Asia Pacific’s payments landscape is complex, with numerous rules, regulations and systems to navigate. The region is taking the lead, however, in tackling the issues head on and bringing simplicity – especially when it comes to cross-border payments.
Cross-border payments are one of the biggest pain points for treasurers and in Asia Pacific, in particular, there are many complexities to contend with. The region is diverse – with a mix of developed, developing and frontier economies – and getting international payments to and from the region often relies on correspondent banking and financial institutions maintaining a series of bilateral relationships. As well as the regulations for each market, each institution can have its own way of doing things – further adding to the complexity. The problems with this set-up are well known, but now there are changes afoot in Asia Pacific to bring standardisation, simplicity – and innovation – to cross-border payments.
Reet Chaudhuri, Co-Lead, Asia Payments for McKinsey, comments, “Traditional cross-border payments globally are a challenge. They are expensive, time consuming and inefficient,” he says.
Corporates are still reliant on financial institutions and the correspondent banking network to get payments from one side of the world to another. In recent years, there has been increased regulatory scrutiny (and fines) related to know your customer, sanctions screening and anti-money laundering regulations, for example, and many large institutions have dramatically reduced the number of correspondent banks they have. This ‘de-risking’, says Chaudhuri, means that it is now even more convoluted to make cross-border payments.
Chaudhuri illustrates with a hypothetical example. A payment originating from Asia Pacific could go through six or seven steps before it is settled in a frontier market in Africa. The importer may not bank with the international bank with the correspondent network, so they go to their local branch, who goes to their correspondent, who sends the payment to their regional hub, which forwards it to their counterparty in the other country, who sends it to a local clearing bank, who sends it to the local branch of the beneficiary. “Each of these entities is shaving off their fees,” says Chaudhuri.
Chavi Jafa, Vice President, Head of Business Solutions, Asia Pacific at Visa describes the problems with cross-border payments as the three ‘Cs’: cost, clarity and consistency.
The cost comes with the number of intermediaries that are involved in the process – with each taking their cut, making the payments expensive.
Also, “There is a lack of clarity around the process and timing of when the payment will be received,” says Jafa. “If a business sends a payment internationally there is a lack of clarity about when that payment will be received.”
And then the third C is consistency. “There is a lack of consistency from a user perspective. Every financial institution has their own processes that they follow so even if the sender and the receiver are in the same country, they could have a different user experience because they are using a different financial institution,” explains Jafa.
The pitfalls of this way of doing things are well known, both by transaction bankers and corporate treasurers alike. Swarup Gupta, Financial Services Lead and Head, ESG at the Economist Intelligence Unit (EIU), comments, “The correspondent banking network has been in decline for a while.” He adds that most of the large correspondent banks are institutions from developed markets, and they are ill-equipped (and unable to justify their fees) when it comes to catering to the market for low-value transactions and low volumes.
Gupta notes there are issues with settling in currencies that are illiquid, and less well-known, and also the mix of batch and real-time processing can mean that faster payments can still be slowed down when they hit a batch-processing system in a particular country. And on the issue of visibility, Gupta says succinctly: “If you have paid me, I have no clue.”
All is not lost, however. Many parties in this complex landscape are working on improving the situation and bringing speed, simplicity and transparency to cross-border payments. “There is so much focus [on cross-border payments] because the opportunity is so large in Asia Pacific,” says Jafa. She points to research that estimates the size of the potential market as a US$4trn opportunity for cross-border payments in Asia Pacific.
The challenges are huge, however, because of the diversity within the region. Miguel Warren, VP of Southeast Asia at payments company Payoneer comments, “APAC is an incredibly diverse region with a myriad of jurisdictional regulations that need to be considered.” For businesses managing cross-border payments, there is no ‘one size fits all’ and in many cases they need to rely on third-party providers. Warren notes that Hong Kong and Singapore have emerged as prime locations to do this as there are many options for entities to access cross-border payment solutions.
There are myriad options for overcoming the complexities with cross-border payments. There are various solutions in the market that address gaps in the correspondent banking network, notes McKinsey’s Chaudhuri.
With CBDCs, everyone wants them, but no one has them at scale.
Swarup Gupta, Financial services lead and Head, ESG, Economist Intelligence Unit (EIU)
With the lack of visibility, for example, SWIFT gpi makes it possible to see where the payment is. And Visa B2B Connect overcomes the problem of a financial institution not having a correspondent bank in a particular country. And there have been challengers to SWIFT, such as Ripple.
