Future_of_Payments_2021

The future of global payments, 2020 1
The future of cross-border payments 2021
Time for renewal in global cross-border payments
INTERNET OF SOVEREIGN DIGITAL CURRENCIES

2 The future of payments, 2021
Authors Report sponsors

Lewis McLellan
Editor, Digital Monetary Institute Lead report sponsor
The future of Rebecca Brace
payments 2021 Simon Brady
Published by OMFIF Ltd. Kanika Saigal
Official Monetary and
Financial Institutions Editorial and Production
Forum
Clive Horwood
6-9 Snow Hill, London,
EC1A 2AY, United Kingdom
Managing Editor and Deputy CEO
T: +44 (0)20 3008 5262 Simon Hadley
Director, Production
omfif.org @omfif
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About OMFIF Subeditor
With a presence in London, Sarah Moloney
Singapore, Washington Subeditor
and New York, OMFIF is
an independent forum for
central banking, economic Marketing
policy and public investment
— a neutral platform for best James Fitzgerald
practice in worldwide public- Marketing Manager
private sector exchanges.
For more information
visit omfif.org or email DMI team
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John Orchard
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Philip Middleton
Chairman, Digital Monetary Institute Co-sponsors
Acknowledgments
Katie-Ann Wilson
OMFIF thanks officials from Head of Policy Analysis, Digital
the co-operating countries Monetary Institute
and cities for this publication,
which will be joining us in Folusho Olutosin
launch partnerships around Commercial Director, Digital Monetary
the world. We are grateful Institute
to many other associates Sinan Yilmaz
and colleagues for their Programmes and Account Executive,
assistance and guidance. Digital Monetary Institute
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omfif.org 3
Foreword
The high-stakes future of money
As technology increasingly renders cash obsolete and innovators disrupt payment processes
with new forms of money, banks and traditional payment platforms are racing to meet the
challenges of the future. By John Orchard, CEO, OMFIF.
Twenty-five years ago, the internet both wholesale and retail central bank sector set out to thwart a private
boom was in its infancy and mobile digital currencies. There are multiple system they already underpin and
phones an expensive luxury. Friends reasons for this: defending their which already moves money without
Reunited, a clunky forerunner of production, control and supervision wicked problems?
Facebook, was still three years in the of money; enhancing the efficiency The role that existing payment
future, as was the binding together of of money systems, treasury services, platforms and commercial banks play
internet access with mobile telephony securities and markets; or improving in the system is poorly understood
through painfully slow 3G technology. access to money for the unbanked. by the most radical disrupters. Not
RTGS-style systems, which allow banks They are being squeezed by new forms only do they facilitate transaction
to transfer funds by adjusting their services, they provide an infrastructure
central bank balances, had already for regulating and supervising the
been around for 25 years, as had movement of money. Others could,
SWIFT, the system for moving money too, but the spirit of decentralised
between banks worldwide. These three ‘Disrupters with new finance cuts the other way.
technological arenas are now trying to tools, whether networks, Innovators are working on this gap.
meld to accommodate money – and settlement technologies Banks also create credit. A digital
securities – in new formats. or new forms of money public money system might shrink
Why? How? And When? What does combining both, are them, and therefore constrain their
this mean for consumers, financial itching to replace the bandwidth to support the economy,
intermediaries, payment platforms, ageing and expensive unless central banks sought to
technology companies, regulators, payment processes that become direct lenders to the public,
central banks and the economy at have evolved over the which most certainly are not. How
large? Our guide to the future of last 50 years.’ would international interoperability
payments, which convenes public work in any new architecture? Who
and private players, incumbents and would ultimately govern cross-border
innovators, will take you on the tour. wholesale CBDC settlements? And
‘Why’ is straightforward. Technology what technology is robust enough
is rendering physical cash obsolete of private money such as stablecoins to see off ingenious and malign
at speed, in both developed and on the one hand, and contactless cyberwarriors?
developing economies. Disrupters payments typically using commercial Technologists move fast to come up
with new tools, whether networks, bank-created money on the other, with answers. DLT and the wholesale
settlement technologies or new forms while the mind-blowing potential of financial system inch together. In any
of money combining both, are itching distributed ledger technology, which event, wholesale and retail consumers
to replace the ageing and expensive could upend, decentralise and privatise are very likely to benefit from faster
payment processes that have evolved money entirely, emerges – largely and cheaper payments, and treasurers
over the last 50 years. The incumbent working – from the sandboxes. from better cash management,
banks, payment and settlement ‘How’ is bafflingly hard. CBDC assuming new monopolists don’t sneak
platforms are now responding to the working groups quickly bring forth through the revolution.
challenge. ‘wicked problems’. How can oversight When? Somewhere between
Central banks watch with a mixture and privacy be reconciled? Our surveys ‘already’ in some cases, and maybe
of excitement, interest and worry. Not show that key populations don’t believe never in others – which may accelerate
to be left out, they are introducing – or they will. How can they be convinced important geopolitical shifts. Welcome
carefully thinking about introducing – of the use cases? Should the public to the high-stakes future of payments.
Contents
CHAPTER 1: 8
Foreword5 Revolution: the potential role of digital
Introduction 6 currencies in cross-border payments
If digital currencies are to transform the payments landscape,
Key findings 7 it will be crucial for both central banks and payment service
providers to co-exist in CBDC systems with roles defined for
both.
CHAPTER 2: 18
Evolution: upgrading payment
infrastructure for the digital age
Technology can drive existing payment rails to create a
system fit for future purpose. To what extent depends on
several factors.
CHAPTER 3: 28
Wholesale payments: curing
the pain points
Corporates are crying out for quicker, cheaper cross-border
payments. Banks and fintechs have to work together to make
them happen.
CHAPTER 4: 36
Taking tokens into account
In the private sector, tokenised cash solutions for payments
networks are already gaining substantial traction and user-
bases. Could public sector tokens have a similar or even
greater impact?
CHAPTER 5: 48
The road to better remittances
Remittances are a lifeline for the families of millions of
migrant workers. Going digital will remove limits on how
cheap, fast and convenient they can be.
CHAPTER 6: 62
Cybersecurity: regulation vs innovation
A new emphasis on resilience rather than cybersecurity is a
first step but regulators want to go further. Should nascent
resilience regulations be strengthened?
omfif.org 5
Enabling an instant, frictionless future

for cross-border payments
Interoperability across technologies, currencies and geographies is key to enabling more
inclusive global economies, writes David Watson, chief strategy officer, SWIFT.
THE WORLD IS BECOMING ever more

