It’s time to fix cross-border payments

Cross-border payments are notoriously expensive. They are also slower, less reliable and less transparent than domestic payments, in which transfers are now (or soon will be) both instant and instantaneously visible. One reason for these inadequacies is that an oligopoly is at work. There are around 25,000 banks in the world, but almost every cross-border payment ends up being handled by just 15 of them, all of which have relationships with thousands of correspondent banks. Unsurprisingly, given that cross-border payments are also cross-currency, the 15 banks are more or less synonymous with the banks that make up the foreign exchange (FX) oligopoly. CLS, the FX settlement utility set up by the major central banks, is able to cover 87 per cent of transaction volumes across 19 major currencies with a user-base of just 70 member-banks. A mere 14 of the CLS member-banks offer CLS services to the corporates and asset managers that ultimately drive FX activity, as opposed to servicing other banks. Many banks have withdrawn from correspondent banking altogether – the number is down 20 per cent since 2010 – chiefly because of the compliance risks of customer due diligence: banks do not know their customers’ customers and fear being fined for breaches of anti-money laundering (AML), countering the financing of terrorism (CFT) and sanctions regulations. In other words, more than 99 per cent of banks are just processing foreign currency payments for their own domestic or regional customers and relying on the services of the members of the oligopoly to actually send money abroad. This is why it takes an average of 2.6 banks to move an estimated US$1.5 trillion a day across borders. Yet cross-border payments are vital for economic prosperity, international trade, global financial stability, continuing growth in international e-commerce and international travel and especially in poverty reduction. Remittances worth US$707 billion passed through the system in 2019, US$529 billion to people in low to middle income countries, at an average cost of 6.82 per cent in transaction charges. This is why the G20 has made improving cross-border payments a priority and asked the Financial Stability Board (FSB) to come up with solutions; why the United Nations has set a target of reducing remittance charges to 3 per cent by 2030; why the Committee on Payments and Market Infrastructures (CPMI) has published a list of 19 “building blocks” to enhance cross-border payments; and the Bank for International Settlements (BIS) has pondered whether central bank digital currencies (CBDCs) could provide the key that unlocks for companies and consumers the value currently being eaten by banks.

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