Burkhard Balz: Overcoming the remaining hurdles in cross-border
payments
Speech by Mr Burkhard Balz, Member of the Executive Board of the Deutsche
Bundesbank, at the Global Payments Summit, Cape Town, 29 June 2023.
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1 Introduction
Ladies and gentlemen,
Distinguished guests,
I am delighted to be able to speak to you today about the future of cross-border
payments in a town that has played such an important role in cross-border trade
throughout its entire history. Due to its location at the centre of the trade routes between
East and West, Cape Town has always been at the heart of international trade, right
between the Atlantic and Indian oceans.
Although trade was significantly slower during the Age of Sail, when Cape Town rose to
prominence, there was already a need for payments spanning multiple countries and
multiple currencies. This is a problem that we still face today, but on a significantly
larger scale, because digitalisation, automation and globalisation have made trade
faster, more complex, and more global.
Despite recent geopolitical tensions, global trade and migration are still on the rise. I
hope that these trends will not reverse, since fragmentation means a loss of wealth.
However, globalisation has put the spotlight on some of the inefficiencies that still affect
cross-border payments. Compared to domestic payments, cross-border payments
remain slower, more opaque, and comparatively expensive.
Improving cross-border payments on a global scale may seem like an unsurmountable
challenge right now, but, to quote the great Nelson Mandela: "It always seems
impossible until it's done."
2 Striving to improve cross-border payments
In light of the increasing importance of cross-border payments for the global economy,
these inefficiencies prompted the G20 to launch an initiative to enhance this type of
payment.
1
As a result of this initiative, a roadmap consisting of 19 building blocks with concrete
action points was set out in 2020. Since then, work has progressed to a point where it is
now concentrated on three priority actions.
First, regulators around the world have to find ways to harmonise legal, regulatory, and
supervisory frameworks. A greater degree of regulatory harmonisation may help to
automate cross-border payments further, leading to higher processing speed, and could
lower the costs for compliance, which make up a large portion of the costs for these
payments.
Second, market players, payment system operators, and regulators need to come
together in order to harmonise messaging standards and facilitate the exchange of data
between jurisdictions. Especially in this area, cooperation between all relevant
stakeholders is crucial. For instance, the Bank for International Settlements' Committee
on Payments and Market Infrastructures has worked with financial industry
representatives to support harmonised adoption and usage of ISO 20022 for
crossborder payments.2
This brings me to the third area, which is the area where we, as central bankers, can
have the greatest impact: fostering interoperability between payment infrastructures and
expanding their services. As operators of real-time gross settlement (RTGS) systems -
and faster payment systems in a growing number of jurisdictions - central banks have
an important role to play in this field, although we still have to rely on all stakeholders to
ensure that we meet the demands of the market. To gain credibility, public sector
proposals need private sector acceptance.
However, in our role as system operators, we also have to look ahead and guarantee
that our services will still be able to fulfil the needs of their users in the future. In this
regard, we need to be open to new concepts like central bank digital currencies
(CBDCs) and have to explore the roles that these can play.
3 Improving and interlinking existing infrastructures
But before we leap into the future, let's stay in the present. Faster payments are
becoming a reality in many countries. With this development, payments around the
clock, on every day of the year, may become the new norm. This could also warrant
changes in the business hours of RTGS systems.
Even though it may lead to higher operating costs for central banks, extending business
hours could help to create, or improve, overlap between settlement systems in different
time zones. This would also increase the speed of settling payments transmitted across
multiple time zones.
Considering these advantages, and listening to the demands from our users, the
Eurosystem changed the business hours of its T2 RTGS system as part of the
consolidation project that was completed earlier this year. On weekdays, settlement of
interbank and customer payments now begins at 02:30 a.m., instead of 07:00 a.m.
before.
However, simply improving domestic payment systems is not enough as long as they
remain separate and isolated. This is why building and interlinking multilateral platforms
should play a large role going forward.