interconnected, intensifying focus on
cross-border flows. Add to that the
accelerating speed of digitalisation,
which is rapidly raising expectations of
end customers and even challenging
traditional notions of value altogether.
From the development of central bank
digital currencies and stablecoins,
to the need for interaction across
payments systems and solutions,
the pace and scale of transformation
required to meet the demands for the
future is vast.
This report touches on the diverse
opportunities – and challenges –
that are ripe for co-operation and
collaboration in the years ahead. It
provides rich assessments of new
initiatives in payments and, importantly,
how the public and private sectors can
come together effectively to support
and drive innovation. Further, it covers with organisations across the financial banks, commercial banks, fintechs and
the latest on risks and how they are industry and beyond, and, through more to tackle remaining frictions. This
evolving as new entrants and new ways the stewardship of OMFIF, contribute includes innovating in areas such as ISO
of transacting reshape the payments to thought-leadership in support of 20022 adoption, CBDCs and artificial
ecosystem. sustainable, meaningful advancements intelligence to meet the industry’s
For SWIFT and our global for the payments system. needs for speed, predictability and
community of over 11,000 banking We are committed to being a transparency while maintaining strong
and securities organisations, market catalyst for fast, frictionless and guard rails on operational excellence.
infrastructures and corporate secure cross-border payments from Achieving cross-border payments
customers in over 200 countries, account to account, anywhere in the that combine speed and efficiency
interoperability is key to the future. world. Working together, the SWIFT with security and resiliency requires
Bridging different jurisdictions, community already has significantly collaboration and partnership, with
currencies, channels, standards and accelerated the flow of funds across consideration for all types of end
protocols is crucial to empowering the borders, with most now reaching end users at the centre of our coordinated
efficient flow of value and creating beneficiaries in a matter of minutes. efforts. We look forward to continue
more inclusive economies. And, to And we have a comprehensive strategy partnering with and supporting the
that end, we are delighted to partner to go further, collaborating with central community on this journey.
Introduction
Evolution or revolution?
The future of cross-border payments
A new era in cross-border payments is coming and it is coming fast. By Clive Horwood,
managing editor, OMFIF.
A senior technology banker working in the transaction services in October 2021 after consultation with industry participants. It
division of a leading global bank describes the journey needed highlights five key areas: committing to a joint public and private
to upgrade the global payments system as similar to the move sector vision to enhance cross-border payments; coordinating
from Blockbuster to Netflix. Today, it feels like the move from on regulatory and oversight frameworks; improving existing
renting videos to streaming movies happened almost overnight, payments infrastructures and arrangements; increasing data
but it took a long time for the transition to happen – even if the quality and processing by enhancing data and market practices;
final stage of the switch was rapid. and exploring the potential role of new payment infrastructures
The path of progress in upgrading the costly, slow and and arrangements, including digital currencies, tokenisation and
cumbersome infrastructure on which much of the global related technologies.
economy depends is at last under way. And not before time. This will not be easy. Global efforts to establish common
In particular, cross-border payments – which can involve frameworks in fragmented markets rarely achieve their goals.
multiple time zones, regulations and jurisdictions – have long You only need to look at the near miss of the Basel protocols
been associated with greater challenges than their domestic for the banking industry, or the still-nascent attempts to bring
equivalents. The G20 has made enhancing cross-border global standards to the collection and use of data, to see this.
payments a priority, emphasising the role such progress could This report examines the best way to bring about a global
cross-border payments system fit for the digital age. There
appear to be two routes towards it: evolution, through the
‘The path of progress in upgrading the costly, transformative upgrading of existing infrastructure; or
slow and cumbersome infrastructure on which revolution, a great leap forward through the adoption of digital
much of the global economy depends is at last currencies, tokenisation and related technologies.
under way.’ The likelihood is that these two paths will run together.
Industry players have worked hard to transform payments
infrastructure, including industry bodies such as SWIFT,
make in achieving faster, cheaper, more transparent and more payments providers like Visa and banks such as JPMorgan.
inclusive services that would have widespread benefits for Progress is being made at a pace which suggests a brighter
citizens and economies worldwide. future for payments even if more revolutionary technologies fail
Payments sent over the correspondent banking network to live up to expectations. As the payments technology banker
pass between multiple banks, which can result in delays, high points out, while we now are moving out of the Blockbuster
costs and a lack of transparency over the status of individual phase, only a few years ago the industry was more akin to
payments. Inefficiencies can also arise as activities relating to analogue television with only a handful of channels available.
financial crime compliance are often repeated in the payments However, those same firms are also working closely with
chain. Data can be truncated as a result of discrepancies central banks and a newer breed of technology companies
between standards and formats. These obstacles can frustrate to explore the potential of central bank digital currencies and
the customer, with delays over the timings of payments and a stablecoins. Initiatives such as the Partior project, promoted by
lack of clarity over fees. DBS, JPMorgan and Temasek, and the m-CDBC Bridge created
Some of these challenges were illustrated by a report by the BIS Innovation Hub alongside the Hong Kong Monetary
published by Oliver Wyman and JP Morgan in 2021. It found that Authority and Bank of Thailand (and discussed in more detail in
in 2020, global corporates spent $120bn on transaction charges chapter 2 of this report) show how quickly blockchain-related
to facilitate cross-border payments, equating to an average fee initiatives are coming on stream. Advances in tokenisation
of $27 per transaction, excluding foreign exchange costs. The should speed up these developments further.
report also found that the average settlement time for cross- There are major opportunities arising from the re-
border transactions was two to three days. engineering of global payments infrastructures with the aid of
This is an industry ready for renewal. The roadmap towards new technologies, but only if public and private sectors work
a better global system for cross-border payments was laid out closely together to ensure system interoperability and cross-
in an interim report from the Financial Stability Board, published border regulatory alignment.
omfif.org 7
Key findings
CBDCs and stablecoins Tokenisation

Central banks have an With the right governance
opportunity to seize the architecture, tokenisation could
initiative, but a duty to help combat money-laundering,
ensure that whatever fraud and terrorist financing,
payment solution becomes but it may require a trade-off
dominant, they are still able between privacy and oversight.
to fulfil their mandates and
preserve stability.
Infrastructure Remittances
Widespread technological Global cross-border peer-to-
innovation in transaction peer standardisation would
banking has reconfigured allow greater competition,
front- and back-end parts cut the cost of remittances
of the payments system and allow policy-makers to
as well as the very rails on share best practice. But this is
which payments move. difficult to achieve given the
differing levels of digital and
financial development between
countries.
Wholesale payments Cybersecurity

High-value payments The infrastructure of the global
systems are in the process payments system is 20 years
of migrating to ISO 20022 old or more, and comprises
standards, paving the way legacy components designed
for richer structured data, long before cybersecurity was a
more interoperability and threat. Instead of trying to shore
better straight-through up these systems, policy-makers
processing. should consider accepting that it
is the underlying infrastructure,
rather than the regulations, that
should change.
Chapter 1
Revolution: the potential role of digital

