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Flow of cross-border payments needs better pipelines
IMAGINE you turn on a tap in Singapore and hot water comes out in an apartment block in New York. It sounds impossible, and yet something similar happens every day in the global payments system.
Despite this, there is major scope to improve the plumbing that enables money to flow across borders. While domestic payments have advanced rapidly in recent years through the introduction of Real Time Payment schemes, such as FAST in Singapore, cross-border payments have failed to keep pace.
Today, it takes at least six parties to make a cross-border payment - the sender in one country, the beneficiary in another, and two correspondent banks and two central banks on each side of the transaction.
The rules governing those transfers vary around the world, as a result of individual decisions made by different jurisdictions over a number of years. Each of those decisions has been made for good reasons, but the net result is inconsistent standards that can make it complex to move funds overseas.
That sounds like a problem, but does it really matter in the scheme of things? Yes it does and it impacts all of us.
International payments underpin global trade and commerce and anything that makes it harder for businesses to make and receive payments will have a knock-on impact on global growth.
Indeed, the overall value of cross-border payments is expected to rise by 5.5 per cent per year from US$22 trillion in 2016 to an expected US$30 trillion in 2022 across both retail and corporate payments. Every year, HSBC alone processes more than four billion payments for corporate customers.
Thankfully, this has been recognised as a pain point for businesses, which is why a number of initiatives are already under way to improve the speed, convenience, transparency and inefficiency of cross-border payments.
Now some jurisdictions, such as Singapore, are leading efforts to see if the global financial community could go further and faster to reform the current system.
Last week, the Monetary Authority of Singapore released a report which it developed along with Bank of Canada, the Bank of England, and a consortium of banks - led by HSBC - looking into the existing challenges and frictions when companies undertake cross-border payments.
The report surfaces several potential solutions to these issues, ranging from upgrading the current infrastructure through to undertaking a complete overhaul.
It finds that brand-new models - including those based on Wholesale Central Bank Digital Currency and Distributed Ledger Technology - could potentially improve the speed and transparency of cross-border payments and resolve current pain points for businesses.
But such a change would not be simple and would need to be implemented with care and control.
For a start, the global financial community would need to understand the legal, regulatory and governance challenges that would need to be overcome. For example, the need for the data required for cross-border payments to be globally consistent, irrespective of which jurisdiction the payments are being sent to.
And institutions facilitating payments would need to know how long any change would take to implement and what it would mean for their current operating models.
To move this forward, we foresee three areas of focus for policymakers and service providers.
The first is to help international companies understand what the new payment models could mean for them and for their suppliers and customers.
Today, companies' treasury management systems plug into the current cross-border payments model. If the model changes, companies would need to connect to a different infrastructure, and run two systems in parallel during any transition from one model to another.
The second is for the global financial community to conduct further joint research to better evaluate whether a holistic approach to infrastructure change could deliver greater benefits than incremental improvements to the current model.
Finally, regulators need to consider further the policy implications of some of the more fundamental changes to the status quo reviewed in the report.
Private sector innovation could help to address some of the challenges. For its part, HSBC will continue sharing insights with policymakers to help deliver the practical benefits of digital technology to international businesses and users.
Whether we choose to continue efforts already under way to improve the current system, or whether we go in a completely different direction, the financial community needs to work together to get it right. Cross-border payments are the heartbeat of the global economy - and we cannot afford for them to be disrupted.
Ultimately, the choice will depend on whether the benefits of moving to a fundamentally new model for cross-border payments outweigh the costs and challenges of implementing it.
That question has just started to be asked. The key to answering it will be more innovation and collaboration between regulators, banks and businesses to ensure we have an international payments system that delivers value for all.
- The writer is CEO of HSBC Singapore.