The global cross-border payments market was valued at $181.9 trillion in 2022, and is projected to reach $356.5 trillion by 2032, growing at a CAGR of 7.3% from 2023 to 2032. Historically, cross-border payments were initiated through manual processes, often involving letters of credit, checks, and extensive documentation. They have evolved significantly throughout history, closely intertwined with the development of trade, currency exchange, and industrialisation. With the onset of industrialisation and wire transfers, banks began to facilitate cross-border fund transfers. However, despite technological advances, cross-border payments remain riddled with inefficiencies that hinder their effectiveness. These frictions affect businesses and individuals and pose a significant barrier to financial inclusion and economic growth. Enhancing the efficiency of cross-border payments is a key priority on the G-20 roadmap.

The Financial Stability Board (FSB) has released numerous consultations to gather insights and drive improvements. The FSB has identified particularly four challenges associated with cross-border payments — high costs, low speed, limited access, and insufficient transparency.

The old and the new

The Bank of England and the Bank for International Settlement classify retail cross-border payment arrangements into four models: correspondent banking, closed loop or the single system model, interlinking of payment infrastructures, and peer-to-peer.

Correspondent banking uses intermediary banks, increasing the complexity of payment and costs. This model is declining due to regulatory costs and fintech competition. The single system model relies on single payment service providers, facing interoperability and regulatory issues. Interlinking payment infrastructures involve connecting countries’ systems for seamless transactions but has technical and regulatory challenges. Peer-to-peer allows direct payments using technologies like distributed ledgers. The FSB has identified issues such as high costs and low speeds in these systems, proposing solutions and leveraging technologies such as blockchain and digital wallets to enhance cross-border payments.

As new technologies emerge and the demand for improved cross-border payment systems grow, various bilateral and multilateral initiatives are being undertaken to enhance cross-border payment capabilities. These new-age models represent a significant shift from traditional cross-border payment methods, reflecting the ongoing evolution of the global financial landscape. Most of these new-age cross-border payment projects fall into three primary categories: Linking Fast Payment Systems (FPS) or Instant Payment Systems (IPS), Central Bank Digital Currency (CBDC) projects focusing on cross-border payments, and distributed ledger technology (DLT) based cross-border payment projects. Notably, many DLT-based projects also involve CBDCs. Innovative pilot projects aim to make international transactions faster, more cost-effective, and more secure, offering improved financial access and efficiency for businesses and individuals worldwide.

The PayNow-PromptPay (PNPP or PPPN) linkage, launched in April 2021, connects the FPS of Singapore (PayNow) and Thailand (PromptPay) through cross-border gateways built and operated by both countries’ systems operators (BCS and ITMX, respectively). Similarly, the UPI-PayNow linkage enables real-time, cross-border fund transfers between India and Singapore. It allows users to send money using mobile numbers or virtual payment addresses, offering a secure and cost-effective solution for international remittances.

Challenges to cross-border payments

Cross-border payments rely not only on technology but also on adherence to various legal and regulatory frameworks. According to a 2021 Committee on Payments and Market Infrastructures (CPMI) report, providers highlighted legal, regulatory, and compliance costs as major challenges. Payments crossing multiple jurisdictions must comply with diverse domestic laws regarding anti-money laundering, customer due diligence, data sharing, and settlement processes, necessitating consistent and enforceable rules across all involved countries. As innovations flourish, regulatory bodies worldwide are catching up to create frameworks that ensure security, stability, and transparency. The Financial Action Task Force (FATF) has been pivotal in setting international standards for combating money laundering and terrorist financing that include guidelines for digital payment methods.

A significant regulatory challenge noted by many surveyed projects is the inconsistent implementation of the anti-money laundering and counter-terrorist financing (AML/CFT) framework, which can profoundly impact system design and functionality. The FSB’s 2023 report reveals that while AML/CFT requirements are based on FATF principles, fragmentation across jurisdictions creates friction, particularly in wire transfer recordkeeping. This inconsistency affects various aspects of cross-border payments, including customer identification, sanctions screening, and data sharing. Variations in documentation requirements and screening processes can lead to delays, additional queries, and operational inefficiencies.

Furthermore, privacy laws and data protection regulations contribute to these challenges. For instance, varying standards for data sharing and privacy can complicate compliance with AML/CFT regulations, leading to issues such as conflicting information and increased manual reconciliation. Overall, these regulatory discrepancies necessitate tailored solutions for each jurisdiction, adding complexity and cost to cross-border payment systems.

The way forward

To ensure the integrity and efficiency of cross-border payments, legal frameworks must balance user privacy with financial integrity requirements, particularly around AML and CFT. Countries should adopt a risk-based approach to AML/CFT compliance, ensuring consistency in regulatory measures and engaging the private sector to develop effective techno-legal solutions.

This involves clearly defining participant roles in compliance, setting transaction limits for reduced compliance requirements, enhancing sanctions screening through information sharing, and exploring Know Your Customer (KYC) utilities to streamline identity verification.

Additionally, countries should agree on common purpose codes to reduce compliance costs and technical issues in cross-border payments.

Security and privacy are paramount in cross-border payment systems. Governance frameworks should outline clear terms for data collection, processing, and sharing, ensuring compliance with data protection laws.

Privacy-by-design principles should be incorporated to address privacy concerns. International cooperation on privacy interoperability through bilateral agreements and model contractual clauses is essential. Consumer protection must include transparency regarding fees, terms, and a clear grievance redressal mechanism.

A robust dispute resolution framework should address both user grievances and inter-provider disputes, including a centralised complaint management system and a well-defined process for resolving conflicts between Payment Service Providers (PSPs).

Access to cross-border payments should be broadened by including non-bank entities and simplifying compliance requirements, while capital controls should be streamlined to facilitate smoother transactions.

Overall, these measures are critical for enhancing the efficiency and inclusiveness of cross-border payment systems.

Sanhita Chauriha is a Technology and Data Privacy Lawyer. Views are Personal.