Blog

The new Lego - building blocks of the new cross-border payment roadmap

[fa icon="calendar"] 20-Aug-2020 15:37:38 / by David Woolcock

Lego blog-01

 

I have been catching up on some light reading in the glorious English sunshine.  One report in particular caught my eye; the Bank for International Settlements (BIS) Committee on Payments and Market Infrastructures released a paper in July looking at “Enhancing cross-border payments: building blocks of a global roadmap” (ECBP) and the vision is very exciting. It also goes someway to answering my question in a post-Davos blog When will we activate Digital Currencies in our Treasury Management Systems? 

The ECBP is a report to the G20 who have made enhancing cross-border payments a priority during the 2020 Saudi Arabian Presidency. The report is addressing the second stage of three overarching building blocks. Stage one was Assessment, stage two is the actual Building Blocks, and stage three will be the Roadmap. Stage one identified the challenges and frictions for wholesale and retail cross-border payments via industry outreach, resulting in the identification of four key challenges; 

  1. High cost 
  2. Low speed 
  3. Limited access 
  4. Limited transparency 

The seven identified frictions were; 

  1. Funding costs 
  2. Weak competition 
  3. Fragmented and truncated data formats 
  4. Complex processing of compliance checks 
  5. Limited operating hours 
  6. Long transaction chains 
  7. Legacy technology platforms 

From this came 5 core sets of focus building blocks needed to build a better model for cross-border payments and were labelled from A to E instead of cool colours as in Lego playing blocks! 

 

The set of focus blocks in A to C dealt with matters such as committing to a joint and private sector vision; coordination of regulatory, supervisory and oversight frameworks; and the improvement of existing payment infrastructures and arrangements. The first two lay a foundation and the more exciting construction work is in the latter level C. This deals with enhancing the functionalities of existing systems, aligning processes and operating hours across jurisdictional systems. It also posits the actual linking of disparate existing global payment systems. This would be a significant benefit to enabling the enhancement of Payment vs Payment (PvP) networks and expanding the currencies covered. This would find favour with various Central banks who have been recently warning on payment default risks (Herstatt Risk), posed by non-CLS currencies, in the foreign exchange market. 

 

Focus area D was all about increasing data quality and STP processes by enhancing data and market practices. This proposed initiative is looking to increase the speed, price and transparency by proposing common data formats. This will include conversion and mapping from legacy formats and the use of LEI’s and common protocols for data exchange. This will also unleash the potential to improve compliance processes and data handling and make cross-border payments safer and, hopefully, see a dramatic drop in fines being dished out for AML breaches. 

 

The last set of building blocks (focus area E) deals with the exciting new horizons in the payments world by exploring the potential role of new payment infrastructures and arrangements. This is the one that may answer my question posited in the opening paragraph. While noting that these new payment infrastructures range from those that are operational, to those that are in the design stage and others that, for the moment, are theoretical the focus in these building blocks is central bank digital currencies (CBDCs) and global stablecoins. It notes that the building blocks in A to D will significantly enhance the potential for new technologies by removing the barriers to new cross-border payment infrastructures and arrangements, enabling them to flourish. 

So, setting a comprehensive set of delivery milestones involving both the public and private sector, together with monitoring, will go a long way to ensuring success. Faster, cheaper, and more transparent cross-border payment services will deliver widespread benefits for all in a post-Covid19 pandemic global economy. No doubt many firms will begin to examine their cross-border payment provision to customers and look at the exciting ePayments technologies available to them. Platforms and systems that integrate across old legacy systems, thus opening up a new world of opportunity as these initiatives gets an all-important boost from the G20 working together to realise the vision. 

Topics: Banking, Regulation, Treasury Management, Treasury, Payments, FCA, FX payments, regulatory reporter, Treasury Trading Solutions, Banking Regulation, treasury trading, COVID19, UK, cross-border payments, cross-border

David Woolcock

Written by David Woolcock

David Woolcock is an independent consultant and Director, Business Consulting at Eurobase. In addition, David is Chair of the Committee for Professionalism at ACI – The Financial Markets Association as well as Vice-Chairing the ACI FX Committee. He is also a member of the Market Practitioners Group for the Bank of International Settlement's FXWG that wrote the FX Global Code.