Cross-border payments amount to trillions of dollars each year. A study by the Board of Governors of the Federal Reserve System finds that end users and financial service providers consider cross-border payments to be costly and cumbersome, but that the incentives to develop faster and lower cost systems do not exist.
1. Domestic infrastructures are not designed to handle cross-border payments
Over the past few decades, many countries have established both high and low value payment systems that are based on proprietary communication and security standards. As a result of largely independent development, there is a lack of standardization and automation in inter-bank and intra-bank networks. This adversely affects banks and businesses alike and results often in manual intervention to collect and repair data.
Major banks with subsidiaries, branches and associated banks in many countries may move funds to a destination country by an intra-bank transaction. The beneficiary is either credited directly where it has an account with the foreign operation or the payment is sent to the beneficiary’s bank via a bilateral transfer, or a national clearing and settlement system. A report by the European Central Bank, however, finds this method to be the most costly and inefficient due to the use of non-standard customer interfaces, incompatible formats between domestic and foreign banks, and the low degree of automation in banks’ internal systems.
For example, the United States has dozens of siloed and underutilized payment infrastructures, often competing with one another for volumes. With more than 60 distinct clearing and settlement entities (down from several hundred), a major U.S. bank may operate dozens of largely redundant payments operations and technology platforms, each with its own dedicated applications, staffs, rules, and business processes.
2. Lack of common message standards
Businesses also face the challenge of removing paper and manual processes by introducing straight-through processing (STP) as much as possible. This requires payment instructions to be generated electronically as part of the business process, passed securely, efficiently and cost-effectively to their banks, and matched and reconciled automatically via a universal reference number within invoicing, accounts payable, accounts receivable and other systems. However, according to a recent wire transfer survey only 15 percent of respondents report that their wires always come with sufficient remittance information (for example, customer account number and invoice number, to apply the payment correctly). The typical business must research 17 percent of the wires that it receives at the average cost of $35 per wire and 30 minutes of time. Resistance to the adoption of standards arises from the large costs associated with enhancing internal systems and procedures relative to the small volume of international payments. Unlike domestic standards, cross-border message standards have to support multiple domestic rules and regulations before they can be adopted within a market. In addition the value of a standard is realized only when the specification is widely accepted. As a result, banks may be reluctant to make sizable investments to support such standards if they are uncertain that other banks are making similar investments to upgrade their systems.
3. Impact of regulatory requirements
The complex governance structures of these disparate payment systems — some public, some private, some operated as industry associations — only add to the challenge. Achieving coordinated change at an industry level is nearly impossible without government mandates. However, when government mandates occur, they tend to focus more on responding to crises (or preventing crises) than on promoting efficiency. The Patriot Act, Know Your Customer (KYC), Basel II, Sarbanes-Oxley, and Federal Financial Institutions Examination Council (FFIEC) rules governing credit card business practices — to name just a few recent regulations — have cost billions of dollars for banks, but produce little, if any, incremental revenues.
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