Cross-border payments are laden with challenges. Compliance, regulatory, and tax nuances are coupled with pricing complexity, cultural barriers, and fraud. As global instant-payment transaction volumes look to eclipse the 75 billion mark in 2023, it is critical that domestic rails look for ways to integrate with their foreign counterparts. There are more than 60 instant-payment networks worldwide, and few of them communicate seamlessly. Indeed, in the United States there are no published plans for even the two domestic rails, FedNow and RTP, to interoperate.
A Step in the Right Direction
The private sector has hit the market with cross-border solutions, and this is a vital step toward solving the puzzle of international payments, but the solutions, in some cases, may be closed-loop and/or may circumvent the primary instant-payment highways. Nations in the instant-payment game should take note of the memorandum of understanding on Cooperation in Regional Payment Connectivity that was signed between the central banks of Malaysia, Indonesia, Thailand, Philippines, and Singapore. Through this agreement, the ASEAN 5 countries—the Association of Southeast Asian Nations—will seek to connect their instant-payment rails through the Bank of International Settlement’s Nexus Project. The ASEAN 5 approach, at least on paper, is a model for the type of communication that should occur between influential countries in cross-border payments, at least regionally if not globally. As The Central Bank of the Philippines Governor Felipe M. Medalla stated in a recent seminar, as quoted by Business World, “Our vision is to be one with the ASEAN 5 to have cross-border payments.”
We will have to see how things progress as we get beyond the back-slapping phase and the real work of integration begins. We are still waiting for the Single Euro Payments Area (SEPA) to deliver on its promise of providing faster payments across the EU, and central banks, particularly those in the West, are not well known for sharing.
Are Real-Time Payments Really Real?
It is worth mentioning that nobody is exactly sure what the impact of instant payments will be. Will denizens of the RTP world be limited to DoorDash and Uber drivers looking for their instant fare and tip fix for the day, or will RTP truly become a meaningful new rail in the major payments landscape? Despite having the world’s largest economy, the United States ranks eighth, behind Nigeria and Thailand, in RTP volume overall and 33rd in transaction volume per capita, according to a finding by ACI Worldwide.
How will banks and card schemes react? Non-interest-bearing instruments are becoming more important each year for banks as loan revenues get squeezed, and ACH and wire fees are a significant source of those income streams. How will the banks position instant payments alongside those legacy rails? The card schemes have an ideal environment for providing global connectivity, but will they welcome the competition of another payment type?
Governments Must Lead
The gig economy is global, laptops have more range than battleships, and Greta in Germany wants to send her grandson in the United States a $20 birthday gift, now. The first step in building a globally interoperable instant-payments highway is for the leaders of the central banks to exercise a bit more outreach. Nobody is under the impression that a worldwide network is a short-term pursuit, but regional plays, like Nexus, are certainly achievable in the next three to five years. Watch this space because central banks, while protective of their sandboxes, do not like to get outdone in the press. Let us see if other regions can match the ASEAN 5 announcement. Those countries are not connecting routers just yet, but the outreach and putting pen to paper is a good first step.
Overview by Albert Bodine, Director of Commercial and Enterprise Payments at Javelin Strategy & Research.
