IMPACT ANALYSIS: Final stage of roadmap for enhancing cross-border payments, challenges addressed

The Financial Stability Board (FSB) has published the third and final stage of the roadmap designed to enhance cross-border payments and reverse the decline in correspondent banking.

The G20 has made this a priority during the Saudi Arabian presidency. The goal is to make cross-border payment services — including remittances — faster, cheaper, more transparent and more inclusive, while maintaining their safety and security. 

This is seen as having widespread benefits for citizens and economies worldwide, supporting economic growth, international trade and development, and financial inclusion and the pandemic has made this all the more critical.

Key issues

The FSB delivered the stage 3 roadmap to G20 finance ministers and central bank governors for their meeting on October 14, 2020.

In July 2020 the Committee on Payments and Market Infrastructures (CPMI) published the stage 2 report, together with detailed technical background.

The three stages of the process are assessment, building blocks and roadmap. In stage one of the process the FSB, in coordination with relevant international organisations and standard-setting bodies, conducted an assessment of existing arrangements and challenges for cross-border payments. The findings were published in April 2020.

For stage 2, the CPMI’s work identified and developed 19 “building blocks” to enhance cross-border payments. As part of the work, a set of considerations were identified which should support the proposed work in stage 3. The 19 building blocks were divided into five focus areas. The CPMI made the point that while individually each of the proposals “has the ability to bring notable benefits to cross-border payments, due to their interdependencies the most significant enhancements are likely to arise if over time they are all advanced and implemented in a coordinated manner”. The five focus areas are:

  • Committing to a joint public and private sector vision to enhance cross-border payments.
  • Coordinating on regulatory, supervisory and oversight frameworks.
  • Improving existing payment infrastructures and arrangements to support the requirements of the cross-border payments market.
  • Increasing data quality and straight-through processing by enhancing data and market practices.
  • Exploring the potential role of new payment infrastructures and arrangements.

The first four focus areas seek to enhance the existing payments ecosystem. The fifth is more exploratory and covers emerging payment infrastructures and arrangements. While each of the building blocks in the first four focus areas individually has the ability to bring notable benefits to cross-border payments, they have many interdependencies and the most significant enhancements are likely to be achieved if they are all implemented in a coordinated manner. The potential for new payment infrastructures and arrangements will also depend on the first four focus areas delivering change.

Compliance tips and next steps

The stage 3 roadmap is the most detailed iteration of the process and sets out to address the challenges and frictions in the existing cross-border payments processes. The challenges are high costs, low speed, limited access and insufficient transparency, all of which affect end-users and service providers, although not all in the same way.

The roadmap sets “ambitious but achievable goals and milestones” and is designed to allow for flexibility and adaptation as the work progresses, while ensuring that the safeguards in terms of secure processing and legal compliance are observed. It encompasses a variety of approaches and time horizons, and seeks to achieve as much as possible in the short term. 

There is a delineated project plan with timings and allocated responsibilities. The bodies taking forward individual building blocks, or individual actions under these building blocks, will publicly consult at the appropriate points, according to their own governance processes, to ensure transparency and accountability and to benefit from as wide a range of perspectives as possible. As the work progresses, any significant proposed change to international standards or domestic regulations should include time for public consultation.

One of the first actions under the roadmap will be to reinforce momentum by setting more specific quantitative targets for addressing the four challenges (cost, speed, transparency, access), for endorsement at the October 2021 G20 Summit. The targets will then be monitored and reported on regularly. They will be set in an inclusive manner, including through public consultation. Although such overall targets cannot fully reflect the diversity of the international cross-border payment market and may need to be refined over time in the light of experience, they will play an important role in defining the ambition of the work and creating accountability. The work is due to start now and is planned to continue until at least 2025.

A significant feature of the work will be the need to re-engage banks in particular to resume correspondent banking and the associated facilitation of cross-border payments. Banks have traditionally maintained a broad network of correspondent relationships, but firms are cutting back the number of relationships they maintain and are establishing fewer new ones.

There are a number of root causes for the decline in correspondent banking. The main reason cited is the uncertainty about how far customer due diligence should go to ensure regulatory compliance: in effect, the practical extent to which banks need to know their customers’ customers (KYCC).  As a result, correspondent banking has been subject to de-risking with the associated withdrawal of services which:

  • generate insufficient volumes to overcome compliance costs;
  • are located in jurisdictions perceived as too risky;
  • provide payment services to customers about which the necessary information for an adequate risk assessment is unavailable; or
  • offer products or services or have customers that pose a higher risk for anti-money laundering/combating the financing of terrorism and are therefore more difficult to manage.

The Bank of England is fully involved and committed to the project. “I believe that the timelines and actions in the roadmap and the fact that the pace of this work has been maintained during what has been an unprecedented year for us all, underlines the importance and urgency placed on improving cross-border payments,” Victoria Cleland, executive director, banking, payments and innovation at the Bank of England, said in a speech on October 13, 2020 at the Central Bank Payments Conference.  

The FSB is clear that “strong commitment, coordination and accountability will be critical to success”. The roadmap incorporates a framework where individual actions are taken forward by the most suitable expert bodies, in accordance with their mandates, with the FSB providing coordination and reporting annually on progress to the G20 and the public. This process will provide an opportunity to update and adapt the roadmap as it evolves, to keep it on track to meet its overall goals.

Financial services firms need to follow the potential developments in reforming the international approach to cross-border payments and correspondent banking. The roll-out of the stage 3 roadmap is likely to involve substantial amounts of consultation and involvement from the private sector. Indeed, the work under each building block will consider the best way to involve the private sector — something which will be essential to share insights and practical expertise, as well to deliver the required change.

This article was written by Susannah Hammond, a member of the Thomson Reuters Regulatory Intelligence team in London. With Thomson Reuters Regulatory Intelligence, you can find and get clarity on regulatory developments. It is your first step in your regulatory compliance program, because it allows you to track, flag and share regulations.

Susannah Hammond is a senior regulatory intelligence expert and joined our regulatory intelligence team from GE Capital Bank where she was head of compliance. Susannah has over 25 years’ wide-ranging experience in international and UK financial services.

A qualified chartered accountant, Susannah’s compliance career includes SG Warburg, Caspian Securities and PricewaterhouseCoopers. She was head of international regulatory risk for the Halifax Group and became head of retail regulatory risk for HBOS plc upon Halifax’s merger with Bank of Scotland.

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