Cash & Liquidity ManagementPaymentsMarket infrastructure providers, policymakers speed up work on cross-border real-time payments

Market infrastructure providers, policymakers speed up work on cross-border real-time payments

Interlinking domestic payment networks a possible avenue for real-time cross border payments

Market infrastructure providers are rushing to develop interlinkages between different domestic real-time payment systems, aiming to unlock cross-border flows.

Tracking the growing number of national real-time payment systems, various financial sector players are building cross-border networks to capitalise on those real-time capacities, speakers at the 2021 Sibos conference said on Tuesday.

“Interlinking domestic payment systems is a good solution to eventually find the ‘Holy Grail’ of cheap and fast international cross-border payments,” said Ulrich Bindseil, director-general at the European Central Bank (ECB).

There are several initiatives already in the works. Across the Nordics, the P27 initiative is looking to develop the first real-time payments network that will allow payments across five currencies. Similarly, the Swedish Riksbank is piloting a program with the ECB to allow for instant payments between Krona and Euros.

Earlier this week, a partnership between the European Banking Authority, SWIFT and The Clearing House tested the feasibility of linking a European and a US settlement system.

“We think that this is a model that is highly repeatable across instant systems which have these common characteristics of being 24/7 and ISO-based,” said Russ Waterhouse, executive vice president at The Clearing House.

Waterhouse added the common adoption of the ISO 20022 standard has made interoperability on a technical level much easier.

However, Marc Bayle de Jesse, CEO at CLS, warned that the real challenge in interlinking different payment systems will not come from technology but from a legal context.

“[Dealing with] two different jurisdictions is a complex mechanism that is beyond technical difficulties,” he said.

“Partnership is key here, and clear messages from the regulators will be very important in this context.

One of the biggest hurdles in creating a real-time cross-border payment system indeed stems from regulatory requirements, specifically those surrounding Anti-Money Laundering (AML), Combating the Financing of Terrorism (CFT) and sanction screening.

Bindseil said that even within the euro area, instant cross-border payments have a “significantly higher” rejection rate compared with domestic payments.

“Even in the EU, we have not achieved full harmonisation of AML and CFT compliance. On an international level, those things are much worse.”

Existing players better positioned for inter-linkage than Big Techs

Meanwhile, Waterhouse was skeptical of the value digital currencies would bring to cross-border real-time payment capabilities, since they would require banks to “re-plumb” if CBDCs were to use traditional banking infrastructure.

“When you think about the costs and the timeline that banks had to go through to do instant payments, you’d essentially have to do it again to create the separate payment form.”

Bindseil considers the discussion of CBDCs in cross-border payments more “remote”, given the fact most countries are still in the research or early experimental stages. He believes interlinking domestic real-time systems can provide a more immediate benefit.

“Because you are recycling the existing roles of those two players (banks and market infrastructures), you can come up with cost efficient achievements in cross-border payments.

He added this approach to be a good solution, especially in comparison to a Big-Tech-developed propriety network.

“[Interlinking market infrastructure] is a good solution compared to other approaches like a closed-loop solutions, where Big Techs would take over – which would lead to market fragmentation, market power and other drawbacks.”

Whitepapers & Resources

Transaction Banking Survey 2019

Transaction Banking Survey 2019

2y
TIS Sanction Screening Survey Report

Payments TIS Sanction Screening Survey Report

2y
Enhancing your strategic position: Digitalization in Treasury

Payments Enhancing your strategic position: Digitalization in Treasury

2y
Netting: An Immersive Guide to Global Reconciliation

Netting: An Immersive Guide to Global Reconciliation

3y