Enhancing Cross Border Payments

Extracting sources of cross border payment friction

There is a widely held view that cross-border payments are intrinsically inefficient as each payment must go through different jurisdictions and banks, creating friction and delay. There are several reasons for such delays with the most common issue being the lack of a holistic, ubiquitous global payment system. According to a new study from the Committee on Payments and Infrastructures (CPMI), end-to-end processing times that exceed hours or even days, spend most of the time at the beneficiary bank. Global trade hit a record high of $28.5 trillion in 2021, increasing from 25 per cent from 2020. This alone shows how rapidly cross-border payment activity is increasing, elevating the need for banks to reduce processing times.

Identifying sources of friction

The average payment processing time is 8 hours and 36 minutes with payments passing through 3 legs before reaching the customer, the originator, in-flight and the beneficiary leg. Sources of friction can be faced at any point along this timeline regardless of amount, distance or currency conversion, so what are the true causes?  

Interestingly, delays through the in-flight leg are minimal. Despite an increase in the number of intermediaries a payment must go through, average processing time remains low, representing less than one per cent of total payment volume. Most intermediaries are global correspondent banks allowing payments to go through a more streamlined and automated process explaining the marginal delays (or lack thereof) within the in-flight leg.

On the other hand, time spent at beneficiary banks is markedly longer than the in-flight leg. While the intermediary banks process 78 per cent of payments in less than five minutes, beneficiary banks can only process 33 per cent of payments in the same time. These inefficiencies within the beneficiary bank not only impacts along the cross-border transaction but can trickle down to businesses, potentially encountering higher direct and indirect costs.

Understanding variations of time spent beneficiaries

In most cases of payment delays, the effect of a single factor is unclear. Instead, multiple factors explain extreme variances in processing times, with majority being specific country-level variables.

Longer processing times tend to be a result of capital controls and bank offline hours. While it can be assumed that longer bank offline hours limit the time allowed for banks to process payments, it is also directly correlated with the use of batch processing. This limits the extent to which banks can execute payments in batches rather than transaction-by-transaction. Comparatively, capital controls come with extensive compliance processes, that, while limiting the spread of international economic disturbances, increase processing times at beneficiary banks affecting a country’s economy in other ways.

It is also important to note that longer processing times also tend to occur in low and lower-middle income countries, which can be attributed to the lack of an established financial sector. Operating in open economies, attracts and stimulates investments in market infrastructure, supporting faster processing of cross-border payments. These can be an important pattern in the future of payments, highlighting the need for sophisticated and innovative financial infrastructure to ensure fast, seamless cross-border payments.  

Solutions to shape the future

The cross-border payments process on a global scale is undergoing profound change with several shifts seen from governments to transnational payment systems and even in customer behaviours. While future regulatory changes are to be expected, customers are putting further pressure for real-time digitally enabled cross-border payments from every transaction point. What we have already seen happening in customers, is a shift to solutions that have enhanced value propositions such as Buy Now Pay Later services. This threatens not only to cut banks out of their correspondent banking relationships, but also loosens bank’s ties with end customers in payment-related activities.

Initiatives such as SWIFT gpi and payment pre-validation are improving the speed of cross-border payments. These services meet a wide range of needs across the entire international banking community, ensuring that transactions meet industry-wide requirements for speed, transparency and a better end-user experience. Those that are on the SWIFT network, must adhere to the standards set by SWIFT gpi at all legs of the transaction journey, underpinning the ongoing and future developments of cross-border payments. With more banks adopting SWIFT gpi, a foundational platform can be developed allowing SWIFT more accurate future analyses over a larger share of payment processes.