currencies in cross-border payments
If digital currencies are to transform the payments landscape, it will be crucial for both central
banks and payment service providers to co-exist in CBDC systems with roles defined for both.
By Rebecca Brace.
DIGITAL CURRENCIES WILL radically payments at the Banque de France, The Financial Services Board
shake up the world of payments. The said at an OMFIF panel that central subsequently developed a roadmap
private sector has led the charge bank digital currencies are crucial in for enhancing cross-border payments,
thus far, with cryptocurrencies and preserving the anchoring role of central focusing on five areas – the fifth of
stablecoins promising instantaneous bank money, adding that a ‘digital which is to explore the potential of
value transfers across borders and wholesale CBDC could greatly enhance new payment infrastructures and
jurisdictions, disintermediating banks cross-border payments’. arrangements, such as multilateral
and disenfranchising regulators. ‘There are many, many intermediaries platforms, stablecoins and CBDCs.
No one denies that problems in cross-border payments,’ continued
exist in the present cross-border Hurman. ‘It’s a really important The rise of CDBCs and stablecoins
payments network, but the emergence process for populations, particularly CBDCs and stablecoins are both forms
of unregulated private sector digital remittances. The time to process the of digital currency. A stablecoin is a type
currency solutions poses serious risks to transaction can be drastically reduced of cryptocurrency that is intended to
financial stability. if we implement new technologies like have a stable price by pegging its value
Policy-makers face a new challenge. CBDCs.’ to other assets, such as currencies and
If they cannot modernise the cross- The financial industry has set out commodities. As such, they are not
border payments network, they to tackle these challenges in different subject to the same volatility as other
risk losing control of the system, ways. For one, SWIFT global payments cryptocurrencies such as bitcoin.
outcompeted by solutions designed innovation has enabled banks to access Around 200 stablecoins are already
with no regard for financial stability real-time tracking, faster payments and either in use or in development,
mandates. more transparency over bank fees. including Tether, True USD, Gemini
Then there are the benefits. A While these initiatives will no doubt Dollar and Diem – the latter being a
JPMorgan and Oliver Wyman report incrementally improve the quality digital coin under development by
published in 2021 said that corporates of cross-border settlements, there Meta (formerly Facebook) which was
spent $120bn on transaction fees in are certain frictions that are caused originally announced as Libra in 2019.
2020. Reducing these costs opens new by things outside SWIFT’s control. At this stage, notes Olivier Truquet,
avenues for profitable investment and Changing the operating hours of bank blockchain lead, Asia Pacific, at GFT
economic growth. settlement systems, for example, will Group, ‘The main use case for different
Central banks have an opportunity likely require the intervention of the currencies such as stablecoins is
to seize the initiative, but they have a public sector. offshore cryptocurrency investments.’
duty to ensure that whatever payment Dirk Schrade, the Bundesbank’s In October 2021, the FSB published a
solution becomes dominant, they are deputy head of payments and progress report on the implementation
still able to fulfil their mandates and settlement systems, said on an OMFIF of its high-level recommendations for
preserve stability. panel: ‘There’s a clear need to improve regulation, supervision and oversight
Central bankers clearly take the cross-border payments. The other of global stablecoin arrangements.
issue extremely seriously and are systems are good, and improvements Discussing developments since the
energetically pursuing solutions. are still occurring, but it will take new publication of the FSB’s high-level
Claudine Hurman, director of technologies to achieve the most recommendations in October 2020,
infrastructures, innovation and ambitious outcomes.’ the report says that fostering the
omfif.org 9
soundness of global stablecoins ‘is ‘Central banks have an in the CBDC space. Progress on the
an integral part of the roadmap for opportunity to seize the digital yuan, or e-CNY, continues apace,
enhancing cross-border payments initiative, but a duty to with numerous pilots underway in
endorsed by the G20 in October 2020.’ ensure that whatever different cities. While the digital yuan
payment solution has not yet been officially launched,
Latest CBDC developments becomes dominant, they adoption is progressing rapidly. As of
The development of stablecoins is one are still able to fulfil their October, 140m people had opened
of the factors that has been credited mandates and preserve wallets and the digital currency had
with prompting central banks to stability.’ already been used for transactions
accelerate their work on CBDCs. The worth over $9.5bn.
term ‘CBDC’ is understood to mean the So, for many people CBDC is already
virtual form of a country’s fiat currency a fact of life. ‘When you go into a regular
and is sometimes described as a ‘virtual supermarket, if you have some e-CNY
banknote’ – but there are different in your e-wallet, you can use it to make
types of CBDC, and definitions can your everyday purchases,’ says Truquet.
vary. A report by Deloitte, ‘Are central CBDCs for retail payments, others, such ‘You just go to the counter and show
bank digital currencies the money of as Banque de France, are looking at your quick response code, which is
tomorrow?’, explains that a CBDC is wholesale applications. embedded into your e-CNY wallet. And
‘envisioned by most to be a new form of As of January 2021, 86% of the then you can leave with your goods,
digital money with a central bank liability, world’s central banks were engaging just like you would if you were using an
denominated in an existing unit of in some form of work on CBDCs, Alipay or WeChat Pay wallet.’
account, which serves both as a medium according to the Bank for International
of exchange and a store of value.’ Settlements. ‘The last two years have CBDC, stablecoins and cross-border
As Sirish Kumar, former chief seen significant process in the design, payments
financial officer for India and Asean development and adoption of CBDCs,’ So how could digital currencies address
at PayPal, observes, ‘CBDC systems says Madhav Soundalgekar, principal the current pain points in cross-border
are at a proof of concept stage. solutions consultant at Finastra, noting payments? There is an argument that by
There has been good progress on the that over 80 projects around the reducing the number of parties needed
convergence of terms and definitions. I world are currently in various stages to settle payments, a stablecoin or
also see that groups working on CBDC of development. While the Bank of CBDC-based system could potentially
systems have got an understanding of England has not yet decided whether reduce the costs, time and complexity
the existing technologies available.’ to introduce a CBDC in the UK, a involved in the process.
CBDCs come in two main categories: statement published in November Aniko Szombati, chief digital
retail CBDCs (used by the public for noted that the it will hold a formal officer at Magyar Nemzeti Bank, the
low-value, high-volume payments) and consultation in 2022 on whether to Hungarian central bank, says they
wholesale CBDCs (used by financial proceed. If so, ‘the earliest date for are aggressively pursuing this: ‘We’re
intermediaries). While some central launch of a UK CBDC would be in the exploring all opportunities to participate
banks, such as the People’s Bank second half of the decade.’ in international projects. We want to be
of China, are focusing on the use of China, meanwhile, is the clear leader at the forefront of research on CBDC.
There’s a lot of room for improvement in 1.1. Central

cross-border payments, helping banks Engagement in CBDC work Focus of work Type of work in addition to research banks
to transact more quickly, cheaply and exploring
transparently.’ 84 60 60
CBDC projects
One benefit is that payments are continues to
instant, says Sky Guo, CEO and founder grow
78 45 45
of blockchain company Cypherium, Share of
respondents
which supports interoperability 72 30 30
conducting work
between CBDCs and stablecoins. ‘Right on CBDC
now, if a merchant receives a credit card 66 15 15 Source:
payment, it can take several days to International
actually receive that,’ he says. ‘But with 60 0 0 Monetary Fund,
2017 2018 2019 2020 Wholesale General Both Experiments/ Development/ Oxford Economics,
digital currency, that process can be purpose proofs of concept pilot arrangement OMFIF analysis
made instant.’
2018 2019 2020
Other benefits include a reduction
in the risk of counterfeit payments
associated with cash, eliminating the gap at this point in time in terms of
140m
need to carry physical cash and the knowledge, platforms and skills, and in
ability to make contactless payments – terms of how to convert and swap digital
a feature which Guo says is particularly currencies when you are creating cross-
attractive against the backdrop of the People who have opened border payments.’
global pandemic. wallets using China’s digital Creer points out that legal and
Tony McLaughlin, managing director, yuan regulatory considerations can present
transaction banking at Citi, explains that a challenge. ‘I think stablecoins will get
$9.5bn
one issue with settling cross-border to the point at which they can be used
payments is that the relevant systems globally for cross-border payments, to
are not open around the clock. ‘In other reduce remittance challenges and make
words, if we’re making a payment to Total value of transactions so cross-border payments faster and more
another country and the real-time gross far that have used the digital fluid – but they’re not quite there yet,’
settlement system isn’t on, we can’t yuan he adds.
make that final settlement,’ he says.
‘To the extent that CBDCs deliver 24/7 Role of stablecoins
central bank money, that will become Truquet says a key difference between
useful for the participants in cross- stablecoins and CBDCs is that
border payments, because it will make stablecoins ‘will make value available to
that central bank asset available around anybody, regardless of your jurisdiction
the clock.’ – and I think that’s quite unique.’ He
However, McLaughlin warns that comments that if stablecoins are
CBDCs are not a silver bullet solution backed by fiat reserves, that will
where cross-border payments are come with regulations. ‘But I think it’s
concerned. ‘There are multiple parties also interesting to see other kinds of
in a payment chain, so the central stablecoins, not necessarily backed
bank being available is just one part of by fiat currencies, but collateralised
the puzzle,’ he says. ‘The bank where or algorithmic stablecoins. Those are
the beneficiary is also has to be on. really free from any kind of government
If the central bank is on, but the end influence.’
beneficiary bank isn’t, that doesn’t solve Another consideration around
the issue.’ stablecoins, says Creer, is the potential
So, while digital currencies may have for large tech providers to get involved.
the potential to improve cross-border ‘This kind of stablecoin technology is
payments, they may not be able to solve going to make the act of sending money
all the current challenges. There are also abroad much more integrated into
some further obstacles that may need your social media and your technology
to be overcome along the way. ‘At some accounts – it’s going to be a lot easier
point, the majority of cross-border to set up wallets, compared to what
payments will be completed in digital you need today to link an account to
currencies,’ predicts David Creer, global PayPal.’ In the future, he says, it is likely
distributed ledger technology and that big tech companies will have links
crypto lead at GFT. ‘But I think there’s a to stablecoins that will enable them to
omfif.org 11
access the private tokenisation of cash.

