Disponible en Español
BR-CEMLA-SECO Symposium on Cross-Border Payments: initiatives, scope and challenges
October 5 - 7
The Symposium on Cross-Border Payments was held in digital format, and was co-organized by Banco de la República, CEMLA and SECO. The keynote speaker was Dr. Tommaso Mancini-Griffoldi, Division Chief of the IMF's Monetary and Capital Markets Department. The main topics discussed were the landscape of cross-border payments, the challenges faced by both retail and wholesale cross-border payments, policy challenges and possible solutions, among which m-CBDCs stand out.
The event began with opening remarks of welcome from Gerardo Hernández, Leonardo Villar and Ivo Germann.
The first session, Global Panorama of Cross-Border Payments: characteristics, evolution, and future trends, was given by Tommaso Mancini-Griffoli. He emphasized that the objective is to have a platform for cross-border payments, with a common financial infrastructure, rules, security guarantees, etc. Then he explained the differences between making a transfer between banks in the same country and banks in different countries, starting with the fact that they have different currencies. One way the problem is being addressed is with digital tools, such as Bitcoin. He also mentioned some of the economic, technological, and legal challenges, such as trust, compatibility, and privacy.
He continued with his proposal of a platform that contains a single ledger, and instead of creating money, it only creates a representation of that money. Since there is only one ledger, there can be no double spending or double commitment in the contracts. Some of its applications are in hedging contracts, shared risks, and insurance, in addition to the extensions that the private sector can make use of.
It was emphasized that this platform could be an extension of a public good, by providing the infrastructure to tokenize settlement assets. With the domestic sector, it will only share the asset settlement functions and infrastructure. CBDCs can be this platform, but there are a lot of variables, like whether they should be wholesale or retail (or both). Tommaso stressed that a representation of the currency is created on the platform, but this does not require banks to create a CBDC; it can be treated as a stablecoin fully backed by central banks.
After a brief break, the second session of the day dealt with the challenges of retail cross-border payments in emerging economies. The first panelist was Horacio Tomás Liendo, director of the Legal Fintech team at Mercado Libre, who highlighted the importance of cash in Colombia, and that this is one of the main challenges of digitalization. The next challenge is technological, as the current infrastructure must be renewed.
The next speaker was Javier Gamboa, Director of Public Policy for the Andean and Caribbean Division for Mastercard. He highlighted the increase in cross-border payments in recent years, and its complexity is not only due to a scalability issue, but also to many other factors. He highlighted the role that public policy plays to favor the development of these transactions.
Next, Ben Dyson, Leader on Cross-Border Payments at BIS Innovation Hub, spoke about the difficulties of connecting payment systems, however, this makes them more efficient and cheaper. Some common problems are the structural differences in them, language differences, finding an entity that can do the currency foreign exchange, data privacy conflicts, among others. Making bilateral connections may seem like a solution, but as the network grows many problems appear.
During the question-and-answer session, when questioning the areas of opportunity for the development of retail cross-border payments, Horacio highlighted financial inclusion. On this occasion, he recalled the previously presented Nexus and XC platform proposals, which reduce costs and allow access to a larger population. When asked about the priority of public policy to facilitate the growth of cross-border payments, Javier pointed out the generation of trust in the system. Javier highlighted that the user went from a cash system where you observe the sender and receiver of the payment, to an international electronic commerce system where even the regulations of the countries are different and unknown, and generate mistrust about the origin and destination of the payments. Finally, Gilberto added that the Fintechs and the new players generate economic competition in the system, thus generating a better experience for the user who will be offered with better technologies and platforms.
The last panel of the day dealt with the Challenges in Wholesale Cross-Border Payments in Emerging Market Economies. It began with a presentation by Juanita Hernández, Country Manager Colombia, Panama & Ecuador, SWIFT. She highlighted that, unlike 5 years ago, SWIFT has practically 100% of its payments settled in less than 24 hours, and almost 80% in less than 6. The average time is 90 minutes. In addition, they are working on developing an artificial intelligence platform to improve the effectiveness of payment control, to detect and block transactional fraud. In addition, in a study published in 2021, they demonstrated the interoperability between CBDCs and SWIFT. She also mentioned the experiments carried out to connect through a link some CBDCs developed by different technologies.
