Cross-border payment systems have been neglected for too long

Op-ed by Sir Jon Cunliffe, Chair of the Committee on Payments and Market Infrastructures (CPMI), published in the Financial Times under the title "Cross-border payment systems have been neglected for too long", 13 July 2020. Read the original on the Financial Times website here.

The coronavirus crisis has revealed just how much we can now live and work online and in "real time". Central banks have purchased trillions of dollars of assets, banks have provided billions of dollars of loans, in the UK internet shopping has risen 50 per cent and online supermarket spending has more than doubled. Technology, we have discovered, has advanced at bewildering speed.

But despite these technological advances it can still take as long as 10 days to transfer money to different jurisdictions. And that transaction can cost up to 10 per cent of the value of the transfer. A payment from the UK to some countries has to go through four currencies and as many as five banks. Cross-border payment systems still use message formats developed 100 years ago for the telex machine. For decades, they have been the forgotten corner of the global financial plumbing. 

The G20 has tasked the Basel-based Financial Stability Board (FSB) with coordinating the development of a road map to tackle the system's various problems. The FSB's first report, which assessed existing cross-border payment arrangements and challenges, was issued in April.

The second report on ways to enhance the system was published on Monday by the Committee on Payments and Market Infrastructures (CPMI) of the Bank for International Settlements, a hub for central banks and other financial regulatory and supervisory authorities.

Fixing the plumbing matters. Global financial transfers were well over $20tn in 2019 and are expected to hit $30tn by 2022. Improving the cost, speed and reliability of payments would remove frictions that prevent many small businesses reaching out to customers beyond their borders. Six out of 10 cross-border business-to-business payments require some kind of manual intervention, each taking at least 15 to 20 minutes.

Better systems would make a real difference to many of the poorest and most vulnerable who disproportionately bear the cost of the frictions and shortcomings of the current systems. Remittances from workers back to their home countries are now worth more than three times global development aid. It is perhaps no surprise that many seeking to send money home turn to alternative and sometimes innovative solutions that are less secure.

These shortcomings have rightly been identified by proponents of frontier technology payment systems like Facebook's Libra. Such "big tech" initiatives have thrust payment systems into the limelight and on to the political agenda. But as the CPMI report makes clear, this is much more than a technological problem and it is not clear that frontier technologies are necessary or sufficient for the improvements we need.

The CPMI report identifies five key areas in which we need to act. These include a commitment to a joint public and private sector vision. They cover better global coordination of regulation, supervision and oversight arrangements. They include much needed improvements to existing payment systems, such as extending operating hours, expanding access and using liquidity more efficiently. They aim to ensure that different payment systems are able to talk to each other seamlessly. The report also suggests exploring the feasibility of incorporating more innovative developments such as central bank digital currencies and global "stablecoins", backed by some reserve asset.