However, McLaughlin notes that
stablecoins do not currently fall within
the regulatory perimeter: ‘They are
not currently officially sanctioned legal
instruments – and that’s going to make
them very difficult for banks and other
regulatory players to interact with.’
He adds that while the ability to
send peer-to-peer payments using
a stablecoin might solve the issues
associated with cross-border payments,
‘it is also very troublesome from a
financial crime perspective, and might
be used to avoid sanctions, capital
controls and foreign exchange controls.’
While anti-money laundering monitoring
and sanctions checking might be
perceived as friction, McLaughlin
continues, ‘That’s not friction – that’s
making sure that criminals are not
using the payment system for money
laundering, terrorist financing,
ransomware and other forms of financial ‘While digital currencies Universal Payment Channels’, notes
crime.’ may have the potential that ‘Existing CBDC initiatives involve
to improve cross-border different motivations, strategies,
Need for interoperability payments, they may not legislation, regulations, guidelines, and
Improving cross-border payments be able to solve all the standards.’ As such, ‘These unique,
is unlikely to be the main driver for current challenges.’ but ultimately fragmented, CBDC
embarking on a CBDC project, which initiatives could significantly impact
tend to be motivated by domestic their interoperability with other CBDC
applications first and foremost. networks.’
Nevertheless, considerable focus has Kumar says that while export-
been placed on the role that CBDCs orientated economies will be keen to
could play in cross-border payments focus on building CBDC systems to
once they are established. cater to the large, untapped market
The need for interoperability is of cross-border payments, ‘This will
an important consideration. A report need development of more real-time
by Visa, ‘Cross-border payments for clearing and settlement systems, and
Central Bank Digital Currencies via a reduction in the number of parties
1.2. Current correspondent banking methods creates barriers for users

Source: International Monetary Fund, Oxford Economics, OMFIF analysis
Originating Respondent Correspondent Receiving

Payer bank Payee
bank bank bank
Different opening hours

Unclear Unclear incoming
FX rates fees
Varying communicatios
standards
involved in settlement processes today.’

For two domestic CBDC systems to be
interoperable, he says, ‘it is important
to focus on aligning on regulatory
framework – the technical design and
standards between two domestic CBDC
systems can be addressed as the next
priority.’
While interoperability represents
a challenge, the potential benefits
of a multi-CBDC network could be
considerable. Oliver Wyman and
JPMorgan’s paper, ‘Unlocking $120
Billion Value in Cross-Border Payments’,
argues that ‘A full-scale mCBDC
network which facilitates 24/7 real-time,
cross-border payments and foreign
exchange PvP settlements could save
global corporates nearly $100 billion
annually.’
Interoperability could come in
different forms, as a paper published by
BIS in 2021, ‘Multi-CBDC arrangements
and the future of cross-border
payments’, explains. Potential models
could include compatible or interlinked
CBDC systems, or a single system for
mCBDC. The paper notes that each ‘Improving cross-border involving BIS Innovation Hub, the
model comes with its own complexities payments is unlikely to Reserve Bank of Australia, Bank
– enhancing compatibility, for example, be the main driver for Negara Malaysia, Monetary Authority
could lead to choice and competition, embarking on a CBDC of Singapore and South African
but might also result in some of the project, which tend to be Reserve Bank. The focus of the project
same challenges associated with motivated by domestic is on testing the use of CBDCs for
traditional cross-border payments. The applications first and international settlement. As the BIS
single system approach, meanwhile, foremost.’ website explains, ‘A multi-currency
could allow for more operational common settlement platform would
functionality and efficiency, but also enable transacting parties to pay each
increase governance and control other in different currencies directly,
hurdles. without the need for intermediaries
A number of projects and initiatives such as correspondent banks.’
are currently focusing on CBDC While full interoperability between
interoperability, including: CBDCs may take time to achieve,
• The Multiple CBDC Bridge: A project other types of initiatives could also
being developed by BIS Innovation Hub, gain ground in the meantime. GFT, for
the Hong Kong Monetary Authority, example, worked on the Blockbaster
the Bank of Thailand, the PBoC and IV project run by Deutsche Börse,
the Central Bank of the United Arab Deutsche Bundesbank and Germany’s
Emirates. The project builds on Project finance agency, focusing on securities
Inthanon-LionRock, an initiative to settlement using distributed ledger
build a common platform for multiple technology. ‘What was interesting was
CBDC settlements. According that they were linking into traditional
to a report by BIS, the resulting payment systems,’ says Creer. ‘So
prototype demonstrated ‘a substantial they were using a central bank trigger
improvement in cross-border transfer chain – but that central bank tokenised
speed from multiple days to seconds, trigger chain was actually linking into the
as well as the potential to reduce TARGET2 payment system.’
several of the core cost components of He adds, ‘My hypothesis is that in
correspondent banking.’ the interim between wholesale and
• Project Dunbar: An initiative retail CBDCs taking place, especially
omfif.org 13
in Europe and America, I think we’re ‘Other notable Insurance Corporation. For CBDCs,
going to see more work like this, where developments include meanwhile, privacy remains a significant
traditional payment systems are being Partior, a digital multi- concern – as Guo says, ‘people don’t
used alongside cash on-chain solutions currency payments want the government to monitor all of
to provide some kind of interim network being developed their transactions.’
payment services. It’s going to be more by DBS, JP Morgan and Payments industry expert Ruth
effective and faster than traditional Temasek which aims to Wandhöfer, whose roles include chair of
payment systems – but isn’t going to be speed up and reduce the the Payment Systems Regulator Panel,
the full on CBDC centrally issued digital costs of cross-border partner at Gauss Ventures and member
money.’ payments.’ of the board of advisors at RTGS
Other notable developments Global, likewise cites the implications of
include Partior, a digital multi-currency CBDCs on privacy and anonymity
payments network being developed for low-value transactions. Under an
by DBS, JPMorgan and Temasek which account-based CBDC model, she
aims to speed up and reduce the costs explains, all users hold an account with
of cross-border payments. It follows the the central bank. As a consequence, the
results of Project Ubin, which explored central bank can see all data relating to
the use of blockchain and DLT for the CBDC transactions. ‘This centralised
clearing and settlement of payments data source for all flows has to be
and securities. managed by the central bank, including
The Oliver Wyman/JPMorgan paper from a security perspective and from a
notes that administrative, coordination processing perspective. For me, that’s
and policy difficulties could prove to a centralisation risk – if you centralise
be a hindrance for initiating mCBDC all the data within a central bank, the
networks at scale. The paper suggests latter then becomes a very attractive
that commercial bank networks such honeypot in terms of data hacks,’ she
as Partior, and/or hybrid networks with says.
both central bank and commercial bank Being the centralised issuer and
liquidity, ‘could provide more immediate processor of CBDC transactions also
and complementary pathways in a means that central banks need to weed
public-private partnership mode to help through data and carry out AML/know-
bootstrap these networks and prove your-customer checks, something
benefits before large-scale adoption by normally performed by banks.
the central banking community.’ ‘Furthermore, we have to question
Citi, meanwhile, has proposed the whether having all data with the central
concept of a regulated liability network bank is acceptable from a data privacy
to tokenise regulated liabilities such as perspective. If something goes wrong
central bank money, commercial bank or wrong decisions are taken, you’re
money and electronic money, with fully exposed to a centralised digital
partitions for different participants. In infrastructure, with no way out.’
this model, CBDCs can be held directly A further obstacle where digital
by end users, as well as being used currencies are concerned is the lack of
by other RLN participants to settle clarity over the definition of settlement
obligations between each other. finality. As such, a consultative report
on stablecoin arrangements published
Barriers and concerns by the Committee on Payments
More broadly, a number of concerns and Market Infrastructures and the
and obstacles remain around the role International Organization of Securities
of CBDCs and stablecoins moving Commissions noted that a systemically
forward. ‘For stablecoins, I think the important stablecoin arrangement
biggest hindrance is the regulatory side,’ should ‘clearly define the point at which
says Guo. ‘In the US, for example, the a transfer on the ledger becomes
Securities and Exchange Commission irrevocable and technical settlement
thinks stablecoins are still securities happens and make it transparent
– but there’s no legal framework.’ As whether and to what extent there could
such, he says the US is still exploring be a misalignment between technical
the correct way to regulate stablecoins, settlement and legal finality.’
because they carry a credit risk but Finastra’s Soundalgekar says other
are not insured by the Federal Deposit challenges ‘will emerge from the
What policy-makers are saying

