Building regional payment areas: the Single Rule Book approach

Summary

Focus

Under ideal circumstances, cross-border payments would be processed as seamlessly as comparable domestic payments, even where multiple currencies are involved. In practice, however, each border can add to the costs of a cross-border payment if crossing the border means entering a different technological, regulatory and legal environment, with different systems, regulators, and courts. This paper analyses regional payment integration projects across the world to identify key lessons for future cross-border payment enhancements on regional and global level, focusing on the role of technology, law and regulation. 

Contribution

Technological, legal and regulatory harmonisation across borders can reduce the barriers to effective cross-border payments. However, research on the integration of regional payments systems has so far been underdeveloped and the interactions of technology, law and regulation have not been explored in detail. We seek to address that gap and show how these dimensions can contribute to more efficient, safe and inclusive cross-border payments, regionally and globally.

Findings

We show that a high degree of cross-border harmonisation via rulebooks has been instrumental for successful regional integration projects. Potentially costly events such as rejects, returns, and revocations of payment orders can be reduced, sanction screening and financial compliance processes be made more efficient. Drawing on this insight, this paper suggests globally coordinated action to develop a comprehensive framework to guide and support regional payment integration which we call a "Single Rule Book." Finally, we explore its potential contents and the minimum requirements the "Single Rule Book" would impose. 

Abstract

In October 2020, the G20 endorsed a significant initiative to enhance cross-border payments. Faster, cheaper, more transparent, and more inclusive cross-border payment services will deliver widespread benefits for citizens and economies worldwide, supporting economic growth, international trade, global development, and financial inclusion. Enhancing cross-border payments requires more than mere adoption of technical standards. The best outcome involves aligned technological, regulatory, and legal frameworks. This paper analyzes such payment integration projects.

Each border adds to the costs of a cross-border payment if crossing the border means entering into a different technological, regulatory and legal environment, with different systems, regulators, and courts. Under ideal circumstances, cross-border payments will be processed as seamlessly as comparable domestic payments, even where various currencies are processed. While this highly ambitious target is unlikely to be achieved globally in the short to medium term, regionally, the gap between cross-border and domestic payments has already been narrowed. At the global level, mismatches between the inter-institutional framework on the back-end and the contractual relationship with clients on the front-end represent potential costs for the payment services provider and increase legal risk, prompting costly legal, due diligence manual adjustments in payments processes. A high degree of cross-border harmonization via rulebooks along the technological, regulatory, and legal dimensions has been instrumental for successful regional integration projects and has promoted straight-through-processing. Potentially costly events such as rejects, returns, and revocations of payment orders have been reduced, sanction screening and financial crime compliance processes agreed.

Drawing on this insight, this paper suggests globally coordinated action to develop a comprehensive framework to guide and support regional payment integration. This we call a "Single Rule Book." Such a Single Rule Book could be instrumental in enhancing safety, efficiency, and integrity in cross-border payments. We explore its potential contents, and importantly, the minimum standards it would impose.

JEL classification: G20, G21, G28, E42, E58, K23, K24, O16.

Keywords: payments, cross-border payments, central banks, harmonization of law.