
Abstract
Cross-border payments constitute a fundamental pillar of the contemporary global economy, serving as the essential conduit for international trade, foreign direct investment, and a vast network of remittances that support livelihoods worldwide. Despite their critical importance, the established mechanisms for facilitating these transfers are frequently characterised by significant inefficiencies, including elevated transaction costs, protracted processing times, pervasive opacity, and the complex, often arduous, demands of regulatory compliance. This comprehensive report undertakes an exhaustive analysis of the prevailing landscape of cross-border payments, meticulously examining the multifaceted challenges confronted by a diverse array of stakeholders, from individual consumers to multinational corporations. Furthermore, it delves into the burgeoning realm of technological innovations, such as Distributed Ledger Technology (DLT) and Central Bank Digital Currencies (CBDCs), alongside key multilateral initiatives, all of which are poised to profoundly enhance the efficiency, cost-effectiveness, transparency, and accessibility of international financial transfers. The report posits that a convergence of technological advancement and concerted international cooperation is imperative to forge a more robust and equitable global payment ecosystem.
Many thanks to our sponsor Panxora who helped us prepare this research report.
1. Introduction
The relentless pace of globalisation, marked by the interconnectedness of economies and societies, has precipitated an exponential surge in the volume and value of cross-border financial transactions. These payments are not merely operational necessities; they are the lifeblood of global commerce, enabling enterprises of all scales to transcend geographical boundaries and penetrate new markets, facilitating the critical flow of remittances from expatriate workers to their families in their home countries, and supporting governmental engagements in intricate international financial activities. Indeed, the sheer magnitude of these flows underscores their systemic importance: global cross-border payments were projected to exceed USD 156 trillion in 2022, with a consistent growth trajectory anticipated in the years to come, reflecting an expanding global economy and increasing digital connectivity [1].
Despite their undeniable significance and the rapid evolution of domestic payment infrastructures, the traditional mechanisms governing cross-border payments have, for several decades, largely resisted fundamental transformation. This inertia has resulted in a persistent legacy of inefficiencies, elevated operational costs, and systemic friction, which ultimately impede economic growth and financial inclusion. The present report embarks on a detailed exploration of this complex global cross-border payment ecosystem, systematically identifying the inherent challenges that characterise the existing architecture, and subsequently investigating a spectrum of innovative solutions currently being developed and deployed with the explicit aim of addressing these critical impediments. By dissecting both the entrenched limitations and the transformative potential of emerging technologies and collaborative frameworks, this analysis seeks to offer a holistic understanding of the past, present, and future trajectory of international money transfers.
Many thanks to our sponsor Panxora who helped us prepare this research report.
2. The Current State of Cross-Border Payments: An Intricate Tapestry
Understanding the complexities of cross-border payments necessitates a thorough examination of the foundational systems, the myriad of key players involved, and the intricate infrastructure that underpins these global financial flows. While technological advancements are rapidly reshaping the landscape, a significant portion of international transactions still relies on established, often antiquated, structures.
2.1 Traditional Payment Systems: The Correspondent Banking Paradigm
Historically, and predominantly to this day, cross-border payments have been orchestrated through an elaborate network known as correspondent banking. This model dictates that banks, particularly those lacking direct relationships or branch networks in specific foreign jurisdictions, maintain accounts with other banks (their correspondents) in various countries to facilitate the settlement of transactions in local currencies. The process typically involves a ‘chain’ of intermediaries, often referred to as the ‘lifts and loops’ problem, where a payment might traverse several correspondent banks before reaching its ultimate destination. For instance, a payment from a small bank in Country A to a beneficiary in Country Z might require routing through a larger intermediary bank in a major financial hub (e.g., New York, London), which then routes it to another correspondent bank in Country Z, which finally credits the beneficiary’s account. This multi-layered process is inherently time-consuming and opaque. Each intermediary in the chain may levy its own fees, and the foreign exchange conversion, often executed at each ‘hop,’ can further erode the principal amount, making the final sum received unpredictable. The ‘Nostro’ (our account with you) and ‘Vostro’ (your account with us) accounting entries are fundamental to this system, representing the reciprocal ledger accounts maintained by correspondent banks to track interbank balances [2]. This reliance on pre-funded accounts in various currencies also creates significant liquidity management challenges for banks.
2.2 Key Players and Infrastructure: A Diverse Ecosystem
The ecosystem of cross-border payments is populated by a diverse array of stakeholders, each playing a distinct role in the journey of international funds.
2.2.1 The Society for Worldwide Interbank Financial Telecommunication (SWIFT)
For nearly five decades, SWIFT has been the dominant messaging network for secure international interbank communications, forming the backbone of global financial messaging. Established in 1973, SWIFT operates not as a payment settlement system itself, but as a critical communication layer, transmitting standardised messages (e.g., MT103 for customer payments) between financial institutions. Its ubiquity, reliability, and security have made it indispensable for banks worldwide, connecting over 11,000 financial institutions across more than 200 countries and territories [3].
While SWIFT has been instrumental in standardising interbank communication, its reliance on the traditional correspondent banking infrastructure means it inherits the inherent limitations of that system, particularly regarding speed and cost-effectiveness. The introduction of SWIFT Global Payments Innovation (GPI) in 2017 marked a significant evolutionary step, aiming to enhance transparency and speed by providing end-to-end payment tracking and clearer fee structures [4]. However, even GPI operates within the confines of the existing correspondent banking model, seeking to optimise it rather than fundamentally transform it. While GPI has significantly improved the payment experience, particularly for corporate clients, the underlying challenges of multiple intermediaries, varying operational hours, and liquidity management persist.
2.2.2 Commercial Banks and Money Transfer Operators (MTOs)
Commercial banks remain primary facilitators of cross-border payments, particularly for businesses engaged in international trade and high-value transactions. Their extensive networks and regulatory compliance infrastructure position them as trusted intermediaries. However, their services often come with higher fees and slower processing times compared to more specialised providers.
Money Transfer Operators (MTOs), such as Western Union and MoneyGram, cater predominantly to the retail remittance market, serving individuals sending smaller amounts of money, often to developing countries. MTOs typically operate through extensive agent networks, allowing for cash-to-cash or cash-to-account transfers. While offering greater accessibility for unbanked populations, their services are frequently characterised by significantly higher fees and less favourable exchange rates, disproportionately impacting vulnerable populations who rely on these services [5].
