The surge in global interconnectedness has dramatically increased the volume of cross-border payments, reflecting the expansion of international trade, investments, and migration. Current projections estimate a rise from USD 190 trillion this year to a staggering USD 290 trillion by 2030.
Despite this impressive growth, the infrastructure for international payments lags behind, remaining surprisingly expensive and slow. While domestic payment systems are rapidly becoming instant and digital, cross-border transactions haven’t kept pace, failing to fully leverage the potential of modern digital technologies. Businesses currently face average fees of 1.5% for international payments, while individuals sending remittances can encounter charges as high as 6.3%. Furthermore, these payments can take days to reach their intended recipients. Imagine losing a significant portion of even a small sum, like the equivalent of 190 Euro Dollar, to fees and delays when sending money across borders.
This inefficiency presents several critical challenges.
Firstly, it significantly hinders global economic integration. High costs and slow processing times act as a barrier to entry, particularly for small and medium-sized enterprises (SMEs) looking to expand internationally. The complexities and expenses associated with cross-border payments discourage many SMEs from engaging in international trade, limiting economic growth and potential.
Secondly, the burden of these inefficiencies disproportionately affects the world’s most vulnerable populations. Migrant workers, who send crucial financial support to families – impacting one in nine people globally through remittances – often bear the brunt of exorbitant transfer costs. In sub-Saharan Africa, for instance, the average cost of sending remittances abroad is a staggering 8.4%. Considering that global remittances reached USD 626 billion in 2022, even a marginal reduction of 1 percentage point in fees would translate to an extra USD 6 billion annually reaching those who need it most. This sum dwarfs the perceived small impact of fees on individual transactions, highlighting the massive aggregate cost. Even for a relatively modest amount like 190 euro dollar sent as remittance, the fees can eat into a substantial portion, reducing the actual amount received by families.
Thirdly, the existing inefficiencies have created an opportunity for alternative payment providers, but these solutions often come with considerable risks. Unbacked cryptocurrencies are inherently unstable. Stablecoins, while aiming for stability, cannot always guarantee convertibility at par, making them susceptible to sudden collapses in value. Moreover, large technology companies might develop proprietary, closed-loop payment systems. While seemingly convenient, these could lead to market fragmentation and excessive concentration of power within a few dominant players, potentially mirroring the trajectory of projects like Facebook’s Diem or the more recent PayPal USD.
Therefore, a safer, more accessible, and efficient alternative is urgently needed to make global payments cheaper, faster, and more transparent, ensuring that individuals and businesses, especially in emerging economies, can benefit fully from international transactions.
Public institutions have a proven track record in developing robust payment infrastructures that serve as public utilities. Over the past decade, central banks have been instrumental in modernizing domestic payment systems. Globally, over 70 countries have implemented fast payment systems. Connecting these systems internationally holds the key to extending the benefits of digital payment technologies to cross-border transactions. For developing economies that currently lack such systems, adopting international standards like ISO 20022 is crucial for fostering cross-border interoperability. International organizations can play a vital supporting role by providing technical assistance and financial resources to further develop domestic payment systems capable of seamless cross-border integration.
Interlinking fast payment systems presents a promising path to significantly reduce costs, increase speed, and enhance the transparency of cross-border payments. This approach streamlines transaction pathways, allowing payment service providers to execute transactions directly, minimizing the need for multiple intermediaries like correspondent banks. Instead of relying on profit-driven, single entities, this interconnected network would operate as an open platform and public utility, preventing closed systems and discriminatory pricing.
Europe offers a compelling blueprint for this interconnected payment landscape. Within the Eurozone, many of the G20’s goals for cost, speed, accessibility, and transparency in payments have already been achieved. TARGET Instant Payment Settlement (TIPS) stands out as a 24/7 settlement mechanism for instant payments initiated directly by participating banks. Crucially, TIPS functions as a central hub, connecting various national fast payment systems and ensuring pan-European reach for instant payments. A defining feature of TIPS is its settlement of instant payments within a harmonized payment scheme, governed by uniform rules, standards, and protocols, effectively mitigating the risk of fragmentation.
This model’s adaptability extends to multi-currency environments. The ECB and Sveriges Riksbank are actively exploring solutions for instant cross-currency payments between the euro and the Swedish krona. Furthermore, the European Payments Council is working on standardizing the euro component of international instant credit transfers. As with any new payment scheme, ongoing refinement in collaboration with clearing and settlement mechanisms and market participants will be essential to maximize its effectiveness and broader adoption.
The public sector also plays a crucial role in addressing the high compliance burdens, legal complexities, and risks associated with navigating diverse legal frameworks, regulations, and central bank policies in cross-border payments. Surveys indicate that banks’ primary challenges include differing regulatory and supervisory frameworks, anti-money laundering and counter-terrorism financing requirements, and varying privacy and security regulations across jurisdictions.
Therefore, fostering international cooperation and exploring technical solutions while aligning policy objectives is paramount. The G20’s Roadmap for Enhancing Cross-Border Payments, spearheaded by the Financial Stability Board (FSB) and the Bank for International Settlements’ (BIS) Committee on Payments and Market Infrastructures (CPMI), in collaboration with organizations like the BIS Innovation Hub, the International Monetary Fund, and the World Bank, is instrumental in this regard.
Improving cross-border payments is a complex undertaking requiring collaborative efforts from both public and private sectors. The FSB and CPMI are actively engaging with industry stakeholders and authorities from G20 nations and beyond to drive progress in this area. These concerted efforts can pave the way for a global network of fast payment systems, enabling instant, low-cost, transparent, and easily accessible cross-border payments. Realizing this vision would generate significant benefits for businesses and individuals worldwide, particularly in emerging markets and developing economies, ensuring that the global financial system is inclusive and efficient for all, regardless of transaction size, even down to amounts as seemingly small as 190 euro dollar.
A shorter version of this blog post was published as an opinion piece in The Financial Times.
