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The role of wholesale transactions in transforming cross-border payments

Significant change is needed to establish a truly friction-free, real-time cross-border payments system and over the last few years, there have been considerable advances toward achieving this ambition. Last year, the G20 prioritised improvement in cross-border payments in recognition of the incredible benefit this will bring to people and governments all over the world. But while the industry’s focus remains on retail transactions, wholesale inter-bank cross-border payments have fallen behind – despite their crucial role in underpinning such rapid transfers. While this important part of the equation continues to be forgotten, cost of transactions will remain high and speed will be inhibited. To see a true transformation in cross-border payments – including in the retail sector – the industry must now place its focus and energy on the wholesale market.

Technology has increasingly been providing financial institutions with solutions to enable frictionless payments to happen in real-time. Such transactions cut the cost and bureaucracy for all concerned. Not surprisingly, the first area to benefit from the technological revolution in banking was domestic transactions.

Central banks have implemented more efficient ways of moving money around in their own jurisdictions, whether for consumer and small business transactions, or large value commercial transfers, both of which often operate on the Real-Time Gross Settlement model.  There are approximately 60 faster payment solutions using real-time gross settlement operating in different jurisdictions around the world today. This number compares favourably with the mere handful which existed as recently as 10 years ago. It’s now becoming relatively simple to instantaneously trade, settle and transfer funds in a single currency transaction in real time. 

Removing the barriers which hamper cross-border inter-bank transactions taking place in real time is proving a tougher nut to crack, however. The FSB’s report to the G20 identified seven major sources of friction in cross-border trading, including funding costs, complex processing of compliance checks, and the limitations caused by legacy technology platforms. These frictions conspire to inhibit current cross border payments by making them undesirably high cost and low speed, whilst limiting systems’ access and transparency.

Efforts are already underway to address these challenges: The Bank for International Settlements (BIS)’ Innovation Hub, for example, is working with domestic payments systems operators, their member banks and service providers to link countries with existing instant payment transfer systems. The resulting model being developed, “Project Nexus”, will enable seamless cross-border transfer of funds in real time.

Meanwhile, organisations like are launching a bilateral atomic settlement solution for cross-border wholesale transactions, which leverages cloud, a global private infrastructure and streaming technologies to enable instant bilateral settlement without a financial intermediary in the flow of funds. Bilateral atomic Settlement will make it feasible for banks in separate jurisdictions, using different currencies, to complete a bilateral wholesale transaction in the fast, transparent and seamless manner the G20 identified as the aspirational standard for modern cross-border banking transactions to aim for. Bilateral atomic settlement also specifically addresses one of the building blocks (No. 9) identified in the G20 / FSB report: increased adoption of Payment vs. Payment (PvP) to reduce settlement risk.

If change is inevitable, then the banking industry should, and must, embrace it, by adapting how its infrastructure, systems and communications work, in accordance with the G20’s imperative to prioritise cross border payments. Accepting this need doesn’t necessarily mean consenting to a root and branch upheaval of the entire banking system, however, or the abandonment of regulatory systems which have served the industry well for many years. Regulatory authorities in many jurisdictions – including those in the UK – have demonstrated a proactive and strategic mindset toward evolving their regulatory contexts to accommodate innovations in technology and to embrace innovative business models, such as those being seeded pioneered by the BIS Innovation Hub. The industry is ready for change. But change doesn’t have to involve widescale abandonment of what we already have.

In fact, when it comes to innovation, fintechs and other would-be disruptors of normative practice don’t need to adopt a “move fast and break things” mindset, or work to a default approach that dispenses with the prevailing regulatory frameworks. Many of the well-established norms that have served this industry for decades, such as, for instance, transacting in fiat currency, don’t need to be fast-tracked into obsolescence.

We are finally at a tipping point. At long last, we have the technology needed to offer a solution to the challenges that have for so long inhibited the wholesale value chain, to enact the required change. What’s more, that change can be incremental – in line with the existing regulatory frameworks – without requiring huge disruption. The dream of frictionless wholesale cross-border payments can finally become reality – now it’s up to banks to embrace this new change and realise a better system for all.Photo by Pietro Jeng on Unsplash



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