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Destination innovation: where next for the journey to instant cross-border payments

The speed of payments is only going in one direction and that is faster. Whether spending as a consumer or the owner of a business, instant settlement is now pretty much the norm; waiting longer than a day for incoming funds to clear is a source of frustration.

The next area of payments to enter the real-time realm is cross border, also known as IXB. In fact it’s a hot topic right now. As SWIFT’s Europe chief executive Thierry Chilosi recently told Finextra at European Banking Day 2022, there are three key drivers behind the rapidly-evolving shift. Firstly, people want things instantly; secondly, competition is tightening up between innovators; and thirdly, regulators are paying increasing attention to the cross-border payments space.

Indeed, earlier this year SWIFT along with EBA Clearing and The Clearing House jointly announced a pilot service for IXB, supported by banks across Europe and the US for euro and dollar transactions. The scheme is being developed with the aim of supporting other currencies too.

Perhaps most important of all though, it’s predicted that the value of cross-border payments will rise by $100 trillion to $250 trillion during the decade to 2027 – driven by increasing mobility of capital, goods, services and people around the world. It’s clear that IXB represents a huge opportunity for banks and fintechs. Innovators with global ambitions need to engage with this trend soon if not now.

Why does IXB matter and what are the key challenges?

The speeding up of cross border payments goes beyond convenience and user experience. According to the Bank of England, in some low and middle-income economies remittances are now a primary source of development finance. It makes good sense then to ensure money flows quickly and efficiently around the world.

From a B2B perspective, sending money overseas isn’t as straightforward as transferring a few hundred or a thousand dollars to relatives. Commercial payments tend to be high value averaging at $50,000 and typically costing around $200.

So what might this mean in practice? Take, for example, someone trying to send a payment of $1m from the US to the UK. The Federal Reserve and Bank of England both have high credibility and don’t have any liquidity concerns baggage. It’s almost certain that the transaction would go through smoothly.

But try making the same payment to a country without an internationally trusted or understood central bank and there could be fears about the receiving nation’s ability to cope with such a large instant transaction. Liquidity issues aside, there are also challenges around transparency and consistency, in addition to an all-too-common lack of clarity about the intended beneficiaries of settlements.

However, with emerging markets playing an ever-greater role in the global economy, it’s vital that this kind of friction is removed from cross-border payments.

How can a diverse range of nations benefit from IXBs?

To overcome challenges around liquidity and interoperability, there’s a growing view that CBDCs (central bank digital currencies) present a solution. This is because universally-adopted digital tools using a common technical interface or common clearing mechanism can help overcome compatibility challenges between different national banking systems. Unlike their volatile crypto brethren, relatively dependable CBDCs enable a blockchain response to the challenge of how to speed up cross-border transactions in all four corners of the globe.

Banks and fintechs that are aligned with ISO20022 will also be well placed to offer seamless IXB payments, as the rails currently under construction for faster international transactions are being developed with this in mind. SWIFT aims to enable ISO20022 messages for cross-border payments among its community on an opt-in basis by August this year (2022) before switching on general availability in November.

This all elevates the importance of using fit-for-purpose testing tools. With a partner that has a global perspective on financial ecosystems, it’s possible to identify and remove glitches and failures in a simulation environment rather than the real world.

Iliad Solutions t3 engine equips international banking and fintech partners with the ability to conduct endpoint to endpoint automated tests in a way that fits neatly into the product development process – while taking a system-wide view that replicates the way real transactions flow.

For financial institutions that wish to support instant funds settlement between businesses across the globe, system failures with high value B2B IXB payments are simply too costly to contemplate.




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