The rapid pace of globalization and advancements in technology have fueled the demand for more efficient, transparent, and accessible cross-border payment systems. Multilateral payment platforms have emerged as a promising solution. The G20 Roadmap for Enhancing Cross-border Payments (the “Roadmap”) of the Financial Stability Board (FSB) also lists them as a key priority for enhancing such types of payments.
The benefits of multilateral payments
A multilateral payment platform is a payment system that is multi-jurisdictional in design, with the potential to reduce costs and increase the speed, safety, and transparency of cross-border payments. By enabling direct transactions between participating financial institutions in different countries, multilateral payment platforms would eliminate the need for multiple intermediaries and shorten transaction chains. These platforms also offer opportunities for greater efficiencies through the harmonization of data formats, pooling of foreign exchange liquidity, and streamlining of compliance and business processes.
Bilateral linkages have already begun to shape the cross-border payment landscape. Additionally, while several regional multilateral payment platforms already exist, market players are also currently exploring new initiatives.
Takeaways from the Point Zero Forum 2023
Led by The Bank for International Settlements (BIS) Innovation Hub, the Point Zero Forum 2023 roundtable discussed opportunities and challenges in cross-border payments. It brought together key stakeholders and leaders from both the public and private sectors, spanning international organizations, central banks, payment system operators, commercial banks, and fintech companies.
Participants reflected on the progress made to date in enhancing cross-border payments, discussed potential opportunities and challenges, and shared the lessons learned from their respective journeys.
The roundtable discussion centered on the following three major themes:
Establishing optimal governance and interoperability frameworks
Governance and interoperability frameworks provide a stable structure and an organized approach for managing the inherent complexities of cross-border payments. Designed well, such frameworks can ensure that multilateral platforms not only achieve their organizational goals, but also fulfil oversight expectations to operate safely and efficiently. As various platforms emerge, interoperability will be key to mitigate fragmentation in the global financial system.
The principles of good governance include implementing clear, transparent processes and open dialogue to foster stakeholder alignment. Neutral parties, such as the public sector, can align multiple stakeholders, paving the way for self-sustainable yet inclusive multilateral platforms.
As a multilateral platform scales, the number of countries, regions, and currencies it serves will increase. Governance frameworks should evolve not only in terms of board structures and voting rights, but also in terms of membership inclusivity. Depending on the end-goal of the platform and the journey required to get there, the governance model should be optimally defined to allow for agility in its decision-making and inclusivity in its participation processes.
The partnerships among public and private players in the multilateral platform ecosystem have the potential to create efficient and effective solutions. The private sector is able to contribute investment, technology, and expertise, while the public sector can act as a catalyst in setting the overall roadmap and framework to foster collaboration, and drive adoption and alignment among private sector players. Political will is a key catalyst to foster collaboration among participants, facilitate the harmonization of policies, and mobilize public and private funds for multilateral platforms.
Addressing divergent legal, regulatory, and oversight frameworks
In view of the multi-jurisdictional nature of cross-border payments, the divergence of legal, regulatory, and oversight frameworks across different jurisdictions could lead to potentially duplicative and conflicting rules. While progress is being made at the regional level, for example, with initiatives such as cross-border privacy certificates in the area of data protection, achieving harmonization remains a complex task. Addressing this divergence is vital to fully harness the benefits of interoperability through a multilateral payment platform.
Technological advancements have made a centralized sanctions-screening process a potential alternative that overcomes the complexity, inefficiency, and costs of the current screening process. Innovative technologies, such as artificial intelligence (AI), machine learning, and data analytics, have the potential to enable automated sanctions screening with higher accuracy and efficiency.
Significant progress has been made in developing regional and global data governance frameworks that will help balance the need for freer cross-border data flow while adhering to the varying data protection and privacy regulations. Leveraging a combination of distributed ledger technology (DLT), and privacy enhancing technology (PET) or zero knowledge proof (ZKP) could better enable compliance with data privacy regulations while enabling secure and efficient data sharing.
To minimize credit, liquidity, and other risks in the payment processes, settlement finality must occur first at the domestic level and subsequently at the cross-border level. Fostering alignment and finding the right balance is crucial for creating an efficient and trusted settlement framework.
Developing a viable commercial model
One of the main challenges around commercial viability lies in addressing the disparity in transaction volumes between countries, where one country might be a net sender of money while the other a net receiver. While there have been efforts to explore fee sharing arrangements in some bilateral cross-border payment linkages, finding a sustainable and equitable commercial model is crucial to fostering the widespread adoption and long-term success of the multilateral payment platform. Establishing a successful multilateral payment platform requires a well-defined commercial model that incentivizes both public and private sector participation while ensuring long-term sustainability.
Balancing the incentives between the sending and receiving jurisdictions is vital to build and justify the business case for both jurisdictions to participate in the multilateral platform. Costs should not be passed solely to the end-user, and different pricing models should be aligned to the different payment use-cases and the specific needs of the end-users.
Existing solutions, such as payment versus payment (PvP) and netting, coupled with advanced technologies, such as distributed ledger technology (DLT), can help tackle the challenge of trapped liquidity by reducing foreign exchange (FX) costs. Despite the high potential to unlock some of these challenges, strong leadership, robust frameworks, and supportive policies are crucial for enabling the full potential of these solutions.
Future blueprint for multilateral cross-border payment platforms
Enhancing cross-border payments requires a comprehensive approach involving both the public and private sectors. While challenges exist at present, fostering strategic collaboration and alignment, and utilizing modern technology can help ensure the scalability and future interoperability of multilateral payment platforms. The building blocks that are critical to position a multilateral platform for success would need to be constantly developed and refined. These include designing optimal governance and interoperability frameworks, addressing divergence in legal, regulatory, and oversight frameworks, and implementing a viable commercial model.