Enhancing Cross-border Payments: Stage 1 report to the G20

Enhancing Cross-border Payments

Stage 1 report to the G20

9 April 2020

The Financial Stability Board (FSB) coordinates at the international level the work of national

financial authorities and international standard-setting bodies in order to develop and promote

the implementation of effective regulatory, supervisory and other financial sector policies. Its

mandate is set out in the FSB Charter, which governs the policymaking and related activities of

the FSB. These activities, including any decisions reached in their context, shall not be binding

or give rise to any legal rights or obligations under the FSB’s Articles of Association.

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Enhancing Cross-border Payments

Stage 1 assessment report to the G20

The G20 has made enhancing cross-border payments a priority during the Saudi Arabian

Presidency. Faster, cheaper, more transparent and more inclusive cross-border payment

services, including remittances, would have widespread benefits for citizens and economies

worldwide, supporting economic growth, international trade, global development and financial

inclusion.

Cross-border payments are often perceived to face challenges of high costs, low speed,

limited access and insufficient transparency. The challenges with cross-border payments

affect end-users and service providers, but they do not affect all in the same way. Individuals

and small companies face particular challenges with retail cross-border payments, and financial

inclusion remains a challenge for many. Low-value payments may incur high fees as a

percentage of the amount sent and face cumbersome processes. The unbanked and individuals

and firms from fragile states are amongst those who may not be able to access payment services

at all.

Enhancing cross-border payments requires addressing frictions in existing cross-border

payment processes. These frictions include: fragmented data standards or lack of

interoperability; complexities in meeting compliance requirements, including for anti-money

laundering and countering the financing of terrorism (AML/CFT), and data protection

purposes; different operating hours across different time zones; and outdated legacy technology

platforms.

Additionally, the frictions increase the need for intermediaries involved in cross-

border payments to hold precautionary funding – often in multiple currencies. Furthermore,

depending on the country corridor and payment process, the length of the transaction chain can

add to costs and delays. These frictions create cost barriers to entry that may weaken

competition in providing cross-border payments services.

A number of public sector initiatives have sought to address these challenges and frictions

by enhancing existing payment arrangements. On the retail side, the G20 and UN have set

targets to reduce the cost of sending international remittances and launched workstreams to

achieve this. On the wholesale side, central banks have undertaken interlinking projects

between individual national payment systems or, for instance in the case of the euro, established

a regional payment system. The FSB has undertaken action plans to address the decline in

correspondent banking relationships and remittance firms’ access to banking services.

Financial innovation is creating opportunities to make payments more efficient.

Innovation in technology and business models in payments has put the focus on further

enhancements in payments systems. New technologies have the potential to facilitate fast, low

cost, transparent and scalable payments for a broad range of users through the banking system.

This list of frictions is broadly consistent with those identified by market participants via outreach through the CPMI Cross-

border Payments Task Force.

And the use of internet-based infrastructures for payments has created opportunities for new

business models and for new providers including nonbanks to offer payment services.

Technological innovation could build on existing cross-border and domestic payment

arrangements or take the form of new structures and ecosystems. There is a range of

identifiable improvements to current correspondent banking and other cross-border payment

arrangements that are in train or could be implemented.

The use of new technologies and business models in cross-border payments also involves

challenges and risks. Innovation in the provision of financial services should always be

accompanied by measures to address all relevant risks and to ensure that proper consumer

protection is in place. To address this requires a detailed analysis of the operational soundness

of solutions (including to promote interoperability of payment systems), legal certainty and

consistency (including issues related to legal enforceability in a cross-border context and

avoiding jurisdictional conflicts) and whether additional regulation and oversight is needed

(including to ensure meeting AML/CFT requirements and addressing financial stability risks).

For instance, recent private sector proposals to create so-called “stablecoins” for payment

purposes have highlighted the possibility of new digital payments gaining scale quickly,

potentially globally. Therefore, these mechanisms raise questions which are being examined by

the FSB and the public sector more broadly about how to ensure appropriate regulation,

supervision and oversight, but also wider macroeconomic and monetary policy issues. The FSB

is publishing this month a consultation paper on financial regulatory issues associated with

these mechanisms.

Public authorities have an important role to play, working with the private sector to

leverage opportunities and address challenges. As regulators, supervisors and overseers,

public authorities seek to achieve the public policy goals of cross-border payment services

safety and efficiency, through consistent implementation of international standards; however,

they face challenges with cross-border access to information and international coordination in

the regulation and supervision of the various entities in the cross-border payments ecosystem.

As operators of payment infrastructures, central banks provide services primarily designed to

settle transactions between domestic participants in their home currency; as they evaluate how

to modernise systems or improve payments processes in their jurisdiction, they also need to

consider how to address challenges associated with cross-border and cross-currency payments.

As catalysts and facilitators of improvements by the private sector, public authorities can

encourage interoperability of private sector improvements to payment systems.

The Saudi Arabian G20 Presidency has asked the FSB to coordinate amongst the relevant

stakeholders on a three-stage process to develop a roadmap to enhance cross-border

payments:

• Assessment (Stage 1): The FSB, in coordination with relevant international

organisations and standard-setting bodies has considered the existing practice of cross-

border payment arrangements through conducting an assessment of existing

arrangements and challenges, and accordingly is providing this update to the G20

Finance Ministers and Central Bank Governors (FMCBGs) meeting in April 2020.