Regulators speak about digital currencies at OMFIF roundtables
‘Central bank digital

currencies are perhaps
the most promising
area for development in
cross-border payments,
if only because of
the sheer number of
projects underway around the world.’
Denis Beau, Deputy Governor,
Banque de France
‘Although
‘CBDC’s beauty is one significant shift: blockchain has
one process for moving money and demonstrated
another for moving assets… merging efficiency, further
these two processes is work has to be
the ultimate beauty of done to stress
wholesale currency, to scalability and
do this you need the security.’
private sector.’ Claudine Hurman, Director
Sopnendu Mohanty, of Infrastructures,
Chief Fintech Officer, Innovation and Payments,
Monetary Authority Banque de France
of Singapore
‘While wholesale CBDC is extremely

exciting, it has been around for a long time…
much of the debate is around an innovation
in technology rathe than money.’
Tom Mutton, Director of Fintech, Bank of England
omfif.org 15
monetary value aspect of CBDCs, ‘Being the centralised have built strong ecosystems and
where CBDCs can be programmed issuer and processor of technologies for identity verification,
to change value based on market CBDC transactions also real-time processing and micro
circumstances to control inflation/ means that central banks payment capabilities. ‘Central banks
hyperinflation situations.’ In addition, need to weed through will need to leverage and build on those
he points out that in the absence data and carry out AML/ technologies, and partner with private
of standards or a global regulatory know-your-customer payment providers,’ he says. ‘It is crucial
agreement on the technology checks, something for both central banks and payment
supporting CBDCs and stablecoins, normally performed by service providers to co-exist in CBDC
‘consensus and standardisation would banks.’ systems with roles defined for both of
be needed to ensure consumers, them.’
corporates and central banks have faith
in the system.’ Implications for banks
Last but not least, how could the rise
Impact on banks and payment of digital currencies impact banks?
providers As author and commentator Chris
Another consideration is the possible Skinner points out: ‘If banks no longer
impact of CBDCs and stablecoins manage money – if it’s democratised
on banks and traditional payment and decentralised, but issued by central
providers in the future. One risk is that governments directly to citizens and
the use of digital currencies could lead corporates – then what is the role of the
to a reduction in transaction volumes bank? Maybe it’s to store the money;
and revenues. As Wandhöfer explains, maybe it’s to manage digital assets.’
if central banks can directly serve One risk is that if people withdraw
consumers and merchants with CBDCs, some of their bank deposits in order
‘you risk suddenly disrupting a whole to invest in CBDCs, banks will see a
ecosystem of payment processors and reduction in their deposit funding – and
third-party providers that the European this could, in turn, reduce the credit
Union and our regulators have invited to that banks are able to supply to the real
compete in the market with banks.’ economy. A discussion paper published
The nature of the challenges by the Bank of England in June 2021,
may depend to some extent on ‘New forms of digital money’, cites an
how traditional payment providers need to think about is whether people illustrative scenario in which, ‘as deposits
decide to integrate with CBDCs and will switch over to a new form factor of migrate to new forms of digital money,
stablecoins. ‘I think stablecoins can put money, which is CBDC, and how easy banks are assumed to restore their
a lot of pressure on traditional payment is it for them to adopt,’ she comments. liquidity positions, and hence their ability
providers – and I don’t think many ‘From this angle, payment providers to continue lending, by issuing long-
payment providers will be trying to can provide valuable insights from a term wholesale debt. Since this is more
integrate a lot of stablecoins into their user-centric perspective around mass costly than deposit funding, overall
systems,’ says Creer. ‘On the other hand, adoption, consumer experience and funding costs are assumed to rise.’
I think that CBDCs are quite interesting merchant acceptance, because we’ve Nevertheless, the report notes there
for traditional payment providers – and been doing this for decades – we have is ‘significant uncertainty’ around this
I think those providers are potentially a valuable network and can provide illustrative scenario.
going to be providing rails for payments the seamless integration experience But while the rise of digital currencies
via CBDCs in the future.’ for consumers, merchants and could have significant implications for
Consequently, Creer does not believe governments themselves.’ financial institutions, the role banks
that current payment systems such as Erin English, technology policy fellow fulfil as regulated entities is not to
SWIFT, PayPal and Visa and Mastercard at the Visa Economic Empowerment be underestimated. ‘The question is
will become redundant as a result of Institute, adds that many central banks whether or not money and payments are
CBDCs and tokenisation. ‘I think they will have contacted Visa as part of their going to be in the hands of governments
embrace them and integrate them into exploration of this topic, both when and regulated entities in the future,’
their systems, and we will see a lot more seeking information for discussion says McLaughlin. ‘We firmly believe
offerings from them that will integrate papers and for bilateral conversations that money and payments belong in
with these services,’ he comments. about specific areas. ‘Central banks the regulated sector. At the end of the
Catherine Gu, global CBDC lead at are serious about learning more about day, money is the prerogative of the
Visa, points out that CBDCs present CBDC and are very open to outside nation state and its authorised agents
‘opportunity as well as risk’ to traditional expertise and insights,’ he observes. and I don’t see the regulated sector
payment providers. ‘From a central Kumar notes that over the last 10 being disintermediated from money and
bank’s perspective, the first thing they years, payments service providers payments.’ 
Central bank digital currencies could

