Imagine you turn on a tap in Singapore and hot water comes out in an apartment block in New York. It sounds impossible, and yet something similar happens every day in the global payments system.
Despite this, there is major scope to improve the plumbing that enables money to flow across borders. While domestic payments have advanced rapidly in recent years through the introduction of Real Time Payment schemes, such as FAST in Singapore, cross-border payments have been unable to keep pace.
This has resulted in a myriad of challenges for businesses wanting to move funds overseas – including a lack of visibility and efficiency in payment times, limited windows in which to make payments, and inconsistency in country standards.
That sounds like a problem, but does it really matter in the scheme of things? Yes it does and it impacts all of us.
Indeed, the overall value of cross-border payments is expected to rise by 5.5% per year from US$22 trillion in 2016 to an expected US$30 trillion in 2022 across both retail and corporate payments.1 Every year, HSBC alone processes more than four billion payments for corporate customers.2
With the value of cross-border payments set to rise, there is even more reason to resolve issues around their speed, convenience, cost and transparency to boost global growth.
Thankfully, new technology provides an opportunity to rethink what is possible when it comes to smoothing the flow of international funds.
Yesterday [15 November], the MAS released a report which it developed along with Bank of Canada, the Bank of England, and a consortium of banks – led by HSBC – looking into the existing challenges and frictions when companies undertake cross-border payments.
The report surfaces several potential solutions to these issues, ranging from upgrading the current infrastructure through to undertaking a complete overhaul.
It finds that brand-new models – including those based on Wholesale Central Bank Digital Currency and Distributed Ledger Technology – could potentially improve the speed and transparency of cross-border payments and resolve current pain points for businesses.
But such a change would not be simple and would need to be implemented with care and control.
For a start, the global financial community would need to understand the legal, regulatory and governance challenges that would need to be overcome.
And institutions facilitating payments would need to know how long any change would take to implement and what it would mean for their current operating models.
To move this forward, we foresee three areas of focus for policymakers and service providers.
The first is to help international companies understand what the new payment systems could mean for them and their suppliers and customers.
The second is for the global financial community to conduct further joint research to better evaluate whether a holistic approach to infrastructure change could deliver greater benefits than incremental improvements to the current model.
Finally, regulators need to consider further the policy implications of some of the more fundamental changes to the status quo reviewed in the report.
Private sector innovation could help to address some of the challenges. For its part, HSBC will continue sharing insights with policymakers to help deliver the practical benefits of digital technology to international businesses and users.
Whichever path is chosen to improve the current system, the financial community needs to work together to get it right. Cross-border payments are the heartbeat of the global economy and we cannot afford for them to be disrupted.
Ultimately, the choice will depend on whether the benefits of moving to a fundamentally new model for cross-border payments outweigh the costs and challenges of implementing it.
That question has just started to be asked. The key to answering it will be more innovation and collaboration between regulators, banks and businesses to ensure we have an international payments system that delivers value for all.
A contribution piece by Tony Cripps, Group General Manager and CEO of HSBC Singapore, first published in The Business Times on 22 November 2018.
1 Accenture, International Payments in a Digital World
2 HSBC Global Banking and Markets Investor Update 2017