• Building Blocks (Stage 2): The Committee on Payments and Market Infrastructures

(CPMI) is leading the work on creating building blocks of a response to improve the

current global cross-border payment arrangements. This will set out areas where further

public sector work could assist in moving to an improved cross-border payments system

and in public goods or removing unnecessary barriers, and accordingly provide an

update to the G20 FMCBGs meeting in July 2020.

• Roadmap (Stage 3): Building on the previous stages, the FSB will coordinate, with

CPMI and other relevant international organisations and standard-setting bodies, the

development of a roadmap to pave the way forward. In particular, the FSB will report

to the G20 on practical steps and indicative timeframes needed to do so. The three-stage

process will be submitted as a combined report to the G20 FMCBGs meeting in October

2020.

Global cross-border payments, in reality, are carried through a diverse multi-layered set

of networks. These include more traditional arrangements such as correspondent banking,

interlinked domestic payment systems, card networks, remittance services such as money

transfer operators and innovations based on new financial technology, to name just some

arrangements. These networks are based on distinct models, for instance correspondent banking

arrangements settle across the ledgers of the various correspondent banks, while some other

arrangements settle across the single ledger of the central operating platform. These can have

quite different implications for the severity and type of frictions, such as the number of

counterparties that need to conduct compliance checks on a given transaction.

A roadmap for enhancing cross-border payments, therefore, will need to encompass a

variety of approaches and time horizons. Some building blocks that form part of the roadmap,

which may be shorter-term actions, should benefit a number of different types of existing

arrangements, such as improvements in interoperability among payment arrangements and the

standardisation of payment messages, effectiveness of due diligence, enhanced

interconnectedness between payment systems and improved currency conversion mechanisms.

Other building blocks, which may be more medium-term, may go beyond adjustments to

existing arrangements by proposing actions that should eventually improve the structure of the

system and cover all identified frictions, but would take longer and face greater uncertainties in

their development. Some actions would need to be taken at the national level and others at the

international level. Moreover, the roadmap should recognise that, while greater consistency and

a more efficient interlinking are important goals, these do not imply a “one size fits all”

approach for the diverse set of users of the different payment system networks and their

differing needs.

While the roadmap may indicate different possible routes, all need to meet minimum

standards of safety and soundness. For instance, there should be no compromise in meeting

minimum international standards for safe and sound payment systems, prudential supervision

and AML/CFT compliance.

The roadmap will need to involve a variety of actors in the public and private sectors. In

the public sector, payment system overseers, central banks (including as operators of payment

systems), banking supervisors and AML/CFT regulators are among those with roles to play. In

the private sector, banks and other financial institutions, payment systems, technical service

providers and new FinTech solution providers all will have roles.

This report concludes with some preliminary thoughts on areas to consider when

developing the eventual roadmap, which will include practical steps and indicative

timeframes. These include questions to explore a range of topics that fall under four broad

categories:

Operational improvement of payment infrastructures

Improvements to the operational aspects of cross-border payments could improve the efficiency

and speed by which these payments are processed. Building block analysis will examine ways

in which the public and private sectors can catalyse operational improvements to address these

constraints. Questions to be explored further include:

• How can the public and private sectors help to catalyse improvements in technology

that help to better satisfy user needs?

• Are there initiatives that public authorities could take to enhance key payment

infrastructures (cf. real-time gross settlement systems, automated clearing houses, fast

payment systems), including to enhance interoperability?

• Are there areas where operational improvements can reduce the burden of maintaining

liquidity in multiple currencies while meeting prudential liquidity requirements?

• Could operational improvements reduce the length of payment chains and, as a result,

reduce complexities and risks?

Standardisation of data and market practice

Frictions arise from the lack of use of standardised payment messages and the data they contain

and from divergent market practices in processing payments. Questions to be explored further

include:

• What steps could the public or private sector take to increase overlaps in operating hours

across payment systems in different time zones?

• What steps could the public or private sector take to increase the use of standard

message format protocols or other mechanisms to ensure interoperability?

• What other steps could be taken to address and handle other operational aspects such as

data quality, transparency of fees and status of processing, etc?

Legal, regulatory and oversight framework

This report sets out how the need to transmit cross-border payments across multiple

jurisdictions with diverse legal and regulatory practices can create frictions. Current

arrangements can delay payments and increase the cost of offering services across many

currency corridors. To improve the efficacy and efficiency of regulation and supervision,

enhancements may need to be considered. Questions to be explored further include:

• Which initiatives could be taken to improve the efficiency and reduce costs of

AML/CFT and other compliance processes without compromising on the quality of

compliance and to ensure adequate oversight? This could include facilitating improved

customer due diligence mechanisms for AML/CFT, greater use of the Legal Entity

Identifier (LEI) for firms and digital IDs for individuals and stronger regulatory

frameworks that reduce unnecessary barriers to cross-border data sharing when

implementing the FATF standards and other regulatory and supervisory requirements.

What further steps in cross-border cooperation in regulation, supervision or oversight

could help to reduce frictions?

• What further steps can authorities take to enable appropriate access to cross-border

payment services?

Progress monitoring and information sharing

Progress monitoring and information sharing will be essential for successful implementation of

the roadmap. Questions to be explored further include:

• What data would it be useful to collect going forward to enhance understanding and

monitoring of cross-border trends and costs (while taking account of the need to avoid

undue burden on firms from data collection)?

• What steps can be taken to share good practices in areas such as

regulation/supervision/oversight?

• How can authorities share experiences in facilitating FinTech development while

maintaining a sound financial system and a level playing field?

• Are there opportunities for providing technical assistance to improve jurisdictions’

supervisory and regulatory frameworks and thereby enhancing their ability to access

cross-border payment markets?