BASEL – In an increasingly interconnected world, the ability to send and receive money across borders swiftly and affordably is more critical than ever. However, as highlighted by Piero Cipollone, Member of the Executive Board of the European Central Bank (ECB), in a recent speech at the BIS Annual General Meeting, cross-border payments remain plagued by high costs, slow transaction times, and emerging risks. Yet, a clear path forward is emerging, focusing on regional integration and the interlinking of fast payment systems globally.

International transaction volumes are surging, outpacing global GDP growth. This underscores the vital role cross-border payments play in enabling trade, remittances, and investment. Despite some recent improvements, a quarter of global payment corridors still see costs exceeding 3%, and a third of retail cross-border payments took more than a business day to settle in 2024. Worryingly, progress appears to be stalling, with some indicators even showing a deterioration in speed and cost compared to 2023.

The Hurdles to Overcome:

The inefficiencies in the current cross-border payment landscape present significant disadvantages and risks:

• High Costs and Slow Speeds: The traditional correspondent banking model often involves multiple intermediaries, each adding fees and delaying settlement. This disproportionately impacts small and medium-sized enterprises (SMEs) and vulnerable groups like migrant workers sending remittances, where costs can still be as high as 7.7% for sub-Saharan Africa.
• Economic Hamper and Inequality: Exorbitant fees deter SMEs from engaging in international trade, hindering economic integration and growth. It also means that the economic gains from lower trade barriers are diverted into profits for payment intermediaries, rather than benefiting businesses and households.
• Geopolitical Fragmentation: Rising geopolitical tensions threaten to splinter global payment systems, leading to greater complexity, higher costs, and potentially non-communicating blocs, undermining the established international order.
• Emerging Risks from New Technologies: While alternative players like crypto-assets and stablecoins seek to fill the void, they introduce new challenges. Unbacked crypto-assets are volatile and speculative, while stablecoins carry credit risk, are susceptible to runs, and can pose fragmentation risks. A major concern is the dominance of US dollar stablecoins, which account for 99% of the market and raise the specter of “digital dollarisation,” potentially impairing monetary policy effectiveness in emerging markets and increasing capital flight.

The Path to a Faster, Cheaper Future:

Central banks, including the ECB, are actively working on solutions, recognizing their crucial role in ensuring the smooth functioning of payment systems. The G20 Roadmap for Enhancing Cross-border Payments provides a guiding framework for these efforts.

Regional Solutions as a Foundation:

Europe offers a compelling example of successful regional payment integration. The Single Euro Payments Area (SEPA) has harmonized electronic euro transactions, enabling low-cost payments across 41 European countries as easily as domestic ones. Building on this, the TARGET Instant Payment Settlement (TIPS) service allows for instant payments across the euro area. Critically, TIPS is a multi-currency platform, already facilitating fast payments in Swedish and Danish kroner, with Norway joining in 2028. A cross-currency settlement service is also being implemented for instant payments between the euro area, Sweden, and Denmark.

Furthermore, the ECB is supporting the other non EU member countryes in developing their own regional fast payment system based on TIPS software, fostering instant, multi-currency payments.

Global Connectivity Through Interlinking:

While regional integration is vital, it must not come at the expense of global connectivity. The ECB’s vision emphasizes interlinking fast payment systems across regions and countries. Over 100 jurisdictions worldwide now have their own fast payment systems. Interlinking these systems offers significant advantages:

• Reduced Costs and Increased Speed: Bypassing lengthy correspondent banking chains.
• Enhanced Transparency: Clearer tracking of transactions.
• Public Good Management: Ensuring that currency conversion platforms are managed as a public good, avoiding discriminatory pricing.

The ECB is taking concrete steps towards this global interlinking. It plans to implement a cross-currency settlement service for the exchange of payments between TIPS and other compatible fast payment systems globally, provided they comply with anti-money laundering and terrorist financing standards.

Explorations are also underway for:

• Project Nexus (BIS-led): TIPS could serve as a hub in a multilateral network of instant payment systems.
• Bilateral Link with India’s UPI: Assessing the feasibility of connecting TIPS with India’s Unified Payments Interface, which handles the world’s highest volume of instant payments.

Addressing the Settlement Challenge:

While interlinking addresses the “messaging leg” of cross-border transactions, the “settlement leg”—where money actually moves—remains a challenge. This often requires banks with access to both interlinked systems or credit relationships, which is becoming harder due to the retrenchment of the correspondent banking model.

Creative solutions are needed. One promising avenue lies in central bank digital currencies (CBDCs). Jurisdictions could agree to use their respective CBDCs as settlement assets. The proposed design for a digital euro, for instance, allows for use by residents of partner countries (with agreement) and includes multi-currency functionality, potentially enabling non-euro area countries to offer their own digital currencies via the digital euro infrastructure. This approach prioritizes monetary sovereignty and financial stability, with safeguards like individual holding limits to prevent currency substitution.

A Collaborative Future:

The quest for cheaper and faster cross-border payments is at a pivotal moment. It requires responsible innovation, with central banks playing a crucial role in ensuring the safety and integrity of payment systems. Regional solutions like SEPA and TIPS can serve as a strong foundation, provided they remain open and facilitate global interlinking. Ultimately, collaboration, as fostered by forums like the CPMI community, is central to building resilient, inclusive, and interconnected payment infrastructures that meet the evolving needs of people and economies worldwide