2.2.3 Payment Service Providers (PSPs) and Fintech Innovators
The emergence of Payment Service Providers (PSPs) and a new generation of fintech companies has introduced significant competition and innovation into the cross-border payment landscape. These entities often leverage technology to offer more streamlined, cost-effective, and transparent services, sometimes bypassing parts of the traditional correspondent banking chain through direct integrations or proprietary networks. Examples include Wise (formerly TransferWise), Revolut, and Remitly, which focus on optimising FX rates and reducing fees for both individuals and small businesses. Many PSPs utilise APIs to connect to various local payment rails, offering faster and cheaper alternatives to SWIFT for certain corridors.
2.2.4 Clearing and Settlement Systems
At the national level, domestic clearing and settlement systems are crucial. These systems facilitate the final transfer of funds between banks. For cross-border payments, these national systems must interface, often through correspondent banks. The lack of interoperability and harmonisation between these disparate national systems significantly complicates cross-border transactions. For instance, a payment initiated in a real-time gross settlement (RTGS) system in one country must typically transition through slower, batch-based systems or an FX conversion before it can be settled in the destination country’s system.
2.3 Market Segmentation and Dynamics
The cross-border payment market is not monolithic; it comprises distinct segments with varying needs and transaction characteristics:
-
Business-to-Business (B2B) Payments: This segment represents the largest portion by value, encompassing corporate treasury operations, supply chain payments, and international trade finance. B2B payments often involve high values, complex reconciliation requirements, and a strong demand for transparency and tracking. They are highly sensitive to FX volatility and require robust compliance checks.
-
Person-to-Person (P2P) Payments / Remittances: Dominated by migrant workers sending money home, this segment is high volume but typically lower value per transaction. Key corridors include transfers from developed economies (e.g., North America, Europe) to developing nations in Asia, Africa, and Latin America. Remittances are a vital source of income for millions of households and contribute significantly to the GDP of many recipient countries. The cost of sending remittances remains a critical focus for global policy initiatives [6].
-
Business-to-Consumer (B2C) and Consumer-to-Business (C2B) Payments: This segment has seen rapid growth driven by the expansion of e-commerce and the gig economy. It includes online purchases, payouts to international freelancers, and cross-border subscriptions. These payments require speed, convenience, and often support for a wide array of local payment methods.
Many thanks to our sponsor Panxora who helped us prepare this research report.
3. Persistent Challenges in Cross-Border Payments: A Deep Dive
Despite the foundational role of cross-border payments in the global economy, the traditional infrastructure and operational models are replete with significant challenges that impede efficiency, accessibility, and trust. These issues manifest across various dimensions, affecting individuals, businesses, and financial institutions alike.
3.1 High Transaction Costs: The Erosion of Value
One of the most persistent and impactful challenges in cross-border payments is the exorbitant cost associated with these transactions. These costs are often opaque and can significantly reduce the net amount received by the beneficiary. The World Bank reported that the global average cost of sending remittances remained high at 6.0% in Q4 2023, far exceeding the G20’s target of 3% [7]. This figure represents an aggregate, and costs can be substantially higher in specific corridors or for smaller transaction values.
These costs are multifaceted and originate from various points in the payment chain:
- Foreign Exchange (FX) Spreads: Often the largest, yet most hidden, component of the cost. Financial institutions apply a mark-up on the interbank exchange rate, sometimes referred to as ‘dynamic pricing’ or ‘all-in pricing.’ This spread can vary significantly and is less transparent than explicit fees. For high-volume corridors, the spread might be minimal, but for exotic currency pairs or less liquid markets, it can be substantial.
- Intermediary Bank Charges: Each correspondent bank in the payment chain may levy a ‘lifting fee’ or service charge for processing the transaction. These charges accumulate as the payment traverses multiple institutions.
- Receiving Bank Fees: The beneficiary’s bank may also impose a charge for receiving an international transfer, further reducing the final amount.
- Service Provider Fees: MTOs and some fintechs charge explicit transaction fees, which can be fixed or a percentage of the amount sent. While often more transparent than bank fees, they can still be high, especially for smaller transfers.
- Liquidity Costs: Financial institutions need to pre-fund accounts in various currencies across their correspondent network to facilitate payments. The capital tied up in these Nostro accounts represents a significant operational cost, which is ultimately passed on to the customer. Managing liquidity across multiple currencies and time zones is a complex and expensive undertaking.
- Compliance Costs: The significant resources dedicated to Anti-Money Laundering (AML), Know Your Customer (KYC), and sanctions screening are also factored into the overall cost structure of cross-border payments. Financial institutions invest heavily in technology, personnel, and training to meet stringent regulatory requirements, and these operational costs are necessarily recuperated through transaction fees.
For businesses, these costs erode profit margins on international trade and can make smaller international transactions economically unviable. For individuals, particularly low-income migrant workers, high remittance costs represent a direct reduction in the financial support sent to their families, impacting poverty reduction and economic development in recipient countries [8].
3.2 Slow Processing Times: The Drag of Latency
Traditional cross-border payments are notorious for their protracted processing times, which can range from several hours to multiple business days. This delay stands in stark contrast to the near-instantaneous nature of many domestic payment systems. The principal reasons for this latency include:
- Multiple Intermediaries: As previously noted, the involvement of numerous correspondent banks, each operating within its own business hours and processing cycles, introduces inherent delays.
- Varying Time Zones: Global payments traverse different time zones, meaning that processing at one bank might be halted until the next bank in the chain opens for business.
- Batch Processing: Many legacy systems at financial institutions process transactions in batches, typically once or twice a day, rather than in real-time. This can mean a payment initiated in the morning might not be sent to the next bank in the chain until the end of the business day.
- Manual Reconciliation and Error Resolution: Discrepancies in payment details or technical issues often necessitate manual intervention, leading to further delays. Investigations into missing or delayed payments can be time-consuming and costly.
- Anti-Fraud and Compliance Checks: Stringent AML, KYC, and sanctions screening processes, while essential for security, can introduce pauses as transactions are flagged for review. These checks can involve manual verification, particularly for high-risk transactions or unusual patterns.
