Cross-border payments

What are cross-border payments?

Cross-border payments are financial transactions where the payer and the recipient are based in separate countries. They cover both wholesale and retail payments, including remittances.

Cross-border payments can be made in several different ways. Bank transfers, credit card payments and alternative payment methods such as e-money wallets and mobile payments are currently the most prevalent ways of transferring funds across borders.

The two main types of cross-border payments are:

1. Wholesale cross-border payments: These are typically between financial institutions, either to support the financial institution’s customers’ activities, or its own cross-border activities (such as borrowing and lending, foreign exchange, and the trading of equity and debt, derivatives, commodities and securities).

   Governments and larger non-financial companies also use wholesale cross-border payments for large transactions generated by the import and export of goods and services or trading in financial markets.
   
   

2. Retail cross-border payments: These are typically between individuals and businesses. The key types are person-to-person, person-to-business and business-to-business. They include remittances, most notably money that migrants send back to their home countries.

Why do cross-border payments matter?

Over the past few decades, the increased international mobility of goods and services, capital and people has contributed to the growing economic importance of cross-border payments. The value of cross-border payments is estimated to increase from almost $150 trillion in 2017 to over $250 trillion by 2027, equating to a rise of over $100 trillion in just 10 years.

Factors that have been intensifying over recent years include:

• manufacturers expanding their supply chains across borders
• cross-border asset management and global investment flows
• international trade and e-commerce
• migrants sending money via international remittances 

These trends have increased the demand for cross-border payments and the need for end users to have access to cross-border payment services that are as efficient and safe as comparable domestic services. Remittances in particular play a vital role in low and middle-income economies and in some cases are becoming the primary source of development finance. 

Growth and revenue expansion is also driving competitive interest in this market. Innovative new business models and participants are emerging in response.

How do cross-border payments work?

Currencies are closed-loop systems. Domestic payment systems are not traditionally directly connected with the systems of other countries so when making a transfer between two jurisdictions, the currency is not physically transferred overseas.

Instead, international banks provide accounts for foreign counterparts and have their own accounts with their foreign counterparts, which enable banks to make payments in foreign currency. The funds are not sent across borders; instead accounts are credited in one jurisdiction and debited the corresponding amount in the other. Other payment providers such as Fintechs and money transfer agents use this interbank network to provide payment services to businesses and individuals.

For example, in Figure 1 Bank A will send a message to Bank B instructing them to make a payment for a customer. Bank B will then credit the end customer’s account with money from the account Bank A holds at Bank B.

However, not every bank has a direct relationship, so sometimes they need to transact via an intermediary, a ‘correspondent’ bank. This is a bank which provides accounts for Bank A and Bank B if they do not have a direct relationship with each other. This is known as correspondent banking and is an essential component of the global payment system for cross-border transactions.

The more intermediaries that are involved in a cross-border transaction, the slower and more expensive it will be. For currency pairs with high volumes of payments (for example, US dollar to British pound sterling), there will usually be a shorter chain. But for conversions between currencies with a lower volume of payments there are more correspondent banks involved. The more correspondent banks involved the longer the transaction will take, and more costs will be involved at each stage of the chain. The set of payment flows between one country and another is referred to as the ‘country corridor’ or ‘payment corridor’.

At each bank in the chain, fees will be taken for processing and foreign exchange, the payment messages will need to be checked against local financial crime requirements and each bank will need to update the balances in the accounts of the incoming and outgoing payees using their domestic payment systems which are only open during normal business hours. The sender’s bank will need to hold enough cash to cover these unknown costs until the payment is complete.

What are the key challenges for cross-border payments?

Cross-border payments lag domestic ones in terms of cost, speed, access and transparency. It is typically more difficult to make a payment from one country to another compared to making a similar payment within one country. In some instances, a cross-border payment can take several days and can cost up to 10 times more than a domestic payment.

Enhancing cross-border payments was set as a priority in 2020 by the G20. This work included identifying the challenges associated with cross-border payments that arise from a series of frictions in existing processes and developing a set of building blocks to address them. The key frictions are:

Fragmented and truncated data formats

Payments are made by messages sent between financial institutions to update the accounts of the sender and recipient. These payment messages need to contain sufficient information to confirm the identity of parties to the payment and confirm the legitimacy of the payment. Data standards and formats vary significantly across jurisdictions, systems and message networks.

For example, some formats only allow Latin characters, and some formats allow more data than others, meaning names and addresses in other scripts have to be translated, leading to divergences in precise spellings. This makes it difficult to set up automated processes, causing delays in processing and increased technology and staffing costs.

Complex processing of compliance checks

Uneven implementation of regulatory regimes for sanctions screening and financial crime mean the same transaction may need to be checked several times to ensure that the parties are not exposing themselves to illicit finance.

Banks may use different sources for conducting their checks which can lead to payments being incorrectly flagged (for example where entities have similar names to those on sanctions or financial crime databases). This complexity increases with the number of intermediaries in a chain, as the original data provided to meet initial checks may not contain elements needed for checks under other national regimes. This makes compliance checks more costly to design, hampers automation and leads to delays or the rejection of payments.

Limited operating hours

Balances in bank accounts can only be updated during the hours when the underlying settlement systems are available.

In most countries, the underlying settlement system’s operating hours are typically aligned to normal business hours in that country. Even where extended hours have been implemented, this has often been done only for specific critical payments. This creates delays in clearing and settling cross-border payments, particularly in corridors with large time-zone differences. This causes delays and also means banks need to hold enough cash to cover the unknown costs of the eventual foreign exchange rate, which fluctuates during this time, driving up the overall cost of the transaction. This is known as trapped liquidity.

Legacy technology platforms

A significant proportion of the technology supporting cross-border payment systems remains on legacy platforms built when paper-based payment processes were first migrated to electronic systems.

