Confronting Fragmentation: How to Modernize the International Payment System

IMF News, May 10, 2022

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Authors: Kristalina Georgieva
Published: May 10, 2022

1. Introduction

Conference: 10th edition of the IMF-Swiss National Bank High-Level Conference (Zurich).
Core question: how to secure a stable, efficient, and inclusive international monetary system fit for the digital age.
Framing:
- International monetary system characterized as "rules, mechanisms, and institutions" governing monetary arrangements and capital flows between countries.
- Analogy: international payment system as "roads, railways, bridges, and tunnels" that enable currency exchange and capital flow.
Key risks and stakes:
- Russia’s invasion of Ukraine increased the risk of a "new Cold War" and stronger forces of fragmentation.
- Cost of disintegration: would undermine productivity and living standards; historically integration "tripling the world economy and lifting 1.3 billion people out of extreme poverty over the past three decades."
Principal proposal: build new public infrastructure to connect and regulate various payment systems to counter fragmentation.

2. The International Payment System — diagnosis

Components identified:
- Links between correspondent banks; messaging systems such as Swift; money transfer businesses; credit card networks; foreign exchange markets; arrangements between central banks.
Shortcomings:
- Cross-border payments are "expensive, slow, opaque, and not available to many of those who need them most."
- Interoperability failures: "many of the ‘roads’ lead to nowhere, the ‘railways’ work on different gauges, and the ‘tunnels’ are not well lit."
- Intermediary costs reduce end-recipient value.
Key statistic on remittances:
- Average cost of a transfer is 6.3 percent.
- Result: "some $45 billion per year are diverted into the hands of intermediaries and away from ultimate beneficiaries."
Fragmentation drivers:
- Structural: private digital money providers offering cheap cross-border payments within closed networks.
- Geopolitical: countries may develop parallel, disjointed payment systems to mitigate sanctions risk, creating "payment blocs" that worsen fragmentation and raise costs.

3. Modernizing the International Payment System — strategy and design principles

Overarching message: countries should collaborate to build public digital platforms that connect payment systems, making payments more efficient, safer, inclusive, and reducing fragmentation risk.
Three mountaineering-inspired principles:

(a) Use state-of-the-art equipment

Emphasize new technologies and digital platforms as public infrastructure.
BIS Innovation Hub pilots show cross-border transfers can be "nearly instantaneous and costless."
Platform functions:
Facilitate communication, regulatory compliance, competition among payment providers, and eventual cross-border settlement.
Enable programmable features: currency exchange, support for less liquid currency pairs, hedging, automated bids in foreign exchange auctions.
Offer a standard programming interface ("a shared language") to access and automate services.
Supported forms of money on the platform could include commercial bank deposits, central bank digital currencies, and some stablecoin arrangements "if they are well-designed and regulated."
Importance for less advanced payment-system economies: embracing diverse forms of money to "make payments work for all people, in all countries."

(b) Adapt to the terrain

Recognize changing capital flow dynamics as payments become more efficient:
Possible overall increase in flows; potential boost to productive investment and market integration; more flows to low-income countries or previously underserved sectors.
Risks: higher financial market contagion, valuation effects, sudden capital flow reversals—particularly harmful for developing countries with high external financing needs.
Policy responses:
Right fiscal, monetary, structural, and legal measures; in some cases, capital flow management measures to slow flows.
Updated IMF institutional view on capital flow management measures referenced as background for policy agility.
Currency substitution risk:
Digital availability of a desired foreign currency increases the risk of currency substitution.
Possible need for capital flow management measures to "throw sand in the gears" to protect monetary frameworks.
Crypto asset risk:
Crypto assets could be used to circumvent capital flow management measures.
New IMF research (published today) highlights this risk and motivates calls for comprehensive and coordinated global regulation.
Technology and data needs:
Better data and technologies—such as "regtech" and "suptech"—needed to detect risks and irregularities in capital flows automatically.
Platform design implication:
Public digital payment platforms can be calibrated to country-specific needs and policy objectives and include appropriate risk mitigation measures.

Governance is central:
Questions to resolve: access conditions, operational roles, oversight, private sector roles.
Predictability encourages integration; excessive discretion increases fragmentation risk.
Roles for international organizations:
IMF, Bank of International Settlements, Financial Stability Board can suggest solutions, foster consensus, and convene policymakers, private firms, and civil society.

4. Conclusion — call to collective action

Inspirational analogy: 1291 Swiss mountaineers who pledged cooperation and common rules.
Final charge: work together to put the international payment system on a sounder footing to support the digital world and foster an international monetary system that brings greater stability and prosperity for all.

Concluding remarks by Kristalina Georgieva, IMF Managing Director; As Prepared for Delivery, May 10, 2022 — Concluding Remarks at the IMF-Swiss National Bank High-Level Conference, Zurich.