- Cut-off Times: Banks impose daily cut-off times for international payments. Transactions submitted after this time are typically processed on the next business day.
These delays can have severe repercussions. For businesses, slow payments disrupt cash flow management, hinder supply chain operations, and can even lead to reputational damage due to late payments to suppliers or employees. For individuals, particularly in urgent situations such as medical emergencies or immediate family needs, slow processing times can cause significant distress and practical difficulties [9].
3.3 Lack of Transparency: The ‘Black Box’ Problem
The complexity of the cross-border payment chain often results in a profound lack of transparency for both senders and recipients. This opacity contributes to a pervasive sense of uncertainty and erodes trust in the system.
- Opaque Fees and Exchange Rates: As discussed, hidden FX spreads and indeterminate intermediary fees make it difficult for senders to know the precise amount their beneficiary will receive upfront. This lack of predictability is a major source of frustration and can lead to disputes.
- No Real-Time Tracking: Unlike modern parcel delivery services, traditional cross-border payments offer limited, if any, real-time tracking capabilities. Senders often have no visibility into the payment’s status once it has left their originating bank, leading to the ‘where is my money?’ problem. This absence of granular tracking makes it challenging to pinpoint delays or identify the exact point of failure in a multi-bank chain [10].
- Difficult Reconciliation for Businesses: For corporate treasuries, the lack of immediate confirmation of incoming funds and detailed fee breakdowns complicates financial reconciliation processes, leading to increased administrative burden and potential accounting discrepancies. This can also delay the release of goods or services.
- Erosion of Trust: The combination of high costs, slow speeds, and limited transparency breeds distrust among users. Senders may feel exploited by hidden fees, while recipients may face uncertainty about receiving funds in a timely manner.
3.4 Regulatory Compliance and Security Risks: A Tightrope Walk
Cross-border payments operate within a labyrinthine web of national and international regulations, making compliance a formidable and expensive challenge. Concurrently, the multi-party nature of these transactions introduces heightened security vulnerabilities.
3.4.1 Anti-Money Laundering (AML) and Know Your Customer (KYC)
Financial institutions facilitating cross-border payments must adhere to stringent AML and KYC regulations, designed to prevent illicit financial activities such as terrorism financing and organised crime. This involves:
- Customer Due Diligence (CDD): Collecting and verifying identity information of senders and recipients.
- Enhanced Due Diligence (EDD): For higher-risk customers or transactions, requiring more in-depth background checks.
- Transaction Monitoring: Continuously screening transactions for suspicious patterns or deviations from normal behaviour.
- Sanctions Compliance: Checking all parties against global sanctions lists (e.g., OFAC, UN, EU). A single hit can halt a transaction, necessitating manual review and potentially reporting to authorities [11].
Compliance with these regulations is time-consuming, resource-intensive, and costly. The penalties for non-compliance are severe, leading to significant fines and reputational damage. This burden has also led to the phenomenon of ‘de-risking,’ where financial institutions withdraw from relationships with correspondent banks or customer segments deemed too high-risk, thereby reducing access to financial services for legitimate users in certain jurisdictions [12].
3.4.2 Data Privacy and Cross-Border Data Flows
With increasing global data protection regulations (e.g., GDPR in Europe, CCPA in California), transmitting personal and financial data across borders for payment processing and compliance checks becomes complex. Ensuring data security, integrity, and compliance with varying jurisdictional data residency requirements adds another layer of regulatory challenge.
3.4.3 Fraud and Cybersecurity Threats
The complex, multi-party nature of cross-border payments presents numerous vectors for fraud and cyberattacks:
- Payment Fraud: This includes Business Email Compromise (BEC) scams, invoice fraud, and synthetic identity fraud, where sophisticated actors manipulate payment instructions or impersonate legitimate entities to divert funds.
- Cyberattacks: Financial infrastructure is a prime target for cybercriminals. Attacks can range from phishing campaigns targeting employees to sophisticated malware designed to disrupt payment systems or exfiltrate sensitive data. Data breaches can compromise customer information and expose institutions to financial losses and reputational harm.
- System Vulnerabilities: The reliance on legacy IT systems in many financial institutions creates potential vulnerabilities that can be exploited by malicious actors. The lack of interoperability and common security standards across different systems further exacerbates these risks [13].
3.5 Liquidity Management and Capital Costs
As previously touched upon, financial institutions facilitating cross-border payments must pre-fund accounts (Nostro accounts) in multiple currencies with their correspondent banks. This requirement to hold significant balances in various foreign currencies ties up capital, making liquidity management a complex and costly exercise. For smaller banks or MTOs with limited capital, this can be a significant barrier to entry or expansion into new corridors. The need to hedge against foreign exchange rate fluctuations further adds to the complexity and cost.
3.6 Interoperability and Fragmentation
The global payment landscape is highly fragmented, characterised by a multitude of national payment systems, varying technical standards, and diverse regulatory frameworks. This fragmentation hinders seamless cross-border transactions:
- Lack of Common Standards: Different countries use different messaging formats, data requirements, and processing rules, making direct integration challenging.
- Disparate Infrastructure: The absence of a universally interoperable payment infrastructure means payments often have to be translated or adapted as they move from one system to another.
- Regulatory Divergence: Variations in legal and regulatory requirements across jurisdictions (e.g., payment service licensing, consumer protection laws) complicate the design and operation of globally consistent payment solutions.
These challenges collectively contribute to a system that is often expensive, slow, opaque, and fraught with risks, underscoring the urgent need for comprehensive solutions.
Many thanks to our sponsor Panxora who helped us prepare this research report.
4. Technological Innovations and Solutions: Paving the Way for a New Era
The persistent challenges inherent in traditional cross-border payments have spurred significant innovation, driven by advancements in digital technology and a global push for more efficient financial infrastructure. These innovations offer promising avenues for transforming international money transfers.
4.1 Blockchain and Distributed Ledger Technology (DLT): The Promise of Disintermediation
Blockchain, a specific type of Distributed Ledger Technology (DLT), offers a decentralised, immutable, and transparent framework for recording transactions. Its fundamental principles hold significant promise for revolutionising cross-border payments by fundamentally altering the operational paradigm and potentially reducing reliance on traditional intermediaries.
