Changing Landscape of Cross-Border Payments
Present Scenario
In an interconnected world like ours, cross-border payments play a crucial role in enabling the exchange of resources among countries. In 2020 alone, the total value of cross-border payments worldwide stood at $136.7 trillion, which is 161% of the world GDP. For the past few decades, such a lucrative and crucial industry has been dominated by SWIFT (Society for Worldwide Interbank Financial Telecommunication), a Belgian cooperative society. It is estimated that about 90% of the transactions pass through SWIFT. Contrary to widespread belief, SWIFT is not a payment platform; rather, it is a messaging platform which enables financial institutions to communicate securely and reliably. SWIFT is used by over 11,000 financial institutions in 200 countries, which communicate with each other at a rate of 42 million times a day.
Issues
Despite its global hegemony, SWIFT has not been able to address several challenges that the industry faces. Cross-border payments are ridden with issues like high transaction costs, low speeds, limited access and insufficient transparency. The recent exclusion of Russia from the global payments network after SWIFT sanctions by the United States and European Union serves as a good example of limited access. To address these gaps, many startups, companies and institutions are trying to disrupt the space with the adoption of emerging technologies.
Emerging Technologies
One such technology is blockchain. Startups like Ripple, Mercuryo, Liink, Celo and more are attempting to disrupt the space by leveraging the features of cryptocurrencies. Using blockchain can enable a 40–80% reduction in transaction costs, near real-time speeds, high accessibility, and security. As of 2020, the total B2B cross-border transactions on blockchain stand at $122.2 million, which is a small portion of the total value of global cross-border payments, but it is estimated to grow at a CAGR of 70.6% over the next five years.
Another technology gaining traction is the Unified Payment Interface (UPI). UPI has seen tremendous success in domestic payments, and its benefits can be extended to cross-border payments through partnerships among countries. In the Indian domestic market alone, the total value of transactions through UPI accounts for about Rs 41 trillion in 2021 and is expected to grow at a CAGR of 67% in the next five years. UPI provides the benefit of 24*7 availability, near real-time transaction speeds, reduced costs, and process simplification as only the linked mobile number is required. Owing to its success in domestic payments, India recently announced a partnership with Singapore, Thailand, the Arab Monetary Fund (AMF), and other countries to enable cross-border payments through BHIM UPI.
A slightly futuristic view of cross-border payments is the use of Central Bank Digital Currencies (CBDCs) for it. There are nine countries which have already launched a CBDC, and globally more than two-thirds of central banks are in the process of launching their CBDCs in the near future. Though most CBDCs are focused on domestic payments, some central banks are working together to use CBDCs for cross-border transfers, which might help address many of the gaps in the existing system. Adoption of CBDCs for cross-border payments is an option which the G20 is seriously considering, and since India is assuming the presidency of G20 presidency in 2023, it has a crucial role to play in the process. To test the feasibility, the monetary authority of Singapore and the bank of Canada under project Jasper-Ubin tried to link up their experimental wholesale CBDC networks and were successful.
Emerging Trend
One interesting trend in the domain is that countries from a continent or region are coming together to build cross-border payment networks, similar to that of SEPA, to address existing issues in cross-border payments. SEPA is an instant credit transfer system which provides cross-border payment facilities in over 20 countries in Europe. This trend is being observed in Asia, which is already home to numerous successful payment startups. Given that technology like API and QR codes have thrived in the domestic markets of Asian countries, governments are in talks to extend the success of these technologies to build an open and seamless cross-border infrastructure. A similar pattern can also be seen in Africa, where six countries have joined forces to revolutionize cross-border payments on the entire continent. They plan to do so using a platform named Pan-African Payment and Settlement System (PAPSS), pioneered by African Export-Import Bank.
Conclusion
There are many financial institutions betting on different technologies, and it is interesting to notice these changes in the global cross-border payment industry. Though it is not clear as to which technology or platform will dominate the cross-border payments industry in the future, it is certain that the space is up for disruption.
(Disclaimer: The author is Business Consulting Intern in the Banking, Financial Services, and Insurance domain at Tata Consultancy Services Ltd.)
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