Cross-Border Digital Payment Systems: The Case of Singapore, Thailand, Malaysia, and Beyond
IMF News, November 8, 2022
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- Published: November 8, 2022
Overview
- Opening Remarks by DMD Bo Li, November 8, 2022.
- Theme: progress and challenges in cross-border digital payment systems amid a multi-decade digital revolution in financial services.
- Core observation: domestic payments have become efficient, inexpensive, and more inclusive over the last three decades, while cross-border payments remain slow, expensive, and inconvenient.
Problems with current cross-border payments
- Heavy reliance on correspondent banking:
- Banks use accounts in other banks in other jurisdictions to move money and make payments on clients’ behalf; smaller banks use larger banks.
- This model is expensive: customers may pay large spreads on the exchange rate; fees compound as many intermediaries each get a cut.
- Competition is decreasing: the number of correspondent banks globally has fallen by about a quarter over the last decade.
- Distributional harms:
- Example: a migrant worker pays seven out of every $100 she sends back to her home country in fees, reducing funds for her family.
- Small exporters retain less capital to grow their businesses and hire workers.
Recent progress and near-term approaches
- G20 has prioritized improving cross-border payments.
- Country-level fast payment system connections:
- Example: Singapore and Thailand have made quick progress by connecting fast payment systems, resulting in lower transaction costs for cross-border payments.
- Limitations: each bilateral connection must be tailor-made, requiring time and significant effort; risk of a tangled “noodle bowl” of bilateral connections as participation grows.
- Hub model:
- A common hub where countries’ fast payment systems can connect may be more efficient.
- BIS Innovation Hub’s Nexus project is advancing this direction.
Promising long-term solutions and innovations
- Multilateral cross-border payment platforms combining CBDC with new technology:
- Potential benefits:
- Shorten transaction chains.
- Improve security by making central bank money available for settlement.
- Add functionalities such as centralized FX markets native to the platforms to reduce high currency exchange costs.
- Automate financial contracts (e.g., FX auctions) using “smart contracts.”
- Simplify compliance checks while preserving countries’ data sovereignty.
- Increase trust and promote competition with private sector participation for innovation and public sector supervision.
- Design and policy considerations:
- Requires much more than interoperable technology.
- Must protect economic and financial stability while allowing innovation.
- At the country level, authorities need to maintain control over:
- monetary policy,
- financial condition,
- capital-account openness,
- foreign-exchange regime.
- Regional platforms should aim for interoperability to minimize fragmentation costs.
- Ownership and governance questions need resolution.
IMF role, partnerships, and actions
- IMF staff have published a working paper on cross-border digital payments to stimulate further innovation.
- IMF engagement emphasizes partnership with forward-thinking organizations such as the Monetary Authority of Singapore and BIS.
- Rationale: no single institution has all the answers; collaboration and peer learning are essential.
- Objective: shape a more efficient, secure payment system that lessens digital divides and benefits migrant workers, small businesses, major companies, and governments.
Key statements and figures (verbatim from source)
- "last three decades"
- "slow, expensive, and inconvenient"
- "the number of correspondent banks globally has fallen by about a quarter over the last decade"
- "a migrant worker pays seven out of every $100 she sends back to her home country in fees"
- "Singapore and Thailand ... have made quick progress by connecting fast payment systems"
- "noodle bowl" (to describe tangled bilateral connections)
- BIS Innovation Hub’s Nexus project
- "central bank digital currency (CBDC)"
- "smart contracts"
Source: Opening Remarks by DMD Bo Li, November 8, 2022.