https://www.bis.org/publ/othp39.

pdf

A number of fintech providers have used their direct or indirect access to IPSs to provide near-instant
cross-border payments.

However, in these implementations it is the fintech firm that coordinates two independent payments in
two countries; the two IPSs are not directly linked.

Linking IPSs would go further by creating interoperability and connecting payment infrastructures –
rather than banks – across borders.

Linking IPSs is one of the “building blocks” for enhancing cross-border payments

Cost

IPSs tend to be very cost-efficient for domestic payments.

Domestic payments are often free to customers, while banks may pay a very small fee per transaction.

This sets a low-cost basis for cross-border payments through IPSs – although there are always more
costs involved in a cross-border payment than in a domestic payment.

In contrast, traditional cross-border payments often require the bank to hold accounts with a bank in
each country that it wants to send payments to. These “correspondent” accounts are expensive and
time-consuming to set up, and many correspondent banks are withdrawing their services.

Linking IPSs makes it easier for banks to offer cross-border payments to countries where they have no
presence or partnerships.

Transparency and certainty

Linking IPSs would eliminate long correspondent banking chains and allow fees to be calculated upfront
and shown to the sender before they commit to make a payment.

In many traditional cross-border payments services, variable fees are levied by each bank in the
payment chain. This means the sender does not know how much the recipient will receive until the
payment reaches them.

Traditional cross-border payments may fail at multiple stages in the payment chain, sometimes hours
after the sender has initiated the payment.

By design, a payment through an IPS either completes or fails within seconds, so the sender has
certainty about the status of their payment.
Challenges in linking IPS

Linking IPSs is not straightforward. Cross-border payments are inherently more complex than domestic
payments; they require additional steps, such as currency conversion and compliance checks to prevent
the financing of terrorism and other illicit activities. A further challenge comes from the fact that IPSs
have different processes and functionality, and often speak different “languages” in the way they share
data and payment instructions.

Each IPS may use different:

• data formats, standards and mandatory fields;

• processes and the sequence of steps in a payment process;

• scheme rules around liability, disputes, data protection and privacy etc; and

• functionality, including whether aliases are used and whether there is a confirmation of payee service.

This complexity increases exponentially as more participants join the network. Three countries require
just three country-to-country links, but a network of 20 countries would require 190 country-to-country
links. Each IPS operator would need to maintain custom-built links with 19 other IPSs, each with their
own standards and processes. This is difficult from a software development and IT operations
perspective
Nexus overcomes the complexity of linking IPSs on a country-to-country basis by providing a
standardized way for domestic payment systems to speak to each other. This enables
“interoperability” between payment systems.

A network of 20 countries linked by Nexus would require just one integration to Nexus per IPS, and 170
fewer integrations than using custom country-to-country links.
https://www.oliverwyman.com/our-expertise/insights/2021/nov/unlocking-120-billion-value-in-cross-
border-payments.html

A multi-currency central bank digital currency (mCBDC) network as an

effective blueprint to tackle these problems
A full-scale mCBDC network has the potential to reduce the cross-border
transaction revenue by around 80% annually - approximately $100 billion
annually (excluding FX revenues).
https://www.imf.org/en/News/Articles/2017/11/01/sp103017-fintech-and-cross-border-
payments

II. The Current and Future Landscape of Cross-Border Payments

Now let’s apply this framework to cross-border payments. This is an area especially ripe
for change, and could benefit from new technologies. There are significant
shortcomings in today’s system—stemming in part from technological limits, and in part
from a highly concentrated market structure.

Before the internet, sending so-called “snail mail” domestically was fundamentally
different from sending mail internationally. Pricing was significantly different; the
infrastructure was different; and the handling of cross-border mail required international
agreements on payment sharing, packaging, tracking, handling and other processes.

In the age of the internet, however, there is no distinction between a message going to
a domestic or foreign recipient.

When making cross-border payments, various types of users—whether they’re

households, or small enterprises, or large corporations—all put special emphasis on low
cost, security, convenience, predictability, and transparency—the assurance that
intermediaries will preserve the confidentiality of their information.

Market Structure

Existing intermediaries benefit from high barriers to entry; each segment of the
payments chain remains highly concentrated. In many cases, barriers stem from high
fixed and sunk costs required to interface with users, comply with regulation, build trust
in services, and operate large back-offices in the case of correspondent banks. In
addition, size matters for these institutions to manage liquidity and counterparty risk.
Finally, network externalities are prevalent in messaging—and also in settlement, where
netting bilateral positions lowers costs, and access to multiple counterparties facilitates
transactions.

Much will depend on the scenario for technology adoption.

Three scenarios could be considered, each centered on DLT-based applications. In

increasing order of potential disruption, applications might target the areas of: (i) back-
end processes; (ii) compliance; and (iii) means of payment.

DLT: Distributed Ledger Transaction

Let me now turn to a second possible avenue for DLT application to be used as a
means of payment: Central banks could offer their own digital currencies. A “Central
Bank Digital Currency—let’s call it, in shorthand, a “CBDC”—would not be a parallel
currency. It would merely be a digital form of central bank money that can be
exchanged in a decentralized manner. 