With regard to interlinking payment systems - especially faster payment systems -
3
there are a number of exciting projects in the pipeline. For example, Project Nexus
aims to interlink faster payment systems to shorten transaction chains, which will lower
costs and increase the speed of cross-border payments. As part of this project, the BIS
Innovation Hub in Singapore has built a working prototype of Nexus interlinked with test
versions of the payment systems from the Eurosystem, Malaysia, and Singapore.
The advantage of interlinking faster payment systems is that they are already available
around the clock and most of them already operate on the ISO 20022 standard. Some
of them, such as the Eurosystem's TIPS faster payment platform, are capable of
handling multiple currencies as well, which enables the integration of countries outside
of the Eurosystem.
Interlinking faster payment systems will not solve everything, however, and it comes
with a number of caveats. First, not every country already has a faster payment system.
This means that any global strategy aiming to enhance cross-border payments by
interlinking these systems will also need to include a way to help establish faster
payments in countries that do not have them yet.
Second, multiple bilateral links between various countries may be ineffective and
difficult to coordinate. However, solutions like Nexus could also be used to interlink
regional multilateral platforms, such as Buna and TIPS, or possibly even wholesale
payment systems, like SADC RTGS. In order to assess the potential of this model, the
Eurosystem has conducted experiments interlinking TIPS with the fast payment
systems of Malaysia and Singapore, enabling payments to be sent using only mobile
phone numbers.
This brings us to the third caveat: simply interlinking systems will not mean that
payments can be processed across solutions - it must be ensured that payees can be
properly addressed - for example, by using mobile phone numbers. Furthermore,
transactions must be adequately checked for illicit activity. And, lastly, attractive and
interoperable solutions must be available to end users.
4 Central bank digital currencies - a possible solution?
With all of these caveats, perhaps a different approach could be the right one for
crossborder payments? Central banks around the world are now in the process of developing
central bank digital currencies - could these be the solution for cross-border payments
as well?
The development of CBDCs is still at an early stage in most countries and focuses
mainly on domestic markets right now. However, we should not disregard the potential
that CBDCs may have for enhancing cross-border payments. They could be used to
process instant payments and should also help to extend their reach. In many
countries, one of the reasons for pursuing CBDCs is to increase financial inclusion.
Furthermore, cross-border payments made in central bank money may contribute to
lower risk. However, increased involvement of central banks entails its own risk: the risk
of crowding out private competitors. CBDCs should therefore be designed around the
principle of "do no harm". They should also continue to rely on services provided by the
private sector to the greatest possible extent, including for a significant portion of the
cross-border chain.
Even if interlinked CBDCs were to become a reality, central banks would still have to
rely on private actors for certain tasks. One example is currency exchange, since this is
typically a market-based business, including managing and dealing with the inherent
exchange rate risk. Project Icebreaker, an experiment conducted by the Bank of Israel,
the Bank of Norway and the Bank of Sweden in cooperation with the BIS Innovation
Hub in the Nordics, has shown that banks still have a place in a world of interlinked
CBDCs.
And, just like interlinked faster payment systems, a solution based on interlinked
CBDCs would still rely on private actors to provide attractive front-end solutions.
5 Closing remarks
All of this shows that, in order to enhance cross-border payments, we need
cooperation, not only between banks and central banks, but also with other players as
well. Regulators will have to coordinate efforts to harmonise regulation. Central banks
will have to be active in two different roles. As operators of payment systems, we may
have to adjust our systems and communicate with the market on how best to expand
their services. As leaders, we will have to continue to support and coordinate the
actions resulting from the roadmap.
Ultimately, all stakeholders will have to come together to find solutions that are
beneficial for all parties and work together to improve the global payments landscape.
Which brings me back to Nelson Mandela: with close collaboration on a global scale,
which might be hard to imagine today, this may become a reality in the future.
1
Financial Stability Board, G20 Roadmap for enhancing cross-border payments,
October 2021.
2
Committee on Payments and Market Infrastructures, ISO 20022 harmonisation
requirements for enhancing cross-border payments, March 2023.
3
> https://www.bis.org/about/bisih/topics/fmis/nexus.htm