Mastercard VP: Removal of cross-border frictions will improve forecasting

In its latest report, the Committee on Payments and Market Infrastructures (CPMI) identified key frictions to cross-border payments – including funding costs, weak competition, and the complex processing of compliance checks.

Stephen Grainger, executive vice president at Mastercard, says solving these frictions will allow businesses to create more accurate forecasts.

“The problem we’re trying to solve is the lack of predictability and certainty. The lack of predictability means that you can’t plan effectively,” he explains.

“If you’re a large multinational and you don’t have clarity in terms of what balances are coming into your account, it means this will impact you being able to pay your suppliers – potentially on paying your employees. The removal of frictions allows a much greater sense of what is going to happen – which means that you can improve your forecasting.”

Grainger says lowering the barriers to cross-border payments could benefit businesses in terms of economic growth and planning.

“All of this must be about driving either economic value or driving protection for some of the users of that system around the edge. The smaller you are, the less flexibility you have in terms of being able to manage your finances effectively,” he says.

The CPMI states that “faster, cheaper, more inclusive” cross-border payments would unlock benefits for citizens and economies by “supporting economic growth, international trade, global development and financial inclusion” – particularly relevant for the post-pandemic global economy.

Today, the Bank of England announced the appointment of Accenture as the technology driver partner for Real Time Gross Settlement Service (RTGS) Renewal Programme in a bid to boost the UK’s payments service.

Central banks are at the core of the CPMI report, particularly as countries now seek real-time payments, according to Grainger.

“I think the central banks are now asking themselves the question, ‘what is it they need to be able to move their RTGS infrastructures forward in a real-time 24/7 way of operating’,” he says.

“If you can remove the frictions, you can move much more seamlessly to a world of central bank digital currencies (CBDCs) and some countries and governments and central banks may make progress in terms of owning that agenda for themselves.”

In a speech delivered last week, Tobias Adrian, financial counsellor and director of the monetary and capital markets department at the IMF, explained that public-private partnerships would “preserve comparative advantages: for the private sector to interface with customers and innovate and for the public sector to regulate, supervise, and ultimately provide trust.”

Whilst enumerating two models of partnership for the provision of CBDC, Adrian reiterated that collaboration between central banks and public-private partnerships on a cross-border level would deliver significant innovation and growth.

“We will benefit from this public-private partnership that is at the core of the CPMI paper,” adds Grainger.

Despite this, he believes reaching consensus around cross-border payments remains an impossible task.

“If you think about some of the issues that are identified around financial crime compliance, so sanctions and anti-money laundering (AML) – if you could get to this state of regulators and governments agreeing on a common sanction list and if you could get private institutions to agree on a common set of criteria that you would always scan every payment against, you could remove a lot of duplication out of current processes,” he explains.

“You could even get to the point of centralising some of these functions, which today is impossible. Trying to get all these bodies on the same page is almost impossible to achieve.”

In the report, the CPMI discloses five focus areas for cross-border payments including joint public and private sector effort (Focus area A); coordination of frameworks (Focus area B); improvement of payment infrastructures; (Focus area C) increase of data quality; and new payment arrangements (Focus area D).

“It’s interesting that they [the CPMI] talk about sections A, B, C, and D as almost being prerequisites to get to a point of having new outcomes like the scalable introduction of stable coins or central bank digital currencies,” says Grainger.

Grainger warns that consumers switching to digital assets will yet still be facing the frictions of cross-border payments.

“If today I took a token of value like Bitcoin – the reality is, at some point in time, those things exist in a world where they are not the predominant source of liquidity,” he says.

“If you want a fungible source of liquidity, then inevitably, you’ve got another step to do, which is materialising the token into some real-world currency value. That means that you’re then subject to all the frictions that exist in this model today.”

The CPMI report stresses that cross-border payments contrast with domestic ones as they involve multiple players, time zones, jurisdictions and regulations – a takeaway that Grainger points out as well.

“The paper made the point that cross-border payments are more complicated than domestic payments and it’s really important not to lose sight of that because there is this view in certain areas of ‘why should a cross-border payment be any different from a domestic payment’.”

SWIFT gpi has also driven a leap forward in cross-border payments, according to a spokesperson, via email.

“It has served as a catalyst for unprecedented improvement in speed, transparency and predictability.”

The spokesperson said that over 65 percent of payments on SWIFT use gpi – which represents more than $77trn (£59trn) in value in the past year.

“It has been transformational – and it’s just a start. The new strategic ambition approved by our Board earlier this year, builds on this strong foundation to enable seamless, frictionless and instant payments from one account to another, anywhere in the world.”

SWIFT also aims at solving cross-border payments frictions while maintaining robust resiliency, security and availability.

“We look forward to continuing to drive innovation in cross-border payments and welcome the efforts of the Cross-Border Payments Task Force and the Financial Stability Board to accelerate improvements in this space,” added the spokesperson.

The CPMI shows the high speed of cross-border payments on SWIFT gpi in its report, in which it highlights that 35 percent of payments are processed within thirty minutes and only nine percent take longer than a day.

In March, the SWIFT Board approved a new strategy aimed at building on the foundations of gpi to develop frictionless transactions.

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