## Confronting Fragmentation: How to Modernize the International Payment System

_IMF News, May 10, 2022_

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## Bibliographic details
- 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.
  (c) Rely on your team
  - 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.*

---


## References

- [https://www.imf.org/en/about/senior-officials/bios/kristalina-georgieva](https://www.imf.org/en/about/senior-officials/bios/kristalina-georgieva)
- [PRESS CENTER](http://presscenter.imf.org/)
- [institutional view](https://blogs.imf.org/2022/03/30/why-the-imf-is-updating-its-view-on-capital-flows/)
- [New IMF research](https://www.imf.org/en/Publications/fintech-notes/Issues/2022/05/09/Capital-Flow-Management-Measures-in-the-Digital-Age-516671)
- [https://www.imf.org/en/home](https://www.imf.org/en/home)

_Source: https://www.imf.org/en/news/articles/2022/05/10/sp051022-md-concluding-remarks-at-the-snb-high-level-conference_