As domestic payment systems continue to experience rapid innovation in speed, security and accessibility, user expectations when sending and receiving money continue to climb. Yet there is one type of payment that has struggled to meet evolving user expectations and continues to be costly and inconvenient: cross-border payments.
In Strategies for Improving the U.S. Payment System: Federal Reserve Next Steps in the Payments Improvement Journey (PDF), the Fed identified convenient, cost-effective and timely international payments as one of five desired outcomes for payments improvement. To monitor progress, the Fed recently conducted a review of the current cross-border landscape to better understand ongoing challenges and developments. Here are three key observations that are fundamental to understanding this complex payments ecosystem:
- Cross-border payments continue to grow across all use cases. As the economy becomes more interconnected across borders, there is a growing appetite for fast, efficient and accessible payments to be made in every part of the world. With growth in eCommerce, global trade and migration, cross-border payments are on the rise for both businesses and consumers, from family members sending money to their native countries to growth in online marketplaces. In 2019, estimates provided to the Fed from Glenbrook suggest cross-border transactions total around $29 trillion and are projected to grow to around $39 trillion by 2022.
- Cross-border payments are more complex than domestic payments. With no end-to-end system across borders, cross-border payments typically involve higher transaction fees and longer processing times than domestic payments since the payment needs to travel across multiple intermediaries and financial institutions to perform the currency conversion and settlement of funds. Fees are assessed as the payment moves through intermediaries and may not be evident until the net amount is received. For example, this complexity can impact smaller businesses making infrequent global transactions to suppliers.
- Systemic challenges are difficult to overcome. Compliance with anti-money laundering and anti-terrorism financing regulation is often cited as one of the most persistent challenges in cross-border payments. High cost and complexity related to complying with regulatory standards for various global jurisdictions have reduced correspondent banking relationships that, as a result, erodes access to services. Additionally, businesses and financial institutions may face liquidity challenges with trillions of dollars of capital funds in pre-funded transactional accounts (known as nostro/vostro accounts) used to facilitate cross-border payments.
Many initiatives are underway with central banks, international organizations and the private sector – all of which are innovating to address persistent barriers and gaps.
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