Cross-border payments - unlocking new frontiers
Address by Mr Agustín Carstens, General Manager of the BIS, to the Reserve Bank of India Global Conference on "Digital Public Infrastructure and Emerging Technologies", 27 August 2024.
Good morning, Minister Sitharaman, Governor Das, distinguished guests. Thank you for the invitation to speak today.
Let me take this opportunity to congratulate the Reserve Bank of India (RBI) on its 90th anniversary. This is a significant milestone for the institution and one that is worth celebrating.
India's economy has evolved tremendously over the past nine decades. Throughout this time, the RBI's commitment to safeguarding monetary and financial stability has helped to lay the foundation for the country's economic growth and development.
To remain relevant and effective over many decades amid rapid change, institutions must be able to adapt. The RBI – and other central banks throughout the world – have repeatedly shown their ability and willingness to adjust their operations and tools in response to changing economic and financial circumstances.
The need to move with the times applies even to one of the most fundamental central banking activities – the provision of money. Central bank money represents the trusted core of the entire financial system, ensuring finality of payments and the singleness of money. As society and the economy evolve, individuals and businesses will naturally demand that the money that they use comes in a form, and has features, that meet their changing needs. If central banks and trusted financial institutions do not provide money and payment services that meet these demands, individuals and businesses will look elsewhere. It is imperative for central banks to understand these changing demands, to prepare for them and, ultimately, to provide money in a form that is relevant for society. The RBI has led the way in this regard, through its highly successful retail and wholesale CDBC pilots.
In this light, it is clear that the theme of today's conference – digital public infrastructure and emerging technologies – is an important one that is central to the mission of both the RBI and the Bank for International Settlements.
India stands at the forefront of digital public infrastructure development, and its experiences offer many lessons for other policymakers.
The rapid deployment of infrastructure such as Aadhar and the Unified Payments Interface (UPI) has delivered substantial advances in financial inclusion and payments efficiency. It has shown how public authorities, by thinking big, acting fast and embracing cutting-edge technology, can deliver transformative change and unlock the full creative potential of the private sector for the benefit of all. This last element – the involvement of the private sector – deserves special emphasis. It is key to today's two-tier monetary system, and it will remain crucial as the monetary and financial system continues to evolve into the future, both in India and globally.
We should bear India's experience in mind as we think about how public authorities can encourage the efficient and safe deployment of new financial market infrastructures, including emerging technologies such as tokenisation and artificial intelligence (AI), in the context of a more efficient and secure financial system.
These lessons are not only relevant for individual jurisdictions. They are also relevant in thinking about how to enhance the global financial system.
This brings me to the main theme of my remarks today: enhancing the efficiency of cross-border payments.
The topic is critical. It has long been recognised that increased integration of global economies and financial markets creates a heightened need for businesses and individuals to move money across borders. At the same time, more efficient cross-border payment systems would also promote global economic integration.
Cross-border payments typically lag domestic ones in terms of cost, speed, access and transparency. To an extent, this is to be expected, as the transactions are necessarily more complex, often involving multiple participants, time zones, jurisdictions and regulations.
Yet the shortcomings of international payment systems exceed these unavoidable technical frictions. And, in some jurisdictions, the availability and cost of international payments has deteriorated over time, in part due to the well documented shrinking of correspondent banking links. This matters because correspondent banking still plays an important role for many workers living and working overseas in sending remittances home.
It was in part to address these shortcomings that the G20 launched its Roadmap for Enhancing Cross-border Payments in 2020. The BIS, through its Committee on Payments and Market Infrastructures and Innovation Hub, has played an active role in delivering on the roadmap.
Significant focus and resources have been devoted to this end, but much remains to be done.
The good news is that the technology to deliver a vastly improved cross-border payment system exists. And, increasingly, this is being matched by the will and cooperation needed to do so.
Let me discuss two areas where great practical innovation is taking place.
