Two rising technologies, faster payments and cross-border payments, are coalescing as more countries lay foundations to make such transactions possible. Experts say the U.S. is on a path to becoming one of them.
By Colleen Morrison
As adoption of digital payments grows, the world economy opens for consumers and businesses alike. Global ecommerce sites are making it easier than ever to buy on an international scale, and as a result, boundaryless digital payments in the form of cross-border transactions continue to climb.
“If we look at what happened during the pandemic, it really fueled the adoption of digital payments, and this includes cross-border payments.”
—Nasreen Quibria, ICBA
In fact, Amazon reported that more than one-quarter of its 2019 total consolidated net revenue, $74.7 billion, came from international channels. And analysts predict that all types of global payments will continue on this trajectory; worldwide digital remittances are anticipated to jump by 22% in transaction value and 18% in users this year.
“If we look at what happened during the pandemic, it really fueled the adoption of digital payments, and this includes cross-border payments,” says Nasreen Quibria, ICBA’s vice president of emerging payments and technology policy. “Although there were job losses that rose among immigrants, there was even more demand to send back money to families overseas and an urgency to get that money into the hands of those experiencing economic hardship.”
That sense of urgency fuels a desire for more instant global payments. Small and medium businesses have reported increased demand for faster payments, with 91% expressing interest in real-time settlement and 42% indicating they would switch financial providers to have it, according to a 2020 report from Visa and PYMNTS.com. Consumers have already shown a strong use of instant payments, with 42% indicating they had received at least one instant disbursement in 2019, up from 11% in 2017, according to PYMNTS.com.
A global effort
With rising interest in real-time payments, the need for faster cross-border transactions may be reaching a tipping point. The current correspondent banking model, which involves a series of intermediaries and transitions of the payment, can be slow and create a clunky customer experience. In today’s landscape, consumers and businesses seek more streamlined encounters. This means they increasingly have turned to nonbank payment providers to facilitate global transactions.
In fact, 83% of companies report having made cross-border payments in 2019, according to a Levvel Research study commissioned by Tipalti, a global payables automation solutions provider based in San Mateo, Calif. While wires still lead global transactions at 69%, PayPal payments came in second, accounting for 38% of the total.
Beyond demand, the correspondent banking model itself may be reaching a breaking point. While global transactions grow, the number of correspondent banks has been on the decline (see Snapshot, right). The rise in global payment transactions, combined with the deterioration of available institutions to process them, creates a bottleneck that has the potential to increase friction.
To address these issues, the Financial Stability Board (FSB), Committee on Payments and Market Infrastructures (CPMI) and other global organizations worked together to issue a three-stage roadmap that outlines a path to address global payments challenges, including the imperative for faster payments. An opinion editorial published in the Financial Times by CPMI chair Jon Cunliffe signaled the group’s focus on moving global payments at a faster rate: “It can still take as long as 10 days to transfer money to different jurisdictions. … For decades, they have been the forgotten corner of the global financial plumbing … Fixing the plumbing matters.” In the U.S., the Federal Reserve has committed to this initiative and to “assessing potential opportunities and implications for the United States and the industry.”
In lockstep with these initiatives comes the rise of global real-time payments systems with the potential for interoperability. The number of countries with real-time payments networks is now 56, up from 14 in 2014, and each of these systems has been built with global payments as a chief consideration, according to a recent FIS report.
“The real-time platforms that have been established around the globe are all being built on the de facto global standard ISO 20022,” Quibria says. “The different markets have made a concerted effort to mitigate localization.”
Domestic instant payments initiatives
For its part, when the U.S. began exploring its own real-time systems, the Faster Payments Task Force ranked global interoperability as a chief factor in establishing the instant infrastructure. The task force’s effectiveness criteria, originally published in January 2016, specifically pointed to “better choices for U.S. consumers and businesses to send and receive convenient, cost-effective and timely cross-border payments” as a desired outcome.
Yet, at this stage, the Federal Reserve has not announced plans around global payments for its real-time payments system FedNow. The Clearing House, while having noted the importance of cross-border payments, has also not clarified specifics around global transactions on its RTP Network. However, both entities have mentioned building on the ISO 20022 standard with an eye toward future developments.
“It’s really critical to get the foundational elements right,” Quibria says. “Both The Clearing House and the Federal Reserve want to ensure these new payment market infrastructures work domestically before they expand globally. Ultimately, The Clearing House’s real-time payments solution will enable cross-border payments, and we can assume the Federal Reserve is positioning itself to do the same in the future.”
Different paths to take
With the complexity of faster cross-border payments, experts do not anticipate a silver bullet solution. Rather, they expect that these hurdles will be addressed by a multitude of options. Beyond facilitating more straightforward, transparent and expedient transactions through existing and in-development systems, industry leaders have also begun to explore the concept of blockchain technology for creating a new method of exchanging value between geographies. In fact, the FSB roadmap specifically calls out “exploring the potential role of new payment infrastructures and arrangements,” which Cunliffe referenced to include “more innovative developments, such as central bank digital currencies and global ‘stablecoins,’ backed by some reserve asset.” (Stablecoins refers to the idea of a cryptocurrency backed by assets, such as currencies or commodities.)
Regardless of the specifics around the implementation, the industry collectively feels that a movement toward a faster, more efficient cross-border payments infrastructure has risen to a level of necessity. Much more work lies ahead, but the world market has begun aligning on priorities, so a stronger system seems to be in the cards.
“I have no doubt that we will get to a place where we have global real-time payments,” says Reed Luhtanen, executive director of the U.S. Faster Payments Council. “I have no question in my mind that we’re going to get there eventually, but there’s no singular answer to how.”
Building an industry consensus on faster global payments
While work continues on the domestic infrastructure, industry groups have begun the drive toward global faster payments.
The U.S. Faster Payments Council (FPC) launched a cross-border work group to identify what is needed to align the operating policies and requirements of the currently disparate local faster payments systems. The group recently issued a white paper that dives into user-experience issues as well as interoperability challenges that need to be addressed to deliver a faster cross-border payments system. “Our cross-border working group is opening the aperture a bit and helping everyone get an understanding of what are the issues, what are some different potential approaches and ideas that could resolve some of the different nuances and complications that arise with cross-border,” says Reed Luhtanen, the FPC’s executive director.
Luhtanen encourages community banks to be intentional about getting up to speed on the state of faster global payments and to help shape what is to come.
“It’s critical to get the information that’s at the forefront of thought,” he says. “Community banks are a critical group of stakeholders in this discussion and dialogue and [are] a voice that needs to be heard by technology providers, networks and large financial institutions who sometimes are also providers of services.”
Colleen Morrison is a writer in Maryland.