{
  "title": "Fintech and Cross-Border Payments",
  "publication": "IMF News, November 1, 2017",
  "sourceUrl": "https://www.imf.org/en/news/articles/2017/11/01/sp103017-fintech-and-cross-border-payments",
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  "summary": "Findings — shortcomings of current cross-border payments: - Cross-border transfers are costly and cumbersome. - Services are opaque; price is often not known at initiation. - Cross-border payments are slow because routing through many banks causes delays and fees. - Shortcomings arise from technolog",
  "authors": [
    "Dong He"
  ],
  "publishDate": "2017-11-01",
  "sections": [
    {
      "heading": "I. The Organization of Financial Services — A General Framework",
      "content": "- Technology affects attributes of services (speed, security, transparency) and the organization of service providers (market structure).\n- Adoption driven by targeting unmet user needs (\"gap\" or \"shortcomings\" of services); larger shortcomings create stronger incentives for firms to apply technological advances and faster user adoption.\n- Possible effects of technology on market structure:\n  - (i) reduce the need for financial intermediaries;\n  - (ii) push intermediaries to change internal structures (partnerships and acquisitions);\n  - (iii) induce entry of new intermediaries while displacing older ones.\n- Technology can alter underlying market imperfections:\n  - reduce asymmetric information;\n  - facilitate matching of transaction parties;\n  - reduce transaction costs;\n  - change incentives for horizontal or vertical integration;\n  - alter barriers to entry."
    },
    {
      "heading": "II. The Current and Future Landscape of Cross-Border Payments",
      "content": "- Cross-border payments differ substantially from domestic payments due to pricing, infrastructure, and international handling requirements; fintech could make a \"payment just a payment\" irrespective of border.\n- End-user priorities: low cost, security, convenience, predictability, transparency, and confidentiality.\n\nFindings — shortcomings of current cross-border payments:\n- Cross-border transfers are costly and cumbersome.\n- Services are opaque; price is often not known at initiation.\n- Cross-border payments are slow because routing through many banks causes delays and fees.\n- Shortcomings arise from technology, regulation, and market structure.\n\nFindings — market structure:\n- Payments chain segments remain highly concentrated with high barriers to entry.\n- Barriers include high fixed and sunk costs (user interfaces, regulatory compliance, trust-building, large back-offices), need for scale to manage liquidity and counterparty risk, and strong network externalities in messaging and settlement (netting lowers costs; access to counterparties facilitates transactions).\n\nScenarios for fintech (three DLT-centered scenarios, in increasing order of disruption):\n- Back-end processes\n  - Application: shared permissioned DLT platforms among correspondent banks to automate tracking, optimize liquidity and risk management.\n  - Gains: efficiency improvements; little impact on market structure expected.\n  - Uncertainties: unclear pass-through of cost savings to end-users; incumbent oligopolistic correspondent banks may retain market power.\n- Compliance\n  - Application: DLT combined with digital identity and know-your-customer utilities to lower compliance costs (including AML/CFT and sanctions-related controls).\n  - Effects on market structure: digital identities could reduce economies of scope from proprietary customer information and ease switching between providers, conditional on data-sharing willingness or regulatory requirements.\n  - Benefits/risks for end-users: likely cheaper and more inclusive services; privacy and security concerns for personal information on ledgers and for digital identity theft.\n  - Policy constraint: extent to which regulation allows financial institutions to outsource customer due diligence.\n- Means of payment\n  - Application: DLT-backed virtual currencies shift payments from accounts-based to token-based systems; two DLT means relevant for cross-border:\n    - Privately run hub-and-spoke payments networks where fiat is exchanged into tokens (wallets), tokens transferred over the hub, then exchanged back into fiat.\n    - (Implicit) Other token-based DLT payment architectures.\n  - Market-structure implications: potential shortening of the payments chain; messaging and settlement in central bank money or via correspondent banks may be displaced; virtual currency exchanges and wallet providers could capture significant business.\n  - End-user attributes: potentially faster, more traceable, easier to use, cheaper, and more secure — subject to three caveats.\n\nThree caveats to hub-and-spoke virtual-currency networks:\n- Caveat 1: Erratic valuation of virtual currencies introduces risks; volatility limits use as stores of value and may constrain adoption for large-value payments.\n- Caveat 2: Lack of trust in hub-and-spoke networks could erode value. Trust requires:\n  - legal certainty on transfer of ownership of the virtual currency;\n  - trust in stability and security of the underlying technology and issuance/backing rules;\n  - trust in security of virtual currency exchanges and wallet providers (data security and wallet access).\n  - Policy implication: regulators may need regulatory approaches for exchanges and wallet providers to protect consumers and address AML/CFT concerns.\n- Caveat 3: Lack of interoperability among networks could keep hub-and-spoke prices high via strong network externalities and market power.\n  - Policy implication: regulation aimed at anti-competitive concerns could help alleviate high fees."
