Sibos 2024: Achieving the G20’s cross-border payments goals – embracing a balanced approach

On my recent travels, I’ve found myself grappling with the simple yet irksome challenge of power adaptors.

How can the global financial industry ensure we meet the G20’s cross-border payments goals?

Each country boasts its own unique power socket design, reminiscent of distinct payments infrastructure. Increasingly though, many hotels have USB and USB-C ports built into the power sockets. Relief!

Perhaps I am stretching the analogy somewhat, but this tale of standardisation (or lack thereof) has many parallels to the payments world. Perhaps a single universal protocol isn’t realistic today, but we have G20 cross-border payments goals to meet. So, what are the paths ahead? Will interlinking win the day with adaptors and protocol improvements? Or are we overlooking lower hanging fruit on process standardisation? Let’s dig in.

Innovating cross-border payments

One of the higher profile G20 enhancement targets is speed, with the aim to process 75% of payments within one hour. As of March 2024, 89% of transactions on Swift reach beneficiary banks in under an hour. There is nuance, as this does not always mean funds immediately reach the end-customers’ accounts due to the need for additional checks, but this progress is encouraging. How does the global payments industry improve further?

If you dive deeper into certain corridors, a number of potential challenges around cross-border payments start to expose themselves. Thin liquidity and the potential limited reach of correspondent banks are two examples, but they are perhaps just symptoms. Underlying issues range from challenges in navigating exchange and currency controls as well as providers needing to balance the economic considerations of a direct presence in these corridors.

There are a variety of approaches to address these challenges and innovate. These range from fintechs cleverly stitching together RTP rails and operating on a “netting” basis, stablecoin adoption in certain markets, the payment facilitators themselves continuing to develop new tooling, and of course, innovation and direct intervention by central banks.

Much credit must go to central banks and the Bank of International Settlements (BIS) for leading many groundbreaking initiatives. Examples that come to mind are Project Nexus, Project mBridge, Project Agora and Project Mandala. Allow me to briefly elaborate on Nexus and mBridge, projects that HSBC has been participating in or closely tracking.

With Nexus, BIS and participating central banks have developed a blueprint and subsequent Proof-of-Concept (PoC) for multiple domestic instant payment systems (IPS) to be interlinked via a central “Nexus” platform. Instant payment system operators of different countries can connect with each other through a single connection, and the system design is expected to contribute to goals of improving speed, access, and transparency while reducing cost. The BIS Innovation Hub (Singapore) is now working with the central banks of Malaysia, the Philippines, Singapore, Thailand and India as they work towards the live implementation of Nexus, currently focused on establishing the critical foundations of a Scheme Organisation and Technical Operator.

A look into payments innovation is never complete without exploring distributed ledger technology (DLT). Since 2021, BIS Innovation Hub (Hong Kong) has been collaborating with the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Institute of the People’s Bank of China and the Hong Kong Monetary Authority to explore a multi-central bank digital currency (CBDC) platform, focused on the wholesale side.

Leveraging the CBDC systems of participating countries, Project mBridge aims to develop a scalable and interoperable cross-border payment system with CBDCs. Having developed this base, further work to enhance efficiency and transparency of cross-border payments will be tested via Project Rialto. Rialto aims to use a modular foreign exchange (FX) component combined with settlement in wholesale central bank digital currencies (wCBDC) to streamline FX settlement, a key component of cross-border payment.

It’s exciting times with many projects underway. It can also be envisaged that these projects may eventually synergise, such as mBridge potentially supporting settlement flows of interlinking schemes like Nexus.

Beyond new technology

BIS has brought together many central banks to focus on solving cross-border payment challenges, leveraging their position as the “central bank of central banks”, coordinating multiple countries to drive forward the future of payments. The effort in getting many countries to collaborate cannot be underestimated, with the achievement of Project Nexus as a proof point both of BIS’s leadership in this space and also a culmination of many years of ASEAN diplomacy.

However, while technology is enabling great progress, there remain hard yards to be gained, such as regulatory harmonisation, particularly on compliance guidelines and a supporting legal framework, but also in other technical areas such as limit synchronisation. Nonetheless, the hard-earned foundation that has been set with these large-scale projects can also be leveraged to shine more light on process improvement opportunities.

Process innovation

Sitting in Asia, it is clear to me that challenges to achieving the G20’s goals remain. Especially in this region, many of these challenges stem from exchange or capital controls, which necessitate additional checks. These are important for central banks to understand the nature and purpose of payments entering and leaving their borders, record such transactions, and also detect fraud. However, the consistency of interpreting these guidelines among banks and other licensed payments providers leaves much to be desired. There are no shortage of examples, but perhaps the best ones are differing levels of due diligence required on supporting documents in markets that practice exchange controls, or varying interpretations on whether cross-border originated transactions terminating in domestic instant payment schemes are permissible.

It is these examples which cause significant friction, delayed and returned payments, and ultimately unhappy end users of payment systems. As such, more focus on process harmonisation is needed. We are very encouraged that Project Mandala recognises this and is adopting an innovative approach of utilising tokenisation and zero-knowledge-proofs (ZKPs) to address this. We would argue to supplement this with an attempt to streamline some of the root causes of these issues. Innovation can be many things, including collaborating on simplification.

Many of the ground-breaking projects highlighted earlier will take time to mature and build network effects, thus their direct benefits and contribution to the G20 goals may remain limited in the near-term. So let’s balance this out by attempting to tackle some of the deeper-rooted process inconsistencies which could positively impact the broader ecosystem.

After all, as I was reminded by an old industry hand at a ‘payments leader’ thought exchange in Mumbai earlier this year, block four (of the 19 G20 building blocks to enhance cross-border payments) is indeed focused on regulatory harmonisation. Who else wants to pick this up and run with it? After all, payments is a team sport!