revolutionise cross-border payments
Digital money can reduce risks and deliver benefits for cross-currency
transactions, as a joint MAS and Banque de France project found, writes
Naveen Mallela, global head of coin systems, Onyx by JP Morgan.
Global corporations move about $23.5tn across border, cross-currency transactions a reality.
borders every year. Despite this huge volume, the In support of this, the Monetary Authority of
existing wholesale cross-border payments system Singapore and Banque de France worked with
continues to be challenged on efficiency, costs JP Morgan’s Onyx Coin Systems to create a
and transparency. Due to a lack of interoperability simulation using a multi-currency central bank
between infrastructure in different countries, digital currency network. This approach could cut
organisations have to rely on long chains of out intermediaries and make the system far more
correspondent banks to execute transactions, efficient and transparent.
resulting in processing delays and accumulated
fees. Research by JP Morgan and Oliver Wyman The potential benefits of an mCBDC network
estimated the average cost per transaction at $27, include:
while settlement times of up to three days are not • Simultaneous settlement: With simultaneous
settlement, challenges around trapped liquidity,
transparency, Herstatt (or cross-currency
‘These breakthroughs could solve settlement) risk, settlement risk and settlement
many of the challenges in the current delays will be mitigated.
payments system and make 24/7, real
• ‘Always on’ infrastructure: Transactions can be
time, cross-border, cross-currency
executed on a 24/7 basis without cut-off times,
transactions a reality.’
helping to support regional and global currency
flows.
• Short transaction chains: By reducing the number
uncommon. In total, approximately $120bn is spent of intermediaries, transactions can be completed
each year on processing fees. Additional costs much more quickly, while transaction fees and
also must be factored in, coming from foreign liquidity requirements are reduced.
exchange conversions, trapped liquidity and • Prevalidation: Transactions can be screened and
delayed settlements. checked before they are sent, reducing errors and
improving regulatory oversight.
Blockchain moves cross-border payments
forward The BdF/MAS simulation was executed on
Over the past ten years, there have been huge Consensys Quorum, a permissioned fork of
advances in central bank digital currencies and the Ethereum blockchain. Consensus Quorum
blockchain technology. These breakthroughs supports smart contracts, which means that
could solve many of the challenges in the current payment and settlement functions can be
payments system and make 24/7, real time, cross- codified into a programme that executes them
omfif.org 17
automatically once certain conditions are met. a multi-currency digital corridor network based on
The simulation focused on cross-border and commercial bank money, rather than central bank
cross-currency transactions for the Singapore dollar money. The set up would be similar to an mCBDC
CBDC and euro CBDC and resulted in a number of with the main exception being that a commercial
interesting findings. bank, rather than the central bank, assumes the role
• Efficiency: The simulation demonstrated that the of settlement institution.
One such example of an mDCN is Partior – a joint
venture between JP Morgan, DBS and Temasek that
‘One drawback of an mCBDC network is focuses on US and Singapore dollar transactions.
that CBDCs may not be available for all Under this arrangement, the US dollar settlement
countries or currencies.’ services are completed by JP Morgan, while DBS
undertakes the Singapore dollar component.
In addition, it is possible to build a hybrid model
number of correspondent banking parties involved where liquidity in one currency is provided by a
in a cross-border payment chain could be reduced, central bank, while liquidity in another is provided
which may help reduce costs associated with
increased intermediaries.
• Foreign exchange: The use of automated market- ‘Due to the administrative and procedural
makers and liquidity pools could be a viable difficulties of on-boarding multiple
alternative to traditional order book infrastructure central banks, networks like Partior or
for foreign exchange. hybrid mCBDC/mDCN models may
• Visibility: The mCBDC network provided MAS and prove easier to set up and scale in the
BdF with full visibility over cross-border payments short term.’
using their CBDCs while retaining control over
issuance and distribution.
• Interoperability: The simulation demonstrated by a commercial bank. Due to the administrative
interoperability across different types of public and and procedural difficulties of on-boarding multiple
private cloud infrastructures in both Singapore and central banks, networks like Partior or hybrid
France. mCBDC/mDCN models may prove easier to set up
and scale in the short term.
Moving beyond CBDCs Whatever model wins out, CBDCs offer the
One drawback of an mCBDC network is that potential to provide the type of fast, seamless and
CBDCs may not be available for all countries or scalable cross-border payments that organisations
currencies. In this scenario another option would be are searching for.
Chapter 2
Evolution: upgrading payment

infrastructure for the digital age
Technology can drive existing payment rails to create a system fit for future purpose. Large
parts of the infrastructure have already been reconfigured. By Kanika Saigal.
CASH IS LOSING its touch. Slowly, we smooth-running business and going the fundamental problem that payment
are ditching coins and paper money under. providers aim to solve.
in favour of digital and electronic Real-time gross settlements – a Muddying the water further are the
alternatives that allow us to make system that allows for the instant countless, sometimes contradictory
payments at the touch of a screen. transfer of money and securities and is rules and regulations that exist between
Proponents of cashlessness argue usually run by a country’s central bank – jurisdictions. This has limited the growth
that these new types of transactions improves cash flow, makes it easier for and adoption of instant cross-border
are cheaper and more transparent, businesses to manage funds, reduces payments, especially when they require
given the digital trail these types of late payments and speeds up the settlement in different currencies.
transactions leave behind. payment of invoices. Initiating, clearing When putting together
And while cashless transactions and settling transactions are carried out recommendations for the
are convenient, there are also several in seconds, in contrast to intermittent standardisation of cross-border
potential social and economic benefits batch settlements. payments, the FSB takes into account
associated with them. According to The move towards instant payments not just the underlying payments
the Financial Stability Board, cashless in retail and wholesale banking is infrastructure but ‘international
transactions spur economic growth, driven by need and convenience, but standards and guidance, national and
support international trade, drive it is made possible by technology. regional data frameworks, operating
global development and boost financial Widespread technological innovation in hours of and access to payment
inclusion. transaction banking has reconfigured systems, common elements of service
‘But for electronic payments to front- and back-end parts of the level agreements/schemes, the use of
provide a genuine alternative to payment system as well as the very rails payment-versus-payment mechanisms,
cash, the value of the funds needs on which payments move. As a result, the interlinking of payment systems
to be available immediately,’ says new payment gateways, systems and and central bank digital currency design
George Evers, senior vice president, currencies have come to fruition and to provide a strong basis and guide
solutions development, Mastercard. transformed how we transact. for the operational improvements to
‘Arguably, instant payments have been come.’
the biggest driver for change in the Stability But should interoperability be
payments landscape to date.’ But the stability and momentum of this the end goal? ‘We typically talk
In an age of instant gratification, transition relies on the ever-evolving about interoperability in terms of
consumers expect their payments and network of payments itself. Given the technical interoperability, network
transactions to be made immediately. number of stakeholders involved – from interoperability and regulatory
And while instant payments may be both the private and public sectors, interoperability,’ says Chad Harper,
convenient for individual consumers sometimes working in silos, sometimes global payments fellow at the Visa
and small firms, they can have much using different technology and often Economic Empowerment Institute.
broader ramifications for business. at different stages of technological ‘Because regulatory interoperability,
Depending on the size and type development – the current payment done well, enables the other two types,
of company in question, instant landscape is complicated. Indeed, the it is perhaps the most important to
settlement of payments may mean lack of interoperability and integration make progress on. Discussions of
the difference between a successful, means high fees and payment delays – interoperability can sometimes turn
omfif.org 19
into recommendations for uniformity debits. Most people receive their salary
‘The move towards
and rigidity, and we believe this can via a BACS payment and it can take a
instant payments in
stifle innovation. Every time our search couple of days for it to settle.
retail and wholesale
for interoperability lands us in a place In retail banking, faster payment
banking is driven by need
where we think one platform/one systems are gaining ground in several
and convenience, but
route is the answer, we should turn jurisdictions. In 2014, there were 14
it is made possible by
back because we could be damaging faster payment schemes across the
technology.’
resilience by introducing possible single globe. Now, there are close to 50. The
points of failure.’ Unified Payment Interface, India’s
As Mark McNulty, head of payments instant, real-time payment system
and receivables for Europe, the Middle developed by National Payments
East and Africa at Citi says: ‘While Corporation of India, launched in
payments can be involved and complex, 2016. Demonetisation in India in the
these complexities shouldn’t impact same year, where INR500 ($6.71) and
the user. We need to ensure that their INR1,000 banknotes were withdrawn
overall experience is seamless.’ from circulation, drove up digital
payment uptake in the country. In June
Faster payments 2021, UPI providers recorded a total
Launched in 2008, the UK’s Faster of 2.8bn digital payment transactions,
Payments Service – which enables worth in total over INR5tn.
mobile, internet, telephone and In 2012, Bankgirot, a Swedish
standing order payments to move clearing system, established BiR, a
quickly and securely between UK bank real-time settlement system for mobile
accounts, 24 hours a day – has grown
exponentially. Usually carried out within
minutes, faster payments can take up
25,000 2.1 Debit cards
to 24 hours to settle but are becoming
overtake
increasingly instant as technology and
20,000 cash as most
regulation evolves. popular
There are several other payment payment
15,000
schemes available in the UK. There method
is the Clearing House Automated
10,000 Number of
Payment System, which is used for retail payments using
and wholesale high value payments and 5,000
selected methods,
are usually settled immediately, and the m
Banker’s Automated Clearing Services. 0
Source: UK Finance
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
BACS is a much older system, dating
Cash Cheque Direct Debit
back to the 1960s, and is used for bank Standing Order Bacs Direct Credit Faster payments and other remote banking
Credit/charge/purchasing card Debit Card Other
transfers within the UK, including direct
Public and private sector Regulatory,

commitment supervisory and
Develop common cross-border payments vision oversight frameworks
and targets
Align regulatory supervisory
Implement international guidance and principles
and oversight frameworks
Define common features of cross-border
Apply anti-money laundering
payment service levels
and counter-terrorist financing
2.2 Enhancing consistently and comprehensively
Existing payments infrastructures cross-border Review interaction between data

