and financial crimes requirements have added even heavier financial burdens and greater liability.

The introduction of SWIFT gpi enhanced messaging has gone some way to helping this. Adopted by more than 3,500 banks, 50% of all cross-border payments now use SWIFT to reduce processing times, while providing full visibility of fees and charges. However, it comes at quite an expense and still doesn’t remove risk or eliminate the cost of trapped liquidity.

A fragmenting market

The absence of a near-term central bank solution to create faster, cheaper, better cross border models has undoubtedly created a gap for non-Central Bank organisations to enter the cross-border space.

It’s clear that there are now many banking and non-banking players ready to use their own blockchain solutions to facilitate cross border settlement. This includes JPMorgan’s JPM Coin and Facebook’s Libra Coin who aim to build on their own global reach and brand recognition, with low-volatility digital assets.

With so much ‘arm-wrestling’, it’s hard for banks and users alike, to know which technology or service to trust.  But some progressive central banks are waking up to these issues and starting to take up the mantle.

Can Central Banks up their cross-border game?

In 2017, central banks in Canada and Singapore successfully developed prototypes that explored the use of  DLT and Wholesale Central Bank Digital Currency (W-CBDC) - a form of money that is limited to commercial banks and settlement organisations that make up the interbank market - to deliver domestic Real Time Gross Settlement (RTGS). In 2019, these trials succeeded in using blockchain to settle cross-border transactions.

This is the opportunity for central banks.

Central banks could potentially take the lead by being able to move beyond close looped, proprietary digital assets to develop more less volatile digital currencies ‘pegged’ to national flat currencies. The Bank for International Settlements (BIS), recently acknowledged that central banks will soon need to issue their own digital currencies and is supporting global central banks’ efforts to this end.

Vision beyond technology

Whether the issues around cross-border payments are solved by central banks, commercial banks, or new entrants, it’s likely that new cross-border projects and payment rails will start to cannibalise existing correspondent banking business and margins.

Even so, increasing international commerce, greater migration and an ever-changing global economy, means cross-border payments will, for the short term, remain a solid revenue source. And, with forecasts predicting a 6% growth and a market value of $30 trillion by 2022,[i] competition in this space is likely to rise as financial service providers look to broaden and extend their customer-facing services. 

The most successful players will be those that can harness innovative digital offerings to deliver cheaper, faster and safer cross-border payments while also presenting a stable, and critically viable, go-to-market strategy to support it within the broadening financial ecosystem.

That means being able to build customer confidence at local and international levels. This takes more than technology, it takes trust. With their financial reputation and ‘open’ approach, central banks are well placed to build the collaborative and cohesive digital assets and infrastructure that could solve the cross-border conundrum once and for all.

[i] Accenture, 2018