4.1.1 Core Principles and Application to Payments
At its core, DLT enables multiple parties to maintain and update a shared, synchronised ledger of transactions. Key features include:
- Decentralisation: No single central authority controls the ledger, enhancing resilience and reducing single points of failure.
- Immutability: Once a transaction is recorded, it cannot be altered or deleted, ensuring auditability and trust.
- Transparency (selective): While transaction details can be permissioned, the existence of transactions is generally transparent to network participants, improving visibility.
- Cryptographic Security: Transactions are secured using advanced cryptography.
- Consensus Mechanisms: Participants agree on the validity of transactions, ensuring ledger integrity.
In the context of payments, DLT can facilitate:
- Direct Settlement: Eliminating the need for multiple correspondent banks by allowing direct value transfer between participants on the ledger. This can significantly reduce transaction costs by cutting out intermediary fees and reducing the need for costly pre-funded Nostro accounts.
- Atomic Swaps and Payment vs. Payment (PvP) Settlement: DLT can enable near-instantaneous, simultaneous exchange of two assets (e.g., two different currencies) without counterparty risk. This is particularly valuable for FX settlement, ensuring that both legs of a currency exchange are completed concurrently or not at all, mitigating Herstatt risk.
- Smart Contracts: Self-executing agreements stored on the blockchain can automate compliance checks (e.g., AML/KYC flags), payment routing rules, and reconciliation processes, reducing manual intervention and speeding up operations.
4.1.2 Public vs. Private DLT Implementations
DLT solutions for cross-border payments typically fall into two categories:
- Public Blockchains (Permissionless): Open networks like Bitcoin or Ethereum. While offering high decentralisation, they often face challenges with scalability (transaction throughput), energy consumption (for Proof-of-Work systems), and regulatory uncertainty due to their anonymous nature. Projects like RippleNet (utilising XRP Ledger) and Stellar (XLM) aim to leverage public ledger principles for faster, lower-cost international transfers, particularly focusing on remittances and B2B payments, by offering efficient FX and liquidity solutions [14].
- Private Blockchains (Permissioned): Networks where participation is restricted and verified (e.g., Hyperledger Fabric, R3 Corda). These are typically preferred by financial institutions due to their enhanced control, privacy features, and higher transaction throughput. They allow participants to have predefined roles and access rights, which aligns better with regulatory requirements and existing financial structures. Many wholesale DLT initiatives, including CBDC projects, utilise permissioned DLTs.
4.1.3 Challenges and Future Development
Despite the immense potential, DLT faces hurdles, including scalability issues for very high transaction volumes, regulatory clarity and harmonisation across jurisdictions, and the challenge of interoperability between different DLT networks and with legacy systems. Energy consumption, particularly for Proof-of-Work blockchains, also remains a concern for broader adoption in an environmentally conscious financial landscape.
4.2 Central Bank Digital Currencies (CBDCs): A New Monetary Frontier
Central Bank Digital Currencies (CBDCs) are digital forms of a country’s fiat currency, issued and backed by its central bank. Unlike cryptocurrencies, they are not decentralised and are designed to combine the benefits of digital payments with the stability and trust inherent in traditional fiat currencies. CBDCs are broadly categorised into two types:
- Wholesale CBDCs: Designed for interbank settlement and financial institutions, aiming to improve the efficiency of wholesale payments, securities settlement, and cross-border transactions.
- Retail CBDCs: Intended for general public use, offering a digital form of cash.
4.2.1 Potential for Cross-Border Payments
The Bank for International Settlements (BIS) has extensively highlighted the transformative potential of CBDCs for enhancing the efficiency of cross-border payments [15]. Their benefits include:
- Direct Settlement between Central Banks: Wholesale CBDCs could enable central banks to directly exchange digital currencies, eliminating correspondent bank chains and reducing counterparty risk. This could lead to real-time gross settlement of international transactions.
- Reduced Intermediation Costs: By facilitating direct transfers, CBDCs could significantly lower transaction fees and FX conversion costs.
- Enhanced Transparency and Traceability: Transactions recorded on a CBDC ledger could offer greater transparency (to authorised parties) and traceability, potentially aiding AML/CFT efforts.
- Programmability: CBDCs could be programmed with specific conditions for payment release (e.g., payment on delivery of goods), enabling more efficient and secure trade finance.
4.2.2 Design Choices and Interoperability Models
Achieving the full cross-border potential of CBDCs hinges on international collaboration and the development of robust interoperability models. BIS identifies three main models for cross-border CBDC interoperability [15]:
- Interlinked Systems: National CBDC systems remain separate but are connected through technical interfaces (e.g., APIs) and common messaging standards.
- Compatible Systems: National CBDC systems are designed with common technical standards from the outset, allowing for easier integration and cross-border functionality.
- Single System: A multilateral CBDC platform where multiple central banks issue and manage their CBDCs on a shared infrastructure, enabling seamless cross-border transfers (e.g., the mBridge project).
4.2.3 Challenges and Considerations
Despite their promise, CBDCs face significant challenges for cross-border implementation:
- International Cooperation and Governance: Requires unprecedented levels of collaboration among central banks and governments to agree on standards, legal frameworks, and governance structures.
- Monetary Policy Implications: The impact of CBDCs on domestic monetary policy, financial stability, and capital flows needs careful assessment.
- Cybersecurity and Resilience: Designing highly secure and resilient CBDC systems capable of withstanding sophisticated cyberattacks is paramount.
- Privacy Concerns: Balancing privacy with the need for AML/CFT compliance is a delicate act.
- Disintermediation Risk: The potential for CBDCs to disintermediate commercial banks from payment flows, impacting their business models and role in the financial system, requires careful management.
4.3 Real-Time Payment Systems (RTPS) and Instant Payments: Extending Domestic Efficiency Globally
Real-time payment systems (RTPS), also known as instant payment systems, enable the immediate clearing and settlement of transactions, 24/7, 365 days a year. While primarily designed for domestic use, extending their capabilities to cross-border payments offers a powerful avenue for reducing processing times and enhancing efficiency.
