The world needs a better cross-border payment network

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The writer is a member of the executive board of the European Central Bank and future governor of the Bank of Italy

In recent decades, the world has witnessed an extraordinary increase in cross-border payments, driven by the globalization of trade, capital and migration. Global payments are expected to rise from $190tn in 2023 to a staggering $290tn in 2030, according to a study.

Despite remarkable progress, cross-border payments remain expensive and slow, leaving the most vulnerable behind. Fees for international payments currently average 1.5 percent for corporations and as much as 6.3 percent for remittances. And it can take up to several days for these payments to reach their recipient.

This raises three immediate issues. The first is the effect of economic integration. Expensive and slow payments hinder integration and growth. The costs and complexity of cross-border payments have been shown to deter many small and medium-sized businesses from expanding across borders.

Second, the world’s most vulnerable populations pay disproportionately. Migrant workers, who Unicef ​​estimates support one in nine people worldwide through remittances, may face higher costs when sending money home. In sub-Saharan Africa, the cost of sending remittances abroad reaches 8.4 percent. With remittances worth $626bn by 2022, even a measly 1 per cent cut in payments would leave the neediest with $6bn in their pockets every year.

Third, alternative players recognize these inefficiencies as a business opportunity, but their solutions carry significant risks. Cryptos that are not backed by assets are intrinsically volatile and akin to gambling. Even those crypto tokens that are stablecoins cannot guarantee conversion at par all the time, which makes them volatile. And large technology groups may seek to create “closed-loop solutions” that restrict payments to users who adopt a particular payment tool. This can lead to the fragmentation of systems and a high concentration of market power in specific areas.

So we need to provide a safer and more accessible alternative that makes global payments cheaper, faster and more transparent. There are now more than 70 local, fast payment systems around the world. By connecting them, the benefits of digitization will ultimately extend more fully to cross-border payments. Such a move would also improve efficiency by shortening transaction chains and ensuring more open connections between payment systems, recognizing this as a public good.

For many developing economies that do not currently have rapid payment systems, it is important to use international standards to promote cross-border interoperability. And by providing technical assistance and funding, international organizations can lend their support to the further development of domestic systems for cross-border payments.

In many ways, Europe serves as a compelling example of what this interconnected payment landscape could look like. The Target Instant Payment Settlement mechanism in the eurozone is a 24/7 facility for instant payments initiated directly by participating banks. And it is also a central hub that links many fast payment systems and ensures that instant payments have a pan-European reach. An important feature of Tips is that it settles payments immediately within a scheme governed by uniform rules, standards and protocols, avoiding the risk of fragmentation.

This model can also be used in multiple currencies. The European Central Bank and Sveriges Riksbank are exploring possible solutions for cross-currency instant payments between the euro and Swedish krona. And the European Payments Council is currently developing a plan to standardize the euro leg of international instant credit transfers.

The public sector also has a role to play in addressing the high compliance costs, legal complexity and risks associated with navigating multiple legal frameworks, regulations and central bank policies on payments. in cross-border. According to a survey, the main pain points for banks are differences in regulatory and supervisory frameworks, especially in areas such as privacy, security and anti-money laundering.

It is therefore important to promote cooperation and explore technical solutions while aligning policy interests. Improving cross-border payments is a complex challenge that requires joint efforts from public and private stakeholders. Such efforts could pave the way for a global network of fast systems that enable quick, low-cost, transparent and accessible cross-border payments.

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