International Payment Speeds: Past, Present & Future (The Monito Briefing Issue #14)

Hello and welcome back to another issue of the Monito Briefing!

This week, we're delving into the speed of foreign currency exchange settlement and cross-border payments — past and present — before looking ahead at the future prospects of the BIS's proposed 'Nexus' scheme for linking domestic instant payment services worldwide to process near-instant international payments.

Industry Highlights

Before we get going, here’s a recap of what’s been happening since our last issue:

• Central bank digital currencies (CBDCs) have the potential to slash the cost of cross-border remittances by as much as 50%, according to a new BIS report.
• Remittances to African countries are expected to decrease by 5.4% in 2021 due to the continuing fallout of the Covid-19 pandemic, according to a report by the UN Economic Commission for Africa.
• Singaporeans and Malaysians will be able to conduct real-time cross-border payment transfers starting next year using only a mobile number, the Monetary Authority of Singapore (MAS) and the Bank Negara Malaysia (BNM) have jointly announced.
• China has announced that it will continue to expand the number of banks involved in its cross-border yuan settlement system to eventually “facilitate services to overseas participants”.

An Overview of the Transfer Speed Landscape

Before we explore what the future of international payment processing speeds may bring, let’s take a look at the state of affairs in the here and now —

Presently, cross-border payment speeds hinge significantly on the type of transfer involved, as well as a multiplicity of other factors such as the countries, currencies, time zones, fund-in methods, and anti-fraud measures that characterize a given transaction.

While there are different methods to send and receive cross-border payments, here are principal three and their associated average speeds in 2021:

• SWIFT: Bank-to-bank international payments are usually communicated as payment orders via SWIFT and its network of some 11 thousand financial institutions worldwide. Because it involves several steps before any amount is credited to the beneficiary — including anti-fraud and AML checks and correspondent account settlement — SWIFT transfers tend to be one of the slower methods of cross-border payment, usually taking between one and five business days to complete a transaction, but taking as many as twelve at the extreme.
• P2P: Championed over the past decade by the likes of Wise, Azimo, CurrencyFair and others, foreign exchange settlement through peer-to-peer payment applications usually allow for a fast transfer time, especially for transfers between frequently-traded currencies where supply easily meets demand. As such, P2P international payments in 2021 can take well under 24 hours to credit the beneficiary’s account (e.g. 38% of Wise transfers arrived within 20 seconds in Q2 2021, according to the company's Q2 Mission Update). However, on the other end, volatile currency fluctuations usually cause most P2P models to pause their transactions, a factor that can result in much longer waiting times.
• Domestic Wires/Partnerships: Many IMTOs leverage extensive partnerships and networks with local banks, agent locations, real-time interbank payments processors, and other payment service providers to process foreign exchange transactions by bypassing SWIFT. While this category is very broad, it tends to be faster than SWIFT payments, taking between one and three business days on average to credit a beneficiary account.

Monito's Q3 comparison data drawn from over a million global searches between June and October 2021 broadly reflects the above distribution when it comes to the money transfer operators with the fastest transfer times by region:

Here, we see that traditional SWIFT transfers tend not to accompany the provider with the fastest transfer time on Monito's search engine, with services such as peer-to-peer foreign currency exchange usually correlating with speedier transfer times.

Nexus by BIS — A Way Forward?

Needless to say, while international payment settlement is often far from instant, it's still a far cry from the pre-internet-era and pre-P2P transfer speeds of the 1970s when SWIFT was still in its infancy.

However, in just the same way as SWIFT has been eclipsed in terms of transfer speeds over the past decade following the rise of internet-based P2P foreign currency exchange services, so too could today's transfer speeds become a thing of the past. Such a change could come in the form of the Bank for International Settlement (BIS)'s proposed 'Nexus' model, which aims to enable international payments to occur "as quickly as sending a text message".

Proposed in July 2021 by the BIS Innovation Hub following prolonged discussion with central banks and banks active in the forex and cross-border payments space, the 'Nexus' blueprint aims to revamp message flows with "minimal adaptations" to link existing real-time national payment systems in different countries.

Acknowledging that many fintechs already leverage domestic instant payment systems (IPSs) independently in different countries to provide near-instant cross-border payments, the BIS notes that because two IPSs are never directly linked, there is an opportunity to improve interoperability by "connecting payment infrastructures – rather than banks – across borders."

According to BIS, this will come with the following pronounced benefits:

• Speed: By bypassing central banks' real-time gross settlement (RTGS) systems, connected IPSs could operate 24/7/365 and process payments in fewer than 60 seconds.
• Cost: By dodging correspondent account settlement through SWIFT, connected IPSs could come with a significantly lower-cost basis than traditional payments.
• Transparency: Fewer fees means that pricing is easier to calculate upfront and display to the sender before committing to making a payment.
• Access: Because all domestic banks (and often other payment service providers) of a given country make and receive payments via their domestic IPS, linked IPSs could improve accessibility and even be available through existing banking or fintech apps.

BIS's 'Nexus' scheme is still in its blueprint phase, and no significant developments have been reported since July. BIS Innovation Hub is currently processing feedback and considering using existing IPSs to create a proof of concept or creating an "implementation entity" as the next step.

As such, while the why and how of 'Nexus' have been firmly established by BIS in its blueprint and technical documents respectively -- the when and even the if are still yet to be as clearly established.

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