4.3.1 Domestic Success Stories
Numerous countries have successfully implemented domestic RTPS:
- Single Euro Payments Area (SEPA) Instant Credit Transfer (SCT Inst): In Europe, enabling instant euro payments across participating countries.
- Faster Payments Service (FPS) in the UK: One of the earliest instant payment systems.
- Unified Payments Interface (UPI) in India: A highly successful mobile-first instant payment system.
- PIX in Brazil: Another rapidly adopted instant payment system.
- FedNow Service in the USA: The newest instant payment system in the US, launched in 2023.
These systems dramatically reduce the time between payment initiation and finality, improving cash flow and convenience for users.
4.3.2 Cross-Border Linking of RTPS
The logical next step is to interlink these national RTPS to facilitate seamless cross-border instant payments. Various models are being explored:
- Bilateral Links: Direct connections between two national RTPS, such as the one between Singapore’s PayNow and Thailand’s PromptPay.
- Hub-and-Spoke Models: A central hub connects multiple national RTPS, allowing them to route payments through the hub. The BIS Innovation Hub’s Project Nexus is exploring this model [16].
- Common Messaging Layer: Standardising messaging protocols (e.g., ISO 20022) across different RTPS to facilitate interoperability.
4.3.3 Challenges and Opportunities
Extending RTPS to cross-border scenarios presents challenges related to harmonising technical standards, managing FX conversions in real-time, aligning legal and regulatory frameworks, and addressing liquidity provision across multiple currencies. However, the potential benefits—near-instant settlement, reduced operational costs, and improved customer experience—make this a compelling area for development. The G20 Roadmap for Enhancing Cross-Border Payments explicitly supports the linking of national fast payment systems as a key action area [17].
4.4 Application Programming Interfaces (APIs) and Open Banking: Enabling Interconnectivity
Application Programming Interfaces (APIs) are software intermediaries that allow different applications to communicate and share data. In the financial sector, APIs are crucial for creating modular, interconnected services. Open banking initiatives, driven by regulatory mandates (e.g., PSD2 in Europe) or market forces, leverage APIs to enable secure data sharing and payment initiation by authorised third-party providers.
4.4.1 Role of APIs in Cross-Border Payments
- Streamlined Integration: APIs allow fintech companies and payment service providers to seamlessly integrate with banks’ legacy systems, enabling faster payment initiation, real-time transaction status updates, and automated reconciliation.
- Enhanced Data Exchange: APIs facilitate the secure and efficient exchange of data, improving visibility into payment flows and supporting advanced analytics for fraud detection and compliance.
- Improved User Experience: By abstracting away backend complexities, APIs enable developers to build intuitive user interfaces for cross-border payment platforms, offering features like transparent fee calculators, real-time tracking, and automated payment scheduling.
4.4.2 Open Banking’s Impact
Open banking, built on API connectivity, can further enhance cross-border payments by:
- Direct Bank-to-Bank Payments: Allowing third-party providers to initiate payments directly from a customer’s bank account, potentially bypassing card networks and reducing costs.
- Aggregated Financial Views: Providing customers with a holistic view of their international accounts and balances, facilitating better financial planning and liquidity management.
- Faster Onboarding and KYC: Secure API access to customer identity data (with consent) can streamline the onboarding process for new cross-border payment services, reducing KYC burden.
While largely applied domestically first, the principles of open banking and API connectivity are increasingly being extended to cross-border contexts, fostering a more interconnected and competitive international payment landscape.
4.5 Fintech Innovations and Payment Orchestration: Diversifying Solutions
The broader fintech sector continues to drive innovation, often by combining new technologies with existing infrastructure to create more efficient and user-friendly cross-border payment solutions.
- Neobanks/Challenger Banks: Digital-first banks like Revolut, N26, and Monzo offer multi-currency accounts, low-cost international transfers, and transparent FX rates, challenging traditional banks’ offerings.
- Specialised FX and Remittance Providers: Companies like Wise (formerly TransferWise) have disrupted the market by offering mid-market exchange rates and transparent fees, leveraging a network of local bank accounts to minimise cross-border hops.
- Payment Orchestration Platforms: These platforms allow businesses to manage multiple payment methods, gateways, and service providers through a single integration. For cross-border payments, they can intelligently route transactions via the most cost-effective and fastest rails available for a given corridor, dynamically selecting between SWIFT, local instant payment systems, or proprietary networks. This reduces complexity for merchants and optimises payment flows.
- Hybrid Models: Many successful fintech solutions combine elements of new and old. They might use DLT for interbank settlement while interfacing with traditional local payment rails for the ‘last mile’ delivery to the beneficiary. This pragmatic approach leverages the strengths of both worlds.
These innovations collectively contribute to a more competitive and efficient cross-border payment ecosystem, offering diverse solutions tailored to the specific needs of different market segments.
Many thanks to our sponsor Panxora who helped us prepare this research report.
5. Multilateral Initiatives and Policy Frameworks: Global Cooperation for Global Payments
Recognising the systemic importance of efficient cross-border payments, international organisations and governmental bodies have launched significant initiatives to address the long-standing challenges. These efforts underscore the understanding that isolated national solutions are insufficient for a truly global problem, necessitating concerted international collaboration and harmonisation.
5.1 G20 Roadmap for Enhancing Cross-Border Payments: A Comprehensive Global Strategy
The G20, representing the world’s major economies, alongside international bodies such as the Bank for International Settlements (BIS), the International Monetary Fund (IMF), and the World Bank, identified enhancing cross-border payments as a priority area in 2020. This culminated in the development of the ‘G20 Roadmap for Enhancing Cross-Border Payments,’ a comprehensive, multi-year strategy aiming to improve the speed, cost, transparency, and access of cross-border payments by 2027 [17].
5.1.1 Strategic Objectives and Key Action Areas
The roadmap is structured around five key ‘areas of work’ and specific building blocks, with clear quantitative targets, such as reducing the average cost of remittances to below 3% and significantly increasing payment speed [18]. The five areas include:
- Commitments by the Public Sector: Central banks, regulators, and other public authorities commit to creating an enabling environment. This involves reviewing and adapting regulatory, supervisory, and legal frameworks to facilitate innovation, enhance competition, and address de-risking without compromising financial integrity.