Visa’s Jafa explains that one of the advantages of using Visa B2B Connect – instead of the traditional correspondent banking system – is that it is a multilateral network. Or in other words, participants sign up to the same rules so there is standardisation among all the participating institutions. “All the participants are governed by the same rules; with this standardisation in processes the user experience becomes consistent,” explains Jafa. This contrasts with the correspondent banking network where Bank A has to partner with Bank B, then Bank C and so on. Also, with Visa’s solution, there is transparency with the transactions. Jafa explains that the fees are confirmed up front and it is clear how much the sender is paying and how much the beneficiary will receive.
Despite this, and other solutions, that address the inefficiencies in the correspondent banking market, most corporates still rely on their banks to do things the old way. For now, correspondent banking and SWIFT are still the dominant players for cross-border payments, says McKinsey’s Chaudhuri.
One recent development that is promising, Chaudhuri says, is the mCBDC Bridge project with a proof of concept that indicates that cross-border payments could be done in almost real-time at a fraction of the cost. This multiple Central Bank Digital Currency Bridge is a project that is building a multi-CBDC platform for international payments and has been tested by the BIS Innovation Hub, the Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People’s Bank of China and the Central Bank of the United Arab Emirates.
Central bank digital currencies (CBDCs) are a hot topic in the industry and many are looking to them to solve the well-known problems with cross-border payments. EIU’s Gupta observes how this work is progressing: “With CBDCs, everyone wants them but no one has them at scale.” Also, in addressing the issues with cross-border payments, and using CBDCs, “Interoperability has to be built into the inception process,” says Gupta.
Gupta points to an interesting CBDC project – known as Project Aber – with Saudi Central Bank and the Central Bank of United Arab Emirates for wholesale cross-border payments. With this project, explains Gupta, the commercial banks in the two countries will issue the same digital token – ie in the same digital currency – so there is instantaneous settlement. The initiative explored the viability of using distributed ledger technology for this single dual-issued digital currency. The project explored whether this could be used for cross-border settlement between the two central banks; between domestic commercial banks in each countries; and cross-border transactions between the commercial banks in the two countries. The project team reported that distributed ledger technology could be used in this way to reimagine cross-border payments and was “pleased by the promising results”. Gupta, however, does not expect to see similar initiatives develop in other countries.
Gupta believes that the greatest changes in the Asia Pacific landscape are coming from elsewhere. “The near future is the linking up of various real-time payment systems rather than the CBDCs,” he says.
There is already plenty happening in this space – with domestic real-time systems in Asia being linked up to make real-time cross-border payments a reality. Also, there has been the linking up of QR code systems between countries, such as the recently-announced scheme between the central banks of Singapore and Indonesia. A report by the EIU, entitled Beyond borders: a new era for digital payments, also notes this trend of Asia taking the lead in the adopting cross-border payment linkages and notes the various countries that are linking up, such as Malaysia, Philippines, Singapore and Thailand.
With schemes such as these, the patchwork of different systems will be simplified and a more seamless, consistent payment experience will be possible – with there being, in theory, no difference between the ease of a domestic payment, and a cross-border one.
One development that will also help with the simplification and standardisation of international payments in the region is the migration to the ISO 20022 format. Payment messaging will be standardised with ISO 20022, the migration to which is still ongoing. Chaudhuri explains this standard – which banks will need to comply with – is an improved messaging protocol that allows much more information to accompany a payment, which will lead to easier reconciliation, he notes. Chaudhuri says many corporates still need to make the change as there is a three-year window of coexistence until full adoption of ISO 20022 by banks.
This standardisation, however, does not solve the lack of speed with cross-border payments, notes Chaudhuri. And while there are a number of projects underway to connect various real-time payment systems in Asia, these are still bilateral arrangements between national systems. Could there one day be an equivalent to the Single Euro Payments Area (SEPA) in Asia Pacific, where the standards, rules and regulations are the same? Chaudhuri does not think so. He argues that it would be challenging for a variety of reasons. Asia Pacific, for example is politically diverse and not a united economic bloc in the same way the European Economic Area is.
While it may seem like change to the payments landscape in Asia Pacific is coming slowly, Gupta has advice to treasurers: “Prepare for disruption,” he says. He notes that the wave of innovation that began with Steve Jobs and the iPhone is now raising business-to-business expectations and customers will be expecting much more than the status quo.