These platforms have fundamental limitations, such as a reliance on batch processing, a lack of real-time monitoring, and low data processing capacity. This creates delays in settlement and trapped liquidity. These limitations affect domestic operations, but become even more of a barrier to achieving cross-border automation of payments when different legacy infrastructures need to interact with each other. The requirement to interface with legacy technology can act as barriers for emerging business models and technologies to enter the market.

High funding costs

To enable quick settlement, banks are required to provide funding in advance, often across multiple currencies, or to have access to foreign currency markets. This creates risks for the banks that they will need to put aside capital to cover; which means that capital cannot be used to support other activities. The uncertainty about when incoming funds will be received often leads to overfunding of positions, which increases costs.

Long transaction chains

These frictions make it costly for banks to have relationships in every jurisdiction. This is why the correspondent banking model is used but this results in longer transaction chains, which in turn increases cost and delays, creating additional funding needs (including to cover unpredictable fees deducted along the chain), repeated validation checks and the potential for data to be corrupted through its journey.

Weak competition

There are significant barriers to entry for firms seeking to provide cross-border payment services. It is also difficult for end users sending payments to accurately assess the cost of initiating a payment, which makes it difficult to gauge the value for money on offer by different providers. These barriers can increase prices for end users and firms and dampen investment in modernising cross-border payments processes.

Why have improvements in cross-border payments been slower to materialise than in domestic payments?

Cross-border payments are by definition more complex than purely domestic ones. They involve more, and in some cases numerous,  intermediaries, time zones, jurisdictions and regulations.

While domestic payments have improved in many jurisdictions, with many more initiatives on the way, cross-border payments are lagging behind.

Other elements that introduce frictions include:

• capital controls
• requests for documentation
• balance of payments reporting
• other compliance processes that can cause significant payment delays

The multi-dimensional nature of these challenges also mean that international collaboration is needed to improve cross-border payments.

What is being done internationally to improve cross-border payments?

Improving cross-border payments was set as a priority for the G20 in 2020, providing important global momentum to solving this longstanding and complex issue.

The G20 asked the Financial Stability Board (FSB), working with the Committee on Payments and Market Infrastructures (CPMI) and other standard-setting bodies to co-ordinate a three-stage process to develop a roadmap to enhance cross-border payments (see Figure 4).

Figure 4: The three-stage process set by the G20

Assessment (Stage 1): The FSB, in coordination with relevant international organisations and standard-setting bodies, conducted an assessment of existing cross-border payment arrangements and identified frictions/challenges. Published in April 2020.

Building Blocks (Stage 2): The CPMI developed a set of 19 building blocks to improve the current global cross-border payment arrangements and address the frictions identified in Stage 1. These building blocks were grouped into five focus areas: (i) commit to a joint public and private sector vision to enhance cross-border payments; (ii) coordinate on regulatory, supervisory and oversight frameworks; (iii) improve existing payment infrastructures and arrangements to support the requirements of the cross-border payments market; (iv) increase data quality and straight through processing by enhancing data and market practices; and (v) explore the potential role of new payment infrastructures and arrangements. Published in July 2020.

Roadmap (Stage 3): The FSB, in coordination with the CPMI and other relevant international organisations and standard-setting bodies, developed a roadmap to deliver the building blocks identified in Stage 2. Published in October 2020.

The reports from each stage of the G20 initiative are:

• Stage 1: Report
• Stage 2: Report
• Stage 3: Roadmap

What are the next steps?

The Stage 3 roadmap sets out actions to enhance cross-border payments and the bodies responsible for progressing the actions, with the CPMI owning / co-owning 11 of the 19 building blocks. The FSB, through its Cross-Border Payments Coordination (CPC) group which is co-chaired by the Bank’s Deputy Governor for Financial Stability and the Governor of the South African Reserve Bank, coordinates across actions in the roadmap where needed and monitors and reports on progress under the roadmap to the G20 and the public.  

The FSB presents a consolidated progress report to the G20 each year. The first of these was published in October 2021. In October 2021 the FSB also published a set of quantitative global targets for improving the cost, speed, transparency and access of cross-border payments – which have been endorsed by the G20. These targets define the ambition of the work under the roadmap and create accountability.

Given enhancing cross-border payments is a multi-dimensional task close collaboration across jurisdictions and between public and private sectors is required. Notably, the involvement of the private sector, sharing their insights and practical expertise to shape policy, as well as delivering change, is key to supporting the practical implementation of the roadmap.

What are we doing to help tackle the frictions in cross-border payments?

We have actively supported the G20 initiative for enhancing cross-border payments from the start. In particular, we have provided senior support via the CPMI, which is chaired by the Bank’s Deputy Governor for Financial Stability (Sir Jon Cunliffe). And also via the CPMI Cross-border Payments Task Force which led the Stage 2 work and was chaired by the Bank’s Executive Director for Banking, Payments and Innovation (Victoria Cleland). Sir Jon Cunliffe and Victoria Cleland are now Chair and Deputy Chair of the Programme Co-ordination Board that oversees the CPMI-led work to deliver the roadmap.

We are also committed to implementing the actions set out in the Stage 3 roadmap and are actively engaged in the international workstream to deliver the roadmap. Enhancements to cross-border payments can only be fully realised with coordinated action and we will therefore continue to work with the public and private sectors in the UK, and international bodies to deliver the actions set out in the roadmap.

A programme is already underway in the UK to deliver a renewed Real-Time Gross Settlement (RTGS) service. These enhancements will not only improve domestic payments but will also provide the technical capability to deliver some of the enhancements considered in the roadmap. We are also actively engaged in considering the role of new innovations, such as Central Bank Digital Currencies, in the financial system.