- Private Sector Initiatives: Encouraging financial institutions, payment service providers, and technology firms to innovate and adopt new technologies. This includes fostering competition, promoting the adoption of ISO 20022 messaging standards, and developing new business models.
- Data and Market Infrastructure Improvements: Focusing on enhancing data quality, harmonisation, and interoperability across systems. Key actions include promoting the adoption of common data standards (e.g., ISO 20022 for richer payment data), improving data exchange mechanisms, and strengthening cyber resilience.
- Legal, Regulatory, and Supervisory Frameworks: Working towards greater harmonisation and consistency of legal and regulatory frameworks globally. This involves aligning approaches to licensing, consumer protection, data privacy, and AML/CFT, as well as addressing legal barriers to new technologies like DLT and CBDCs.
- New Payment Infrastructures: Exploring the potential of novel technologies and infrastructures, specifically CBDCs and DLT, to facilitate more efficient and innovative cross-border payments. This includes supporting cross-border CBDC projects and DLT-based solutions while ensuring their resilience and security.
5.1.2 Governance and Implementation
The Financial Stability Board (FSB) is responsible for overseeing the overall roadmap and coordinating actions across various international bodies. The BIS Committee on Payments and Market Infrastructures (CPMI) and the BIS Innovation Hub play a crucial role in developing analytical work, conducting proof-of-concept projects (like mBridge and Nexus), and monitoring progress against the roadmap’s targets. The IMF and World Bank contribute by providing technical assistance and advocating for financial inclusion. The roadmap represents an unprecedented global commitment to improving cross-border payments, acknowledging that fragmented national approaches cannot adequately address a global challenge.
5.2 Multiple Central Bank Digital Currency Bridge (mBridge) Project: A Landmark CBDC Initiative
The mBridge project (formerly known as Project Inthanon-LionRock, then Project mCBDC Bridge) is a pioneering collaborative effort to develop a common platform for wholesale cross-border payments using multi-CBDCs. It involves the Hong Kong Monetary Authority, the Bank of Thailand, the Central Bank of the United Arab Emirates, the Digital Currency Research Institute of the People’s Bank of China, and the BIS Innovation Hub Hong Kong Centre [19].
5.2.1 Objectives and Progress
The primary objective of mBridge is to address the inefficiencies of traditional cross-border payments—high costs, slow processing times, and complex regulatory compliance—by leveraging wholesale CBDCs. The project aims to:
- Enable Real-Time, Peer-to-Peer Cross-Border Payments: Facilitating direct value exchange between participating central banks’ CBDCs, bypassing traditional correspondent banking chains.
- Reduce Costs and Speed: By streamlining the process and potentially eliminating intermediary fees.
- Enhance Transparency: Providing a clearer audit trail of transactions.
- Improve Liquidity Management: Potentially reducing the need for pre-funded Nostro accounts.
The project has progressed through several phases, including a successful pilot in 2022 that saw commercial banks conducting real-value transactions across four jurisdictions using the mBridge platform [20]. This demonstrated the technical feasibility and potential benefits of a common platform for wholesale cross-border CBDC settlement. The platform operates on a customised DLT, allowing participating central banks to issue their wholesale CBDCs directly onto it, which can then be used by commercial banks to settle international payments.
5.2.2 Significance
mBridge is one of the most advanced multi-CBDC initiatives globally and serves as a crucial testbed for exploring the practical implementation of DLT and CBDCs in cross-border payments. Its success could pave the way for a new architecture for international interbank settlement, significantly impacting the future of global finance.
5.3 Project Nexus (BIS Innovation Hub): Interlinking Fast Payment Systems
Another significant BIS Innovation Hub project is Project Nexus. Launched in 2021, Nexus focuses on designing and prototyping a multilateral system that would link multiple national fast payment systems (FPS) to enable instant cross-border payments. Unlike mBridge, which focuses on wholesale CBDCs, Nexus aims to leverage and interconnect existing domestic instant payment infrastructures [16].
5.3.1 Mechanism and Potential Impact
Nexus proposes a hub-and-spoke model where a central ‘Nexus’ gateway provides the necessary translation and messaging standards to allow different national FPS to communicate. A payment initiated in one country’s FPS would be routed through the Nexus gateway, converted to the destination country’s FPS standards, and then settled instantly. This would allow for near-instantaneous retail and SME cross-border payments, vastly improving the user experience and reducing costs associated with legacy systems. The project is exploring technical requirements, operational models, and legal frameworks for such an interlinking system.
5.4 FX Global Code: Promoting Integrity in Foreign Exchange Markets
While not directly a payment system initiative, the FX Global Code plays a crucial role in enhancing transparency and fairness in the foreign exchange market, which is central to cross-border payments. Developed by central banks and market participants, the Code is a set of global principles of good practice for the foreign exchange market. It aims to promote a robust, fair, liquid, open, and appropriately transparent market by establishing a common set of guidelines for behaviour, particularly regarding ethics, governance, execution, and information sharing [21]. Adherence to the Code by financial institutions involved in FX transactions can lead to fairer pricing and greater transparency in currency conversion, indirectly benefiting cross-border payment users.
5.5 Regional Integration Efforts: SEPA and ASEAN Payment Connectivity
Beyond global initiatives, regional efforts also contribute to improving cross-border payments. The Single Euro Payments Area (SEPA) in Europe is a prime example, harmonising retail euro payments across 36 countries and territories, making cross-border euro payments as easy and cost-effective as domestic ones. Similarly, the Association of Southeast Asian Nations (ASEAN) is pursuing ambitious payment connectivity initiatives, aiming to link national QR code payment systems and real-time retail payment systems across member states. These regional efforts serve as valuable testbeds and demonstrate the benefits of harmonisation and interoperability on a smaller scale, providing blueprints for broader global initiatives.
These multilateral and regional initiatives collectively signify a global recognition of the imperative to modernise cross-border payments. By fostering collaboration, standardisation, and the adoption of innovative technologies, they lay the groundwork for a more efficient, inclusive, and resilient global financial infrastructure.
Many thanks to our sponsor Panxora who helped us prepare this research report.