The next panelist was Jesús Lozano Belio, Senior Manager of Digital Regulation, BBVA, who highlighted the efforts by the authorities to reduce barriers of cross-border payments and to improve the security and efficiency of payment systems.
The last panelist was Ruddy Castellanos, Regional Chief Clearing and Cross-Border Solutions, Citibank, who pointed out the evolution of the payments system from five years to date. He recalled that it was a system with high fees, long response times on payments and shortage of services. Today, these failures are reduced, however, there are still elements to be solved. Ruddy proposed three steps to follow: 1) jointly define a model to follow, 2) incentivize the first agents to adopt such a model, 3) strengthen implementation through regulators.
In the question-and-answer session, Ruddy highlighted placing the user at the center of the discussion, since it is his needs that will guide the adoption of new technologies. For her part, Juanita emphasized the relevance of collaboration in the adoption and creation of new technologies in a safe and resilient environment, to protect the confidence of the financial ecosystem.
The second day began with an introduction by Carlos Arango on international wholesale payment flows.
The first panel of the day dealt with the Expectations and Challenges of multiple CBDCs in cross-border payments. It was initially attended by Benjamin Muller, Policy expert in Banking Operations at the Swiss National Bank. In his presentation, he pointed out that the main difference between wholesale and retail CBDCs is who has access to that settlement method. For wholesale CBDCs, they are only accessible to financial institutions; for retail CBDCs, they are accessible to everyone. In addition, PvP payments on foreign exchange transactions are limited and, in fact, they have decreased recently. PvP payment is an effective and efficient way to settle foreign currency transactions. He added that cross-border assets raise their costs due to the number of intermediaries involved. The Jura project generates CBDCs from each bank using the RTGS system and allows institutions to redeem CBDCs in bulk. At the center of all this is supervision by central banks.
Subsequently, it was the turn of Andrew McCormack, Center Head, BIS Innovation Hub in Singapore, who pointed out the main characteristics of the mCBDC projects of the BIS Innovation Hub. All these projects are focused on complying with the G20 agenda on faster, cheaper, and more accessible payment methods; in addition to other benefits such as the development of emerging markets due to greater liquidity that allows cross-border transactions. Part of the challenges they face are the different issues of governance and regulation, as well as to whom and to what extent accessibility is allowed to different participants.
To conclude the first panel, Marc Bayle de Jesse, CEO, CLS, presented the CLS platform as one of the most important PvP payment methods to date and focused on reducing the settlement risk presented in FX transactions. He recalled the episode of the Herstatt Bank that could not pay its Deutsche Mark obligations in US dollars. He emphasized the evolution of the CLS system (it went from 5 to 18 currencies), in addition to presenting its recent CLSNet platform which is a service that calculates the clearing of payments and in which there are more than 120 currencies and daily transactions for more than 200 billion dollars. The latter platform works with blockchain technology. Finally, he pointed out that any solution to the cross-border payments system must consider governance, credibility, and trust, as well as public-private partnerships.
In the question-and-answer session, it was questioned whether the CBDCs are the future of every cross-border transaction or only for wholesale transactions. To this, Andrew and Marc agreed that it is more important to focus on solving the problem than on the technology used. They indicated that some countries have addressed the retail problem by extending the hours of their RTGS systems. For its part, Benjamin mentioned that the CBDCs could help to get started from zero as long as they keep collaborating with other participants for interoperability and accessibility issues. Another issue was the factors that a Central Bank in an emerging economy should consider before discussing a CBDC initiative, which led to considering the best model that fits the situation of each country, then considering the legal and regulatory context, as well as the questions of who will have access to really improve cross-border payments. A third question dealt with how to involve private or non-financial agents in these issues, where some answers focused on the regulations that central banks have for these agents.