    },
    {
      "heading": "III. Central Bank Digital Currencies (CBDCs)",
      "content": "Definition and basic properties:\n- A \"Central Bank Digital Currency\" (\"CBDC\") is a digital form of central bank money that can be exchanged in a decentralized manner peer-to-peer without need for an intermediary.\n- A CBDC would be exchanged at par with the central bank’s other liabilities (cash and reserves) — either through banks or directly at the central bank.\n\nWhy central banks might issue a CBDC:\n- Efficiency reasons:\n  - Counter monopoly power from strong network externalities in private operators or private virtual currencies.\n  - Counter inability to ensure full stability and safety of privately coded/maintained currencies.\n  - Overcome coordination failure in agreeing on a single new technological standard.\n  - DLT-based CBDC could be more secure and resilient than settlement systems exposed to single point-of-failure risk.\n- Retail and inclusion reasons:\n  - Replacing notes and coins could save state costs of maintaining and replacing cash.\n  - Could reduce transaction costs for individuals and small enterprises with little or costly banking access and facilitate financial inclusion.\n  - By facilitating small-value payments, could boost adoption and efficiency of decentralized service economy.\n- Monetary-policy reasons:\n  - Proliferation of private virtual currencies might erode demand for central-bank money and weaken monetary policy transmission; a CBDC could forestall this.\n  - Replacing cash (except possibly costly-to-store small denomination notes) with a CBDC could allow the central bank to lower interest rates well into negative territory when necessary — balanced by the need to respect social preferences for the form of money.\n\nDesign choices and implications:\n- Basic requirements: issued in the same unit of account as fiat money; a liability of the central bank; exchanged at par with other non-equity liabilities (cash and commercial bank reserves).\n- Key differentiators from commercial-bank reserves:\n  - Whether interest is paid on a CBDC matters:\n    - A non-interest-bearing CBDC is a better substitute for cash than for bank deposits.\n    - An interest-bearing CBDC is a better substitute for bank deposits and may affect transmission and financial stability more.\n- Distribution decisions: how and to whom the central bank distributes CBDC.\n- Technology choices: security, speed, and who bears operating/maintenance/development costs (central bank vs. private sector participation).\n  - Question of whether central bank remains catalyst or full-scale operator.\n- Broader implications: choices affect the nature and regulation of the financial system, conduct of monetary policy, and roles of central and commercial banks.\n- Policy recommendation: a gradual approach to introducing CBDCs, if at all, building on experience and evolving fintech."