6. Future Outlook and Recommendations: Charting a Course for Transformation
The trajectory of cross-border payments is firmly set towards greater efficiency, transparency, and inclusivity, driven by a confluence of technological innovation, regulatory foresight, and international cooperation. The evolution will not be linear but will involve a complex interplay of new paradigms converging with and transforming existing structures.
6.1 Trends and Emerging Paradigms
Several key trends are poised to shape the future landscape of cross-border payments:
- Continued Convergence of Traditional and New Technologies: Rather than a complete displacement, the most likely future involves hybrid models where DLTs and CBDCs enhance specific parts of the payment chain (e.g., interbank settlement), while traditional rails handle the ‘last mile’ to beneficiaries. APIs will be critical for seamless integration between these disparate systems.
- Global Push for Instant and Real-Time Payments: The success of domestic instant payment systems will drive further efforts to interlink them globally. The expectation of ‘always on, always fast’ payments will become universal, pushing financial institutions to adapt their infrastructure.
- Rise of Digital Identity and Harmonised KYC/AML: Digital identity solutions, coupled with common data standards, will streamline the onboarding process for new payment services and significantly reduce the burden and friction associated with AML/KYC checks, making compliance more efficient without compromising security [22]. This could combat de-risking by making it easier and safer to serve diverse customer bases.
- Increased Focus on Sustainable and Ethical Finance: As environmental, social, and governance (ESG) factors gain prominence, future payment systems may incorporate mechanisms for tracking sustainable finance flows, ensuring payments align with ethical sourcing, fair labour practices, or green investments. Transparency in fees will also be seen as an ethical imperative.
- Enhanced Data Utilisation: Richer data attached to payments (e.g., via ISO 20022) will enable better reconciliation for businesses, advanced fraud analytics, and more personalised financial services.
- Interoperability as a Core Design Principle: Future payment systems, whether DLT-based or traditional, will be designed with interoperability in mind from the outset, moving away from fragmented, siloed national systems.
- Embedding Payments into Workflows: Payments will increasingly become integrated into business and consumer workflows (e.g., ‘pay-as-you-go’ services, automated supply chain payments), making them almost invisible and frictionless.
6.2 Key Challenges Ahead
Despite the promising outlook, significant hurdles remain:
- Regulatory Harmonisation and Legal Certainty: Achieving consistent regulatory, legal, and supervisory frameworks across diverse jurisdictions is arguably the most formidable challenge. Differences in data privacy laws, payment licensing requirements, and approaches to digital assets can impede global solutions. Legal clarity around the finality of DLT-based settlements and the status of CBDCs is paramount.
- Achieving True Interoperability: Connecting legacy systems with new DLT-based platforms and interlinking disparate national instant payment systems requires substantial technical investment, agreement on common standards, and overcoming entrenched operational practices.
- Managing Cybersecurity Risks in an Interconnected World: As systems become more interconnected and complex, the attack surface for cyber threats expands. Ensuring the resilience and security of new payment infrastructures, especially those relying on DLT, is critical to maintaining financial stability and public trust [23].
- Addressing Financial Inclusion: While technological advancements can reduce costs, ensuring these benefits reach the unbanked and underbanked populations, particularly in emerging markets, requires thoughtful design and policy interventions. Bridging the digital divide and ensuring equitable access remain crucial.
- Balancing Innovation with Financial Stability: Regulators face the delicate task of fostering innovation while simultaneously safeguarding financial stability, preventing illicit finance, and protecting consumers. This requires a proactive, adaptive, and technology-neutral regulatory approach.
- Resistance to Change: Entrenched incumbents, due to significant investments in legacy systems and established revenue models, may exhibit resistance to fundamental shifts. Cultural change within large financial institutions is a significant undertaking.
6.3 Recommendations
To navigate these challenges and realise the full potential of enhanced cross-border payments, concerted efforts are required from all stakeholders:
6.3.1 For Policy Makers and Regulators:
- Foster Innovation within a Robust Regulatory Perimeter: Develop clear, consistent, and technology-neutral regulatory frameworks that encourage responsible innovation while mitigating risks. This includes establishing legal certainty for DLT-based payments and CBDCs.
- Harmonise Regulations and Standards: Actively participate in international forums (e.g., G20, FATF, BIS) to promote global regulatory harmonisation, particularly for AML/KYC, data privacy, and payment messaging standards (e.g., universal adoption of ISO 20022).
- Support Public-Private Partnerships: Actively engage with the private sector through sandboxes, pilot projects, and dialogues to co-create solutions and ensure policy frameworks are practical and effective.
- Invest in Digital Infrastructure: Support the development and interlinking of national real-time payment systems as foundational elements for cross-border instant payments.
- Address De-risking: Implement policies that provide clearer guidance and incentives for financial institutions to maintain correspondent banking relationships, rather than de-risk, thereby promoting financial inclusion.
6.3.2 For Financial Institutions:
- Strategic Investment in Modernisation: Prioritise investment in API-enabled architectures, cloud technologies, and, where appropriate, DLT to enhance efficiency, reduce costs, and improve customer experience. This includes upgrading to ISO 20022 for richer data exchange.
- Embrace Collaboration with Fintechs: View fintech companies not just as competitors but as potential partners for co-innovation and leveraging their agility and technological expertise.
- Prioritise Transparency and Customer Experience: Offer clear, upfront pricing, competitive FX rates, and real-time tracking for cross-border payments to build trust and improve customer satisfaction. Simplify the user journey.
- Optimise Liquidity Management: Explore innovative liquidity solutions, including DLT-based approaches, to reduce capital costs associated with pre-funding Nostro accounts.
- Strengthen Cybersecurity and Resilience: Invest continuously in advanced cybersecurity measures, threat intelligence, and operational resilience to protect against evolving cyber threats and ensure uninterrupted service.
6.3.3 For Technology Providers:
- Focus on Interoperability and Open Standards: Develop solutions that can seamlessly connect with both legacy and new payment infrastructures, adhering to global messaging and data standards.
- Prioritise Security-by-Design and Privacy: Embed robust security features and privacy-enhancing technologies into solutions from the outset, adhering to best practices and regulatory requirements.
- Develop User-Centric Solutions: Design intuitive, accessible, and inclusive platforms that cater to the diverse needs of individuals, SMEs, and large corporations, simplifying the complex world of international payments.
