CROSS-BORDER INTERBANK PAYMENT AND SETTLEMENTS: Emerging opportunities for digital transformation
The Bank of England, Bank of Canada and the Monetary Authority of Singapore (MAS) have published a report that “examines existing challenges and considers alternative models that could in time result in improvements in speed, cost and transparency for users.” A group of commercial banks joined in the research led by led by HSBC.
The authors believe there “may need to be a more fundamental paradigm shift” to address intrinsic challenges to the existing ecosystem.
Victoria Cleland, Bank of England Executive Director for Banking, Payments & Financial Resilience, commented on the report:
“The ability to make secure and efficient payments is key to the strength of the financial system, and important for consumers and businesses. Many national payment systems are benefiting from considerable innovation and change. In this context it is important that cross border payments, which totalled 1.8 times global GDP in 2016, are enhanced too. They are at the centre of the international financial system; enabling trade, investment and money transfers. This report, which is itself a great example of international collaboration, provides a foundation that will enable further exploration of how innovation could improve this crucial aspect of finance.”
The report is designed to provide an initial framework for the global financial community to assess cross-border payments and settlements in greater depth.
Three models were reviewed. The first two were adaptations to the existing interbank payment system with the third focusing on “use of Wholesale Central Bank Digital Currency and its various applications through Distributed Ledger Technology [DLT].”
The three models are described as follows:
- Model 1: is the collection of current and planned industry initiatives, which we consider to be the baseline for these discussions.
- Model 2 is based on an expanded role for in- country RTGS operators that act as “super- correspondents” for settling cross-border payments instead of relying on intermediary banks as correspondent banks.
- Models 3a, 3b and 3c are variations based on the settlement of cross-border payments between banks using W-CBDCs47. These are a tokenized, limited-access form of central bank liabilities used for wholesale interbank payment and settlement transactions.
A W-CBDC is a “wholesale central bank digital currency.”
So where does this all go?
CBDC’s have been widely discussed with some policymakers criticizing the concept while others remain open to investigation of a CBDC.
The authors of this report conclude that first policymakers must continue to research options and continue to experiment. Second, policy implications must be considered.
Finally, “further thinking could be done on how policy-makers and industry could work together on private sector innovation to address, in the shorter term, the challenges faced by users of cross-border payments identified in this report.
While the discussion is interesting perhaps the most important aspect of the report is the public private partnership that engages three separate state entities that are willing to consider distributed ledger technology as potentially beneficial to improve or revolutionize the current state of payments.
The report is available below.