By Dave Sissens, Chief Executive Officer at RTGS.global
Much attention has been given, globally, to setting up retail banking for the new post-Covid world. This is no surprise. The pandemic has had a massive impact on us as individuals, businesses and even national economies. It drove people online and as such has expedited innovation in finance, including significantly increasing the demand for seamless cross-border transactions.
However, as the industry’s focus remains on retail transactions, wholesale interbank cross-border payments have lagged – despite their critical role in enabling rapid transfers of money. If this critical component of the cross-border transaction equation is overlooked, costs will remain high and efficiency will be low. To see a meaningful shift in cross-border payments, including in the retail sector, the industry must now focus its attention and energy on the wholesale market.
Domestic transactions
When the pandemic was rife in 2020, the G20 (an intergovernmental forum comprising 19 countries and the European Union) made improving cross-border payments a top priority, recognising the enormous benefits that this will bring to people and governments all over the world.
To make this happen, financial institutions are increasingly relying on technology to create frictionless real-time payments and settlements. Such transactions reduce costs and complexity for all parties involved. Unsurprisingly, domestic transactions were the first to benefit from this banking technology revolution.
Central banks have adopted more efficient methods of transferring money within their own jurisdictions, whether for consumer and small business transactions or large-value commercial transfers – it has made money transfers more efficient. In both scenarios, central banks will rely on Real-Time Gross Settlement. This refers to the continuous process of settling interbank payments on an individual order basis across the books of a central bank.
In various jurisdictions around the world, approximately 60 faster payment solutions based on Real-Time Gross Settlement are currently operational. This is a significant improvement compared to the handful that existed just ten years ago. As a result, instantaneously trading, settling, and transferring monies in a single currency transaction, all in real time, has now become commonplace for domestic transactions.
Real-Time Gross Settlement models for cross-border transactions
While significant progress has been made, removing the barriers to facilitating efficient interbank transactions have been a challenge in the cross-border space. These points of friction include settlement risk, capital requirements, access to liquidity, regulatory compliance and security concerns, reliance on multiple intermediaries, and an overall problem that many transactions take days to settle.
That being said, efforts are already underway to address these issues. The Bank for International Settlements’ (BIS) Innovation Hubs are working with domestic payment system operators, member institutions, and service providers to link countries to existing rapid payment transfer networks. The projects are looking to enable seamless, real-time and interbank cross-border fund transfers.
At the same time, companies such as RTGS.global are launching their own solutions. RTGS.global has developed a bilateral atomic settlement service for cross-border wholesale transactions that leverages the cloud, a global private infrastructure, and streaming technologies to enable instant bilateral settlement of one currency for another without the use of a financial intermediary. Bilateral atomic settlement will make it feasible for banks in separate jurisdictions, using different currencies, to complete settlement in seconds. It ensures that payments are facilitated in the fast, transparent and seamless manner which the G20 identified as the aspirational standard for modern cross-border transactions.
Facilitating change for the future of payments
The banking industry must embrace today’s digitally evolving landscape by adjusting its infrastructure, systems, and communications in accordance with the G20’s call to prioritise cross-border payments.
Many regulatory authorities, such as those in the UK, have adopted a proactive and strategic approach in adapting their regulatory frameworks to accommodate technological advancements and embrace novel business models. When it comes to innovation however, fintechs and other would-be disruptors of normative practice do not need to embrace a ‘move fast and break things’ mindset that ignores existing legal frameworks. Instead, transforming legacy processes should be at the heart of innovation.
In spite of this, we have indeed reached a turning point. With technology, we can finally break through the long-standing stumbling blocks of the wholesale value chain. A frictionless wholesale cross-border payment system is on the verge of being a reality; banks are now at the helm of building a better system and embracing the new development.