Many thanks to our sponsor Panxora who helped us prepare this research report.
7. Conclusion
Cross-border payments, while being an indispensable engine of the global economy, have long contended with deep-seated inefficiencies. The traditional architecture, reliant on intricate correspondent banking networks, has been characterised by prohibitively high costs, protracted processing times, pervasive opacity, and an ever-growing regulatory burden. These challenges collectively impede economic growth, exacerbate financial exclusion, and diminish trust in the global financial system.
However, the landscape is now on the cusp of a profound transformation. The emergence of groundbreaking technological innovations, particularly Distributed Ledger Technology and the advent of Central Bank Digital Currencies, offers unprecedented opportunities to fundamentally re-engineer how international money transfers are executed. These technologies promise direct settlement, real-time value transfer, atomic FX swaps, and automated compliance, thereby addressing the core pain points of cost, speed, and transparency. Concurrently, a concerted global effort, epitomised by multilateral initiatives such as the G20 Roadmap for Enhancing Cross-Border Payments and pioneering projects like mBridge and Nexus, underscores a collective commitment from policymakers and central banks to forge a more efficient, inclusive, and resilient payment ecosystem.
Achieving this ambitious vision necessitates continued, unwavering collaboration across central banks, commercial financial institutions, innovative fintech companies, and international organisations. The path forward demands harmonisation of regulatory frameworks, adoption of common data and technical standards, strategic investment in next-generation infrastructure, and a steadfast commitment to interoperability. By embracing these principles and fostering an environment conducive to responsible innovation, the global community can collectively construct a cross-border payment system that not only meets the evolving demands of the 21st-century global economy but also genuinely serves to uplift individuals, empower businesses, and foster greater financial integration worldwide.
Many thanks to our sponsor Panxora who helped us prepare this research report.
References
[1] Accenture. (2023). ‘The Future of Cross-Border Payments: Trends and Opportunities’. https://www.accenture.com/us-en/insights/banking/cross-border-payments-trends-opportunities
[2] BIS. (2016). ‘Correspondent banking’. CPMI Papers No 152. https://www.bis.org/cpmi/publ/d152.htm
[3] SWIFT. (n.d.). ‘About Us’. Retrieved from https://www.swift.com/about-us
[4] SWIFT. (n.d.). ‘SWIFT gpi: How it works’. Retrieved from https://www.swift.com/our-solutions/swift-gpi
[5] World Bank. (2023). ‘Remittance Prices Worldwide Quarterly Report Q4 2023’. https://www.worldbank.org/en/topic/migrationremittances/brief/remittance-prices-worldwide-q4-2023
[6] World Bank. (2020). ‘Remittances Prices Worldwide’. Original reference: y.uno. Re-verified source: World Bank, Remittance Prices Worldwide: The Costs of Sending Money Home
[7] World Bank. (2023). ‘Remittance Prices Worldwide Quarterly Report Q4 2023’. https://www.worldbank.org/en/topic/migrationremittances/brief/remittance-prices-worldwide-q4-2023
[8] IMF. (2018). ‘Remittances: Flows, Costs, and Policy Issues’. Staff Discussion Note. https://www.imf.org/en/Publications/SDN/Issues/2018/06/07/Remittances-Flows-Costs-and-Policy-Issues-45920
[9] PaymentsJournal. (2021). ‘Cross-Border Payments: Trends, Challenges, and Solutions’. Original reference: paymentsjournal.com. Re-verified source: PaymentsJournal.com, Cross-Border Payments: Trends, Challenges, and Solutions
[10] TechBullion. (n.d.). ‘Challenges in Cross-Border Payments and Possible Solutions’. Original reference: techbullion.com. Re-verified source: TechBullion.com, Challenges in Cross-Border Payments and Possible Solutions
[11] FATF. (n.d.). ‘Recommendations’. Retrieved from https://www.fatf-gafi.org/recommendations
[12] IMF. (2017). ‘The Withdrawal of Correspondent Banking Relationships: A Global Survey’. IMF Staff Discussion Note. https://www.imf.org/en/Publications/SDN/Issues/2017/04/24/The-Withdrawal-of-Correspondent-Banking-Relationships-A-Global-Survey-44837
[13] NTT Data Payment Services India. (n.d.). ‘7 Different Cross-Border Payment Challenges’. Original reference: nttdatapay.com. Re-verified source: NTT Data Payment Services India, 7 Different Cross-Border Payment Challenges
[14] Ripple. (n.d.). ‘RippleNet’. Retrieved from https://ripple.com/ripplenet/
[15] BIS, CPMI, BIS Innovation Hub, IMF, World Bank. (2021). ‘Central bank digital currencies for cross-border payments’. BIS Papers No 115. Original reference: bis.org. Re-verified source: BIS.org, Central bank digital currencies for cross-border payments
[16] BIS. (2023). ‘Project Nexus: a multilateral network of instant payment systems’. BIS Innovation Hub report. https://www.bis.org/publ/othp68.htm
[17] BIS. (2020). ‘Enhancing cross-border payments: Stage 3 roadmap’. FSB and CPMI Report. Original reference: bis.org. Re-verified source: BIS.org, Enhancing cross-border payments: Stage 3 roadmap
[18] FSB. (2020). ‘G20 Roadmap for Enhancing Cross-border Payments’. https://www.fsb.org/wp-content/uploads/P131020-1.pdf
[19] mBridge. (n.d.). Retrieved from en.wikipedia.org. Re-verified source: Wikipedia, mBridge
[20] BIS Innovation Hub. (2022). ‘Project mBridge: connecting economies through CBDC’. BIS Innovation Hub report. https://www.bis.org/publ/othp53.htm
[21] Global Foreign Exchange Committee. (n.d.). ‘The FX Global Code’. Retrieved from https://www.fxglobalcode.org/
[22] World Economic Forum. (2021). ‘Advancing Digital Identity: A Critical Path to Digital Economies’. https://www.weforum.org/reports/advancing-digital-identity-a-critical-path-to-digital-economies/
[23] FSB. (2023). ‘Cyber Lexicon’. https://www.fsb.org/wp-content/uploads/P031123-1.pdf
Be the first to comment