Finally, it was questioned what the biggest challenge in the implementation of CBDCs would be, to which Marc emphasized that there are not many agents who would like to take the role of nodes, in addition to the economic cost it has. Benjamin, for his part, emphasized governance and the agreements that can be carried out. After this, the DLT technology that is dealt with would be an important issue. Finally, Andrew highlighted the management of technologies (CBDC or non-CBDC) and focused on how they would relate to each country's RTGS system.
The second panel of the day dealt with policy objectives and institutional and regulatory challenges of wholesale cross-border payments in emerging economies.
In the first presentation, Carlos Conesa, General Director on Innovation and Financial Markets, Banco de España, spoke of the G20 initiative to improve cross-border payments. He pointed seven main frictions: 1) non-harmonized messaging formats, 2) very complex compliance processes, 3) hours of operation limitations, 4) outdated technology, 5) long transaction chains, 6) costs associated with liquidity fragmentation, 7) weak economic competition. The solutions are focused on five areas: a) develop a common vision and ensure collaboration and commitment from both the public and private sectors, b) explore improvements to harmonize or simplify the regulatory framework, c) operational improvements that can be introduced to existing channels, d) promote standardization of messaging and data quality, e) explore new technologies and channels that can improve the efficiency of cross-border payments. He concluded by noting that there was no single solution. Progress is needed in several areas. The solution will be a combination of building new channels and improving old ones.
Alberto Boada Ortiz, Secretary of the Board of Governors of Banco de la República, presented a regulatory perspective. It pointed out the main instruments controlled by the central bank in the field of the foreign exchange market: definition of operations, intervention faculties, regulation of intermediaries and information. On the other hand, the main challenges it faces are: 1) new entrants (market makers and cryptocurrency exchange providers), 2) determining the usefulness and regulation of a digital currency for cross-border payments, 3) improving infrastructures 4) channel definition, 5) information from different sources.
Lucio Holanda Oliveira, Head of the Foreign Exchange Regulation Division of Banco Central do Brasil, continued by indicating that part of the challenges for emerging economies is the impact of the client activities in the financial institutions (import and export of goods and services, trade in financial markets, loans, and credits). Central banks can work on improving domestic regulation, aligning the regulatory framework to harmonize across jurisdictions, and providing guidance and encouraging initiatives to improve cross-border payments through the development of proposals that reduce friction and remove barriers. He shared some of the advantages of Banco Central do Brasil: temporary licenses to test innovative projects, encourage innovation and diversity of business models.
Finally, Juan Pablo Córdoba, President of the Colombian Stock Exchange, presented the approach of a user of the system. He presented his objective which is to create a Stock Exchange between three countries, Colombia, Peru, and Chile. Agents want to buy and sell assets listed in any of the three countries. He explained the main problems, among which is the double conversion (for example, Colombian peso to dollar and dollar to Chilean peso) and the difference with the schedules of the New York stock exchange that generates problems of identifying the settlement price in dollars. He proposed the generation of a unique Clearing House. In addition, he proposed three solution options: 1) to occupy a stablecoin issued by the Stock Exchanges as a payment settlement instrument, 2) to harmonize the operational processes, 3) to develop a wholesale multiple-CBDC that allows the payer to settle the payment in his local CBDC and for the receiver to get paid on their local wholesale CBDC.
On this last presentation, Carlos Conesa highlighted three main ideas: the various solution options, technology as part of the solution (although it must fix some regulatory aspects), and the need for cooperation between the public and private sectors. To this, Lucio added that the expected times to implement the solutions vary depending on the type of solution. If the solution is an improvement to the system, it could be soon, if it involves stablecoins, it could take longer, although it could be a more stable solution.
In the third session, the topic addressed was Possible solutions in wholesale cross-border payments.
Raúl Morales, member of the CPMI Secretariat of the BIS, focused on the RTGS system that is required from the public and private sector. The main blocks to deal with are access to payment systems, hours of operation, PvP, and multilateral platforms, as well as increasing accessibility to RTGS systems for cross-border payment providers in order to avoid intermediaries, increasing RTGS hours of operation to avoid delays or increased costs, considering the concept of Global Settlement Window that seeks the overlap of hours of operation of the RTGS, adoption and expansion of PvP arrays and extend RTGS interoperability by deploying multilateral platforms.
