This week saw the release of a Progress Report from the Financial Stability Board (FSB) on the G20 Roadmap for Enhancing Cross-Border Payments. This blog post delves into key insights from the report and their potential implications for Financial Institutions in the cross border payment space.
I. Setting the Stage:
In 2020, the G20, with the support of the Financial Stability Board and the Bank for International Settlements Committee on Payments and Market Infrastructures, identified cross-border payments as a crucial priority for improvement and modernisation. The framework includes four key challenges, five focus areas, and eleven Key Performance Indicators (KPIs), aimed at improving the cross-border payment ecosystem by making it faster and lower cost with greater transparency and accessibility.
The date set to achieve these targets is 2027. This might seem a long way away now, but thinking about the potential implications down the road allows us to be prepared for the changes to come.
II. Cost Transparency as a game changer for the end consumer:
At a high level, the metrics which are being tracked by the FSB are as follows:
– Speed: based on the percentage of payments being credited to the creditor/beneficiary within one hour and within one day.
– Cost: based on the average total cost of making a payment versus the payment value (excluding payments in excess of US$100,000 equivalent) expressed as a percentage
– Access: based on the percentage of firms having the option to send/receive cross border payments and for individuals it is access to regulated accounts to send cross border payments or remittances.
– Transparency: based on the degree to which key information about the payment including delivery timeframes, price and conditions are shared with payment end users (sender and receiver) or the extent to which disclosure is required by laws or regulations in each market.
Under transparency, all payment providers will be expected to provide key information to their clients for the transactions that they process on their behalf including transaction costs, estimated delivery timeframes, FX pricing and conversion costs and service terms along with payment tracking (at a minimum). It is unclear at this stage whether it would be sufficient for this information to provided at an aggregate level (i.e. a price list) at the start of the relationship or when the price list changes or whether it will need to be provided to the client every time a transaction is processed. Furthermore what level of accuracy is required, whether the information must be presented before the transactions or can be reported afterwards and what happens if the data deviates from the initial estimates?
It seems likely that regulations or rules will be developed in this area, so this is a watching brief for now. One could certainly envisage that for payments completed online the experience might replicate the level of transparency provided by many providers in the retail space today. For some firms this will likely require upgrades to their platforms to collect, store and display the data (or even provide the data or subscribe to SLAs) to ensure that end users receive correct and accurate information.
This change could be transformative if the information is required for each transaction and end customers start to use this information to select which provider to send their transactions to or to benchmark pricing against other providers. Some providers will need to think carefully about how they can demonstrate that they are adding additional value to justify premium pricing (if their prices are higher and wish to avoid commoditisation of the service). Others will need to find ways to reduce their costs.
Most banks today still rely on traditional, SWIFT based correspondent banking and high value rails even for low value cross border payments. Use of these rails can result in high cross border charges which must either be passed back to the client or paid for out of higher FX spreads. If transaction and FX costs fall dramatically in the market, more banks will need to switch to using low cost, domestic or real time payment rails wherever possible to lower their costs and allow for more flexibility in pricing. This will however also reduce the cost and pricing advantages some players enjoy today where they are using local rails as the default option for their payments. The challenge for those players is to figure out how to continue to differentiate services if low cost is no longer a selling point.
III. Wholesale Payments: Progress and Challenges:
The Wholesale payment market (categorised as payments over US$100,000 or equivalent) has promising metrics in the inter-financial institution space with 89% of cross-border payments sent over the SWIFT network being delivered within one hour and 99% within one day, and is consistently high across all regions.
However, there when you take into account the additional step of crediting the funds to the end customer’s account the percentages are disappointing and fall to 60% for processing within one hour (but a more reasonable 93% within one day), with significant variation between regions. This is attributed to time zone issues, market-specific restrictions/requirements, and AML checks – which can delay the process and will need to be worked through if the industry is to meet the target for end to end delivery.
A statistic in the report, which surprised me, is that 84% of cross-border payments processed through SWIFT are settled through one or fewer intermediaries between the originating and beneficiary bank. This data appears to challenge the widely held assumption that many delays are caused by lengthy correspondent banking chains. Based on personal experience, I was expecting to see the majority of cross border payments going through at least 2 intermediaries to reach their final destination. In my opinion, more explanation is needed to help us to understand this statistic and the methodology behind it.
IV. Retail Payments: Variances and Competition:
In the retail payments sector, despite intense competition from new entrants, payment costs remain significantly above the 1% target, with substantial variances based on payment type and region. A large portion of these costs are attributed to FX conversion costs as opposed to transaction fees.
Conclusion:
As we reflect on the Progress Report from the Financial Stability Board and the G20’s commitment to enhancing cross-border payments, it’s evident that we are on a transformative journey. The 2027 targets may seem distant, but require deliberate action by organisations, both individually and collectively to start to prepare.
The call to action is clear:
- Fully assess the impact of the 2027 deadline and KPIs on your business.
- Continue to contribute to collaborative efforts to improve cross border payment service delivery.
- Implement strategies and tactics to bring down the costs of settlement and FX, especially for low value payments, to remain competitive or seek out new sources of value if price advantage is eroded.
By staying aware and planning for these changes, you can ensure your organization remains at the forefront of the rapidly evolving cross-border payments ecosystem, protecting the bottom line and providing improved services to your valued clients.