Network externality is an economics term that describes how the demand for a
product is dependent on the demand of others buying that product. In other words,
the buying patterns of consumers are influenced by others purchasing a product.

https://www.pwc.in/assets/pdfs/consulting/financial-services/fintech/point-of-view/pov-
downloads/the-evolving-landscape-of-cross-border-payments.pdf

Cross-border payments landscape The cross-border payments ecosystem includes B2B, B2P,
P2B and P2P merchants. Processing of cross-border remittances takes place through various
legacy channels such as SWIFT/correspondent banking, post, Rupee Drawing Arrangement
(RDA) and Money Transfer Service Scheme (MTSS).

a) Correspondent bank/SWIFT Banks and other financial institutions use SWIFT

extensively to send and receive international payments. The SWIFT network comprises
over 11,000 financial institutions across over 200 countries. SWIFT is being used by
banks, securities dealers, asset management companies, clearing houses, depositories,
exchanges, etc. Indian banks tie up with foreign correspondent banks and open a
NOSTRO account. The correspondent and Indian bank process the transfer request
through the SWIFT messaging infrastructure.
b) MTSS5 MTSS is a strategic tie-up between overseas principals and Indian agents who
disburse funds to beneficiaries in India at ongoing exchange rates. Transfers usually take
one to three days with charges ranging from 0.3–5% of the transaction amount. This
service can only be used for inward personal remittances with a maximum transaction
limit of USD 2,500 and a maximum of 30 transactions per beneficiary per year. Trade-
related remittances (remittances towards the purchase of property, etc.) are prohibited
under this arrangement.
c) RDA Indian banks have partnered with various international exchange houses to provide
a faster remittance facility to Indians residing outside the country. AD-1 banks6 tie up
with non-resident exchange houses to maintain vostro accounts in FATF-compliant
countries.7 Customers can use these exchange houses to send money to India. The money
is credited to the beneficiary account held with the bank maintaining the RDA within a
few hours.
d) Postal channels The International Financial System (IFS) is a software/platform
developed by the Universal Postal Union (UPU) to facilitate both inward and outward
 remittances through the postal channel across partner countries. These transfers are
conducted over electronic data interchange (EDI) messages from India Post’s central
server to the IFS national server to the destination country postal operator through the
UPU system.
e) Emergence of FinTechs FinTechs have leveraged technology to introduce low-cost
solutions for international payments for individuals, small businesses and corporates.
FinTechs have revolutionised the cross-border payments ecosystem through enhanced
customer service, extensive global reach, flexible payment options, lower fees, and
reduced transaction times.

FinTech companies facilitate transfers in a secure, fast and affordable way. There are two
primary models:

1. cross-border payment rails that don’t run on traditional bank networks

2. technology solutions that allow clients to connect to legacy bank rails more easily

The transfer fees range from 0.25–3% of the transaction amount and depend on the
destination.

f) Future models

Faster payment rails

Distributed ledger technology (DLT)

FinTechs, banks and IT & ITeS companies have been experimenting with DLT in
the cross-border remittance space. This model uses a bidirectional messaging and
settlement component that validates transactions using DLT before funds are
transferred.8 This model is gaining increasing acceptance among customers who
transfer smaller amounts of money, particularly in small-to-medium businesses.

https://www.economist.com/leaders/2019/04/13/the-cost-of-cross-border-payments-
needs-to-drop
https://www.ey.com/en_us/banking-capital-markets/how-new-entrants-are-redefining-
cross-border-payments

https://www.paymentsdive.com/news/fintech-cross-border-banks-coopetition-american-
express-ripple-zelle-venmo/600729/
The market for cross-border business payments

There will be almost 14 billion business-to-business (B2B) cross-border transactions in

2021, according to Juniper Research. Overall, the total value of B2B cross-border
payments will reach $35 trillion by 2022, the research firm said. Other estimates –
including from consultancy Ernst & Young (EY) – suggest the value of global cross-
border payment flows is considerably higher, reaching $156 trillion by 2022. Of that
number, EY estimates that $150 trillion will be B2B transactions, and the consultancy
estimates that the total volume of cross-border payment flow is growing by 5% annually.

Hugo Cuevas-Mohr, president and CEO of Mohr World Consulting,

estimates that the portion of the business cross-border payment market
up for grabs for fintechs is between 25% to 30% of the total number of
transactions. One of the reasons why banks dominate the cross-border
business payments market is because they provide additional services.

Two prominent fintechs running their own cross-border payment

systems include 11-year-old Wise, which is based in London, and Ripple,
a 9-year-old San Francisco-based firm that works with banks and
payment-service providers.

Other fintechs — including Payoneer and Rapyd — aren’t in the business

of running their own parallel cross-border payment networks, but
helping businesses and financial companies more easily access legacy
bank-led cross-border payment rails.

Value prop

An average cross-border payment takes just 30 minutes with Inpay, and

costs businesses, banks and other financial institutions up to 80% less
than traditional SWIFT wire transfers.