Peter Zotos, Managing Director, Global Head of Clearing Product Solutions Specialist of JPMorgan, summarized five events that significantly changed the payments industry: 1) 9/11, 2) 2008’s global crisis, 3) Brexit, 4) COVID-19 pandemic, 5) Ukraine war. He highlighted the way in which the markets and the industry responded to each of these situations such as the importance of stopping payments to "bad" actors, the generation of new technologies such as cryptocurrencies, or the implementation of ISO 20022 to improve communication. He also pointed out new key trends in cross-border payments and how JPMorgan has responded to each one of these.
James Wallace, Vice President of Monetary Bank Engagements, Ripple, presented some of its products focused on wholesale payments: 1) RippleNet, as a payment and messaging infrastructure that can connect different (financial) networks, 2) XRP, a digital asset that acts as a universal exchange currency, and 3) On-Demand Liquidity, which allows payments to be made in real time, without the need to have pre-funded capital in the target market. He also presented his future projects on seeking the interoperability of his platform with CBDCs.
In the question-and-answer session, the question about where we are on the agenda for implementing a multiple CBDC platform was raised, to which James answered that it depends on market participants seeing value in this and the industry adopting it. Peter, for his part, emphasized that it is not a question of whether we have the technology, it's a matter of harmonizing the objectives with the legal and regulatory issues.
One more question was whether these new DLT infrastructures are more efficient than traditional infrastructures. To answer this, James indicated that the efficiency part has to do with the cost of human adaptation to change.
Another question that was raised was about the role that a regional digital currency or a stablecoin orchestrated by a coalition of central banks would have. To this, Raúl pointed out that the payment system should be analyzed in detail, in case there is any other solution (for example, an improvement in RTGS systems) before exploring these new technologies. James, for his part, noted that while a stablecoin or digital currency would add great value, the discussion would focus on the collaboration, coordination and teamwork required.
On the third day, the possible solutions for retail cross-border payments were discussed. The first panel dealt with cross-border payments and economic development where these payments contributed to household welfare and business development in emerging economies.
Jesús Cervantes, Director of Economic Statistics at CEMLA, showed the results of the survey on remittances carried out by CEMLA and Banco de México. He showed that these have had 10 consecutive years of growth, with 2021 being the year of greatest growth and 2022 the year in which remittances are estimated to reach 140 billion dollars. He indicated that, for Mexico, Central America and the Caribbean, the United States is the main source of remittances, while it is Latin America and the Caribbean for the case of South America. Some relevant data are that the increase in remittances was mainly destined for the families most affected by the pandemic. In addition, most remittances are directed to the migrant's mother. Finally, he also pointed out that the choice of a means to send remittances is more linked to comfort and convenience than to the cost of sending them.
Lotte Shou, advisor of South Asia Regional Department of Asian Development Bank, began her talk by pointing out that the Covid pandemic showed an increase in acceptance of the benefits of various digital financial services, including the need to send money at both national and cross-border levels. She emphasized four points: 1) the important role of regional collaboration and coordination in achieving effective and efficient cross-border payments, 2) technological advances and the development of regional integration are very uneven between regions and countries, where the main difference lies in how well infrastructure and regulations are prepared, and how much e-commerce and mobile money can penetrate, 3) remote and sparsely populated countries in the Pacific can potentially benefit from CBDCs to bypass traditional currency restrictions and attract more people to financial systems, 4) emphasize the importance of expanding equitable access to the financial system.
For his part, Dionisio Valdivieso, commented that new intermediaries in cross-border payments have increased competition and efficiency, by reducing costs. However, not being regulated can cause risks in financial stability and problems related to money laundering. He indicated how improving cross-border payment systems increases financial inclusion, for example, by getting low-income people who receive remittances to open deposit accounts.