Central banks and other public authorities are playing a catalytic role in both. They are setting the rules of the game, providing key infrastructure and working productively with the private sector to deliver a better system for all participants. They are also ensuring that measures to secure the integrity of the financial system – including compliance with international sanctions, as well as anti-money laundering and know-your-customer regulations – continue to be adhered to, but with less cost and greater rigour than in today's system.
The first area I would like to highlight is the linking of fast payment systems – like India's UPI system – across borders. These systems leverage on the existing infrastructure that delivers instantaneous, high-volume, low-value payments domestically to facilitate similar payments in a cross-border context. As most instant payment systems (IPS) process domestic payments within 30 seconds, interlinking these systems could conceivably allow cross-border payments to flow in 60 seconds or less – a vast improvement on traditional approaches.
Several countries have already linked their fast payment systems on a bilateral basis. A link exists between the UPI here in India and the PayNow system in Singapore.
These bilateral channels are a good start. But we should aim higher. Bilateral links are hard to scale. Since every IPS has different technical standards, business processes and regulatory requirements, each bilateral link requires a new negotiation and harmonisation of technological and regulatory practices. As the number of participating jurisdictions increases, the number of bilateral links needed to complete the network rises exponentially.
To make progress at a global scale, a multilateral approach is required.
This is what Project Nexus – a joint venture between six central banks and payment system operators and the BIS Innovation Hub's Singapore Centre – seeks to achieve.
Nexus is a multilateral scheme that provides a standard blueprint for domestic instant payment systems to communicate with each other. All they need to do is make a single connection into the network and they can be linked with all other participants.
I am delighted that the RBI has signed up to be a full participant in stage 4 of the project, alongside the central banks and instant payment system operators of Malaysia, the Philippines, Singapore and Thailand. In this phase of the project, the BIS will support the participating central banks and IPS as they work towards live implementation of Nexus. Once it is operational, Nexus will enable almost 1.5 billion people to make cross-currency transfers at the click of a button. And it would pave the way for other interested jurisdictions to join this multilateral network in due course.
The second novel approach to improving cross-border payments that I would like to discuss involves applying new technology to enhance the effectiveness of the correspondent banking system. The adoption of tokenised commercial bank deposits is a key advance here. They provide three key benefits. First, they enable the pre-programming of financial integrity controls, greatly lowering the costs for financial institutions of providing cross-border payment services. Second, when brought together on a unified ledger, they can help to streamline clearing and settlement, enabling faster, less risky and more secure payments. Thirdly, through smart contracts, they can facilitate entirely new, more flexible, contingent payments.
The benefits of tokenised commercial bank deposits as a tool for cross-border payments could be even greater if combined with tokenised wholesale central bank money, to be used as a settlement asset. This approach could also facilitate high-value wholesale payments, which cannot feasibly be sent through IPS.
The BIS Innovation Hub recently launched Project Agorá together with seven central banks. In partnership with a large group of private financial firms convened by the Institute for International Finance, this project will examine the feasibility and use cases of the basic structure I have laid out.
The two approaches to improving cross-border payment systems that I have described are intrinsically worthwhile. They also feed into a broader vision of how the financial system should work in the future.
Recently, Nandan Nilekani and I proposed the concept of the Finternet as a way to articulate this vision. What we have in mind is a system where the combination of a sound economic architecture and application of advanced technologies within a robust regulatory and governance structure will enable individuals and businesses to transfer any financial asset, in any amount, at any time, using any device, to anyone else, anywhere in the world.
To realise that vision, we need to deploy novel technologies – including tokenised assets, unified ledgers and fast payment systems – in an integrated way.
The aim is not to use technology for its own sake, but rather to address major pain points and inefficiencies in the current system. This will deliver faster, more secure and cheaper transactions, providing more choice and better services for users of financial services, and bolstering financial inclusion.
Improving cross-border payments would certainly resolve a significant pain point in today's financial system. And doing so by interlinking fast payment systems and bolstering the correspondent banking system through the use of tokenised deposits and wholesale central bank money would also help to strengthen the integration and technological advancement of the financial system as a whole.
Thank you for your time. I wish you an insightful and worthwhile conference, and the RBI many more years of monetary and financial stability.