    },
    {
      "heading": "IV. Policy and Strategic Implications",
      "content": "- Trust remains essential across all fintech developments; lowering some barriers to entry may raise others (e.g., closed networks creating new market power).\n- Technology promises to improve cross-border payments, reduce costs of compliance with AML/CFT regulation, and offer better and cheaper services — but downside risks need minimizing.\n- Regulatory priorities suggested by the analysis:\n  - Address privacy and security concerns for DLT-based compliance and identity solutions.\n  - Clarify rules on outsourcing of customer due diligence.\n  - Consider regulatory approaches for virtual currency exchanges and wallet providers to protect consumers and address AML/CFT issues.\n  - Monitor and, where necessary, address anti-competitive outcomes from network effects and lack of interoperability.\n  - Study CBDC trade-offs carefully (efficiency, inclusion, monetary-policy transmission, financial stability) and proceed gradually.\n- Call for dialogue: policymakers, investors, financial-services firms, and countries should engage in dialogue to shape outcomes.\n\nThis speech is based on “Fintech and Financial Services: Initial Considerations”, IMF Staff Discuss Notes No.17/05.\n\nIMF Communications Department — Fintech and Cross-Border Payments (Speech by Dong He, Deputy Director, Monetary and Capital Markets Department) — Ripple – Central Bank Summit, Carnegie Hall, New York — November 1, 2017.\n\n---\n\n\n References\n\n- Speeches\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2017/11/01/sp103017-fintech-and-cross-border-payments"
    }
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    "Authors: Dong He",
    "Published: November 1, 2017",
    "Technology affects attributes of services (speed, security, transparency) and the organization of service providers (market structure).",
    "Adoption driven by targeting unmet user needs (\"gap\" or \"shortcomings\" of services); larger shortcomings create stronger incentives for firms to apply technological advances and faster user adoption.",
    "Possible effects of technology on market structure:",
    "Technology can alter underlying market imperfections:",
    "Cross-border payments differ substantially from domestic payments due to pricing, infrastructure, and international handling requirements; fintech could make a \"payment just a payment\" irrespective of border.",
    "End-user priorities: low cost, security, convenience, predictability, transparency, and confidentiality.",
    "Cross-border transfers are costly and cumbersome.",
    "Services are opaque; price is often not known at initiation.",
    "Cross-border payments are slow because routing through many banks causes delays and fees.",
    "Shortcomings arise from technology, regulation, and market structure.",
    "Payments chain segments remain highly concentrated with high barriers to entry.",
    "Barriers include high fixed and sunk costs (user interfaces, regulatory compliance, trust-building, large back-offices), need for scale to manage liquidity and counterparty risk, and strong network externalities in messaging and settlement (netting lowers costs; access to counterparties facilitates transactions).",
    "Back-end processes",
    "Compliance",
    "Means of payment",
    "Caveat 1: Erratic valuation of virtual currencies introduces risks; volatility limits use as stores of value and may constrain adoption for large-value payments.",
    "Caveat 2: Lack of trust in hub-and-spoke networks could erode value. Trust requires:",
    "Caveat 3: Lack of interoperability among networks could keep hub-and-spoke prices high via strong network externalities and market power.",
    "A \"Central Bank Digital Currency\" (\"CBDC\") is a digital form of central bank money that can be exchanged in a decentralized manner peer-to-peer without need for an intermediary.",
    "A CBDC would be exchanged at par with the central bank’s other liabilities (cash and reserves) — either through banks or directly at the central bank.",
    "Efficiency reasons:",
    "Retail and inclusion reasons:",
    "Monetary-policy reasons:",
    "Basic requirements: issued in the same unit of account as fiat money; a liability of the central bank; exchanged at par with other non-equity liabilities (cash and commercial bank reserves).",
    "Key differentiators from commercial-bank reserves:",
    "Distribution decisions: how and to whom the central bank distributes CBDC.",
    "Technology choices: security, speed, and who bears operating/maintenance/development costs (central bank vs. private sector participation).",
    "Broader implications: choices affect the nature and regulation of the financial system, conduct of monetary policy, and roles of central and commercial banks.",
    "Policy recommendation: a gradual approach to introducing CBDCs, if at all, building on experience and evolving fintech.",
    "Trust remains essential across all fintech developments; lowering some barriers to entry may raise others (e.g., closed networks creating new market power).",
    "Technology promises to improve cross-border payments, reduce costs of compliance with AML/CFT regulation, and offer better and cheaper services — but downside risks need minimizing.",
    "Regulatory priorities suggested by the analysis:",
    "Call for dialogue: policymakers, investors, financial-services firms, and countries should engage in dialogue to shape outcomes.",
    "[Speeches](https://www.imf.org/en/news/searchnews)",
    "[PRESS CENTER](http://presscenter.imf.org/)",
    "[https://www.imf.org/en/home](https://www.imf.org/en/home)"
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