In the question-and-answer session Jesus was questioned for the time it takes to receive remittances, to which he replied that it is usually on the same day. It was also questioned if there was data on remittances from organized crime, to which the answer was that it was difficult to obtain, however, although it is almost certain that there is, the amount may be very small. Finally, the best mechanisms to process remittances in each region were consulted.
The second session began with the presentation of Miguel Díaz who talked about the changes that took place in the regulations of cross-border payments to prevent money laundering and terrorist financing. He noted that such regulations led to less efficient transactions by generating the DeRisking effect. This phenomenon caused financial institutions to close correspondent banks in certain jurisdictions. In addition, there was an exponential growth in the development and adoption of technologies and new suppliers of these. The above, together with an increase in remittances, detonated the interest of Central Banks in these new technologies, which led to the creation of the BIS Innovation Hub. This center seeks to develop research in these technologies that can serve as a public good so that any of the Central Banks can make use of them.
Amitabh said that even though India is the largest recipient of remittances, it has some of the most expensive corridors. He stressed that India's payment system is based on the principles that a payment system is a public good infrastructure, and that interoperability is the key to reducing the costs of cross-border transactions, which can be learned from what other countries develop. Following these principles, they support countries to develop fast payment systems and offer to connect them. If the country does not seek the above, they are still open to sharing their knowledge and experiences. He concluded by describing a bit of the features and challenges of the UPI-PayNow connection.
For his part, Yan Xiao, highlighted digital regulatory interoperability as the ability to connect payment systems across different jurisdictions in a legal way with more regulatory convergence. To achieve this regulatory interoperability, he proposed a series of actions, including the adoption of model laws and best practices, as well as commitments by all stakeholders to build an interoperable payment system with international cooperation.
To close the second panel, Othon began by indicating that it is difficult to match different legal structures, however, this is the path to follow. The legal, technological, and business structure of digital payments must be improved and innovated. He highlighted the coordination that must exist between the financial inclusion of the public with the regulatory security of service providers. He pointed out the importance of international coordination that must take place on different fronts: messaging, identity identification, and legal schemes.
In the question-and-answer session, it was asked about what would be the agenda that a Central Bank should follow to implement what was discussed during the session. To this, the speakers suggested that the central bank should provide, internally, the legal and technological infrastructure for local banks and private agents, and externally, the means of communication with international institutions. One more question dealt with the innovations that must be on regulation and coordination, to which Miguel replied that regulations that allow both the entry of new technologies and the reduction of the risk of their use should be analyzed.
The third panel dealt with solutions to retail cross-border payments.
Humberto Guibur began by commenting on the speed of the adoption of digital means of payment. He showed two products: Visa Direct for the general public that moves funds between accounts using credit cards, and VisaB2B Connect, focused on cross-border payment of large companies. He added that it has sought to optimize the transactions with an effective customer experience with agile authentication and authorization by AI models for real-time risk qualification. In addition, it seeks to improve the resolution of disputes between customers and companies to reduce costs, and optimization to improve their strategies for identification, authorization, and fraud mitigation.
Gabriel Bizama presented the Stellar blockchain as well as three use cases of this. The first use case was the flow of funds, such as the transfer of remittances at a lower cost than the average market cost; the second is their use in CBDCs; the third case is the aid in humanitarian assistance.
Jaime Parra began by commenting on consumer behavior and pointing out some of its challenges. Subsequently, he presented different options handled by PayU that allow easiness in cross-border payments. Among these are currency exchange, the wide range of payment methods, the infrastructure that manages to increase the approval rate with lower fees, and security.
The last speaker was Lars Sjögren presenting some features of regional payments initiatives. In addition, he presented some points to follow in the direction of progress in cross-border payments, among which are to emphasize regional solutions, that regulations do not inhibit competition and innovation, as well as being open to new technologies.
In the question-and-answer session, the role of CBDCs in the remittance ecosystem was raised, and it was commented that they must first become an option at the global level and that for that moment to arrive it could take a long time.
Finally, Luisa Fernanda Cardozo (SECO), Carlos Arango (Banco de la República) and Gerardo Hernández del Valle (CEMLA) concluded the meeting with some concluding remarks, comments, and acknowledgements.