frameworks and cross-border
and arrangements payments payments
Promote safe payment corridors
Facilitate increased adoption of PVP
Foster know your customer and
Improve direct access to payment systems identity information sharing
Explore reciprocal liquidity arrangements
Extend and align operating hours
Peruse interlinking payment systems
Data and market practices
Adopt a harmonised version ISO 20022
for message formats
Harmonise API protocols for data
New payment infrastructures exchange
Establish unique identifiers with proxy
and arrangements registries
Consider the feasibility of new multilateral platforms
and arrangements for cross-border payments
Foster the soundness of global stablecoin arrangements
Factor an international dimension into CBCD
Source: Bank for International
Settlements
payments. Europe has TIPS, or TARGET and receive information, such as money
Instant Payment Settlement, based transfer instructions, across borders
on the single euro payments area, securely.
to facilitate real-time cross-border ‘Domestically, this is much easier to
payments in euro. In Singapore, 15 achieve. Internationally, the payments
banks and three non-bank financial industry is continuously evolving and
institutions are signed up to PayNow, adapting so that it can offer the same
the city-state’s version of real-time instant, seamless service,’ he says.
payments. PayNow’s remit has As well as the domestic-international
extended to serve corporates as well as divide, the wholesale settlement
retail customers. system has lagged behind retail. ‘The
Australia’s New Payment’s Platform retail space has changed dramatically
began operations in February 2018. In in the last few years and instant
Brazil, the central bank launched PIX in domestic payments are the norm. But
December 2020 to allow for round the the wholesale club hasn’t evolved in
clock settlements. In Canada, the Real- step, and this is having a detrimental
time Payments Rail is due to launch in impact on cross-border payments,’
2022. Peru, Indonesia, New Zealand says Dave Sissens, chief executive
and Colombia are also poised to launch officer of RTGS.global, a cross-border
instant payment systems in the next liquidity network for banks that locks
few years. in and transfers liquidity ownership in
Instant payment systems across real-time.
the globe work alongside some of the There are a number of reasons
more traditional and slower systems that for this. An industry that has already
already exist. But ‘we increasingly expect seen profitability in decline may not
all payments to be instant and frictionless,’ have the breathing space to invest in
says Harry Newman, head of banking change, existing fees on cross-border
strategy, EMEA, at SWIFT,the global transactions may remain attractive to
messaging system used by banks and some players in payments or, lumbered
financial institutions to send with legacy infrastructure, banks may
omfif.org 21
not be able to adapt to more efficient 2.3 Big tech

40
cross-border payment methods. pushes into
But the roll out of open banking in 4500 32 fintech
the UK and similar initiatives around Total disclosed
30
the world has led to the emergence of fintech funding
new players jostling for a piece of the 3000 21 involving
20 participation from
growing payments sector. With rising 20
big tech venture
competition, banks are having to adapt. 13 14
funds, $m (LHS),
1500 10 deal count (RHS)
Open banking 10
Source: CB Insights
Open banking is a way to offer
regulated companies secure and limited $1,379 $477 $2,891 $2,253 $2,158 $1,297
0 0
access to an individual’s financial data 2016 2017 2018 2019 2020 2021 YTD
so that they can offer services that
may be beneficial to the end user.
It also means that, with permission,
companies can take payments and ‘An industry that has sale company iZettle for $2.2bn. In July
access data directly from a customer’s already seen profitability of the same year, tech company FIS
bank account. Open banking is usually in decline may not have acquired payment processing company
served by application programme the breathing space to WorldPay – one of the UK’s leading
interfaces, a software intermediary invest in change.’ payment providers for small- and
which allows two separate applications medium-sized enterprises – for $43bn.
to share information easily and securely In 2020, European payments solution
without having to leverage each other’s company Worldline merged with
infrastructure or software. Ingenico Group. The deal will combine
Similar to open banking in the UK, Worldline’s coverage of the payment
the EU launched its second payment value chain and expertise in cross-
services directive in 2016, the HKMA border payments with Ingenico’s global
issued an open API framework in exposure to online commerce.
2018 and, in Australia, the consumer In May 2021, payment processing
data right – a data policy initiative as company Stripe bought fraud
opposed to a financial services one – will prevention company Bouncer and,
allow consumers to share their data with in June, Italian payment rivals Nets
whichever authorised third party they and Nexi merged to create one of
choose. Other initiatives, such as those the largest payments companies in
in India, Japan, Singapore and South Europe. In the same month, Deutsche
Korea, are being driven by the market, Bank announced a joint venture with
as opposed to being implemented by payments platform Fiserv and in
regulators. September the bank acquired Berlin-
Open banking and its international based online payment processing
iterations have thrown open the company Better Payment. Also in
payments landscape as banks, fintechs September, digital payments company
and API developers leverage the latest Square acquired Australian buy now,
technology to win over business.
Competition has driven costs down for
retail customers. Wholesale customers
250
2.4 Participation
are increasingly looking at how they
grows across
can replicate retail banking services for a diverse set of
corporate clients. 200
payments
As competition in payments heats systems
up, there have been a number of key 150
Settlement
mergers and acquisitions in the sector participants per
100
involving new banks, fintechs, API payments system
developers and established banks Source: Bank of
looking to access technology that 50 England
enhances payment gateways, point of
0
sales, e-wallets and buy now, pay later 2015 2016 2017 2018 2019 2020 2021
schemes – all of which benefit the user. CHAPS CREST FPS BACS C&CC ICS LINK Visa Mastercard
In June 2019, PayPal bought point of
pay later company Afterpay.

As companies scramble to close
deals that complement their existing
offerings and networks, others
$197
– especially the larger banks and
technology companies – are investing
in innovation hubs and incubators.
Level39 is one of Europe’s largest
Canada boasts the
technology accelerators, specialising
highest contactless
payment limit in the world in finance, retail and cyber-security.
It was the starting point for Revolut,
the UK’s most valuable tech start-up.
Fintech Innovation Lab offers a 12-week
programme in London, Dublin, Hong
Kong and New York run by Accenture to
From cash to
help start-ups refine and test their value
proposition. Barclays, Citi, ING and a
number of other financial institutions
cashless have also set up their own programmes

with innovation sitting at the top of the
transaction banking agenda.
Ten years ago, cash was the most used method for transacting But while all these payment
in the UK. For large transactions, cheques were a widely companies have developed their own
accepted and viable alternative. Businesses relied on slow and niche, most have one thing in common:
expensive interbank systems, such as CHAPS and BACS, for they understand that most of these
payments to settle. services need to be instant.
Meanwhile, the strategy for the payments industry in the UK
was being set by the Payments Council, the industry’s self- Language
regulating organisation, in a way that the Treasury believed ‘did Providing cross-border, multi-currency
not give sufficient regard to consumer and business outcomes’. payments is complex. These types of
Now, cheques are almost obsolete, cards are the most used payments must consider cross-border
payment method and contactless card and mobile payments are governance, different laws, diverging
on the rise. As the Covid-19 pandemic took hold, stay at home anti-money laundering regulations,
and social distancing orders accelerated the adoption of digital foreign exchange conversion and
payment methods. liquidity management in foreign
In April 2020, the industry increased the spending limit on currencies, among other things. It is
an individual contactless card payments from £30 to £45. one of the reasons why, until recently,
Meanwhile, the UK’s Faster Payments System – a nascent unassuming holiday goers would
concept in 2010 – processed nearly 3bn payments throughout find that their credit cards had been
the year. cancelled or would receive a call from
Between 2019 and 2020, the number of contactless their bank referencing suspicious
payments made in the UK rose by 12% and accounted for 9.6bn payment activity while abroad.
transactions, or 27% of the total. This was up from 7% in 2016. ‘If the end goal is standardisation
The share of cash payments in the UK fell to just 14.6% in and interoperability between payment
2019 from 32.7% in 2010 and 50.5% in 2000. Today, paying for systems, one way to do this is for
something in cash in one of the UK’s high street shops is rare. payments to speak the same language,’
Facilitated by electronic payments, e-commerce sales have says Newman from SWIFT.
exploded. In 2019, 13.6% of total global retail sales were made SWIFT is innovating to make
online. By the end of 2021, that number is expected to reach cross-border transactions much
19.5% – a 45.8% increase in market share in just two years. more efficient. SWIFT gpi, launched
By 2024, online retail sales are expected to reach $6.39tn, in 2017, provides complete end-to-
accounting for around 21.8% of total retail sales globally. end transparency around cross-
The move away from cash towards electronic payments is not border payments for corporates. The
just a trend found in the UK. In Hong Kong, four out of five people majority of payments on SWIFT, for
above the age of 15 have a debit card. Canada has the highest example, move across SWIFT gpi.
contactless payment limits in the world at CAD$250 ($197). In 100% of gpi payments are completed
Sweden, there are less than 32 ATMs for every 100,000 people in within 24 hours and 40% of payments
the country. are credited to the end beneficiary
within five minutes. SWIFT’s latest
omfif.org 23
development, SWIFT Go, is a product

like gpi but in the person-to-person
space, which provides consumers
and SMEs with a frictionless and
inexpensive service for small cross-
border payments.
As is the case with other ISO
standards, ISO 20022 creates a
common payment processing
language, which enables cheaper, faster
and more secure payment processing.
Launched in 2004, ISO 20022 has now
become the data standard for financial
messaging and has been accepted
by major central banks and payment
providers around the world.
Almost 200 market infrastructure-
driven initiatives are either using ISO
20022 – including SWIFT – or are
considering adopting the standard. The
UK and US are predicted to adopt the
standard in 2022 and 2023 respectively.
Once globally adopted, ISO 20022
should lead to standardisation in
cross-border payments and support
interoperability between payment
platforms globally. ‘Once globally adopted, payments themselves. This is because
‘En masse migration to ISO 20022 ISO 20022 should lead to settling payments cross-border
is huge,’ says McNulty. ‘It is spurring a standardisation in cross- and in different currencies is a much
great amount of change in payments, border payments and more complicated business, where
as new and enhanced messaging support interoperability protectionist policies and foreign
standards inevitably create a superior between payment exchange conversion can become
client experience. The migration of platforms globally.’ difficult to navigate.
both domestic and cross-border Multi-currency RTGS systems do
infrastructures to ISO 20022 will exist but are rare. In April 2020, the
bring the customer a much more European Central Bank and Sweden’s
standardised experience – regardless central bank, Sveriges Riksbank, agreed
of the nature of their payment – and to allow the settlement of electronic
will enhance the overall resilience of the payments in Swedish krona on TIPS.
ecosystem as it facilitates much greater The Directo a México, set up in 2005,
interoperability.’ came about to facilitate remittances
But there may be some teething from the US to Mexico and links the
problems. ‘While ISO 20022 is Federal Reserve's automated clearing
considered the global standard in house (FedACH) with the Mexican
payments messaging, I have already RTGS system to allow dollar-peso
heard how some institutions and payments.
financial services companies are Through its regional payments
adopting the standard in different ways system, AFAQ, the Gulf Co-operation
– in complete contradiction to why it Council’s RTGS system will offer a
was introduced,’ says Sissens. regional payment system connecting
‘Ensuring a consistent adoption the domestic RTGS payment systems
of the new standards is critical to the of the six GCC countries, facilitating
interoperability of systems in the the efficient delivery of intra-GCC
future,’ he says. payments.
Launched by the Arab Monetary
RTGS Fund in February 2020, Buna is a
SWIFT and ISO focus more on the multicurrency payments system
language used to facilitate cross- that improves the speed, cost and
border payments as opposed to the transparency of cross-border payment
by wholesale banking,’ explains Sissens.

‘This means that currently, international
and domestic instant payments are
supported by pre-funded wholesale
banking systems that move liquidity in
large volumes and value throughout the
day. So, while they might look instant to
the user, they are in fact supported by
large liquidity pools which were moved
well in advance.’
He continues: ‘Liquidity
management becomes even harder
given that within one institution,
wholesale markets and foreign
exchange markets – which are in
a continuous buy and sell loop of
currency – often work in opposition
to one another, so pools of liquidity
may not be readily available to settle
$2.2bn
payments. If we did have more visibility
throughout the system, we should be
able to create further efficiencies.’
Big tech invested large amounts in fintechs in 2020 This is what RTGS.global hopes to
provide. Using cloud-based technology
– specifically through Microsoft’s
Azure platform – RTGS.global allows
wholesale banking partners to lock
both sides of the transaction’s liquidity
flows in regional and key international internationally through one single and settle payments in a variety of
currencies. In the Nordic region, P27 platform – Nexus. According to the currencies instantly. ‘Remittance
is a joint initiative by Danske Bank, BIS, Nexus will provide a more scalable companies often appear to settle
Handelsbanken, Nordea, OP Financial way to grow instant cross-border cross-border transactions instantly
Group, SEB and Swedbank, which is payment networks. In an experimental but in fact there’s an awful lot going on
looking into how to establish a regional proof of concept, the BIS Innovation behind the scenes,’ says Sissens.
payments infrastructure for domestic Hub is working with the MAS, Banca And how relevant will RTGS.global’s
and cross-border payments in Nordic d’Italia, Bank Negara Malaysia, BCS offering be if regional RTGS systems,
currencies and euro. in Singapore and PayNet in Malaysia such as that in the GCC, takes off?
Indeed, certain jurisdictions may to connect the payment systems of ‘Right now, we believe it to be more of
have substantial volumes of payments Singapore, Malaysia and the euro area. the same, we will enable the commercial
between domestic financial institutions ‘If the rules of the road around banks, which underpin such services,
in one or more foreign currencies. As cross-border access to domestic to more efficiently and more instantly
such, it might make sense to onshore instant payments can be harmonised, manage their liquidity. We intend to
these payments by building an offshore then they can be scaled up, and will speak with many of these consortiums
system so it can process payments enhance the cross-border payment in due course,’ says Sissens.
denominated in a different currency experience,’ says McNulty at Citi.
to that of the jurisdiction. This is the ‘At the moment, though, there is not The push for payments
case in Hong Kong. The Clearing House a level playing field which means that Big tech firms – with their existing
Automated Transfer System in Hong while some countries open up their global networks – are emerging as key
Kong is a group of RTGS systems, borders to cross-border payments, players in the domestic and cross-
each of which settles in Hong Kong others don’t for various reasons. border payments landscape. Currently,
dollars, dollars, euro and renminbi. It Enhancing the level of cross-border big tech works within frictionless,
is operated by Hong Kong Interbank access to domestic instant payment closed systems, which makes moving
Clearing, which is a private entity jointly schemes globally and thus levelling this money and information within their
owned by the HKMA and the Hong playing field is key,’ he adds. networks relatively easy. Moreover, they
Kong Association of Banks. Perhaps delving deeper into the sit on massive amounts of consumer
In the P2P space, the BIS is working mechanics of the system should be a data that provides them with the tools
on a blueprint for instant cross-border first step towards interoperability. ‘At to tailor financial and payment products
payments by linking domestic instant the moment, peer-to-peer payments to customers, locking them into their
and/or faster payment systems are made possible by liquidity provided burgeoning ecosystems.
omfif.org 25
Companies, including Facebook, In August 2019, Apple partnered keep consumers safe has proven
Apple and Tencent, have all been with Goldman Sachs and Mastercard wholly insufficient’ and ‘we urge you to
investing in payments and fintech. They to launch Apple Card and in July 2020, immediately discontinue your Novi pilot
are harnessing their customer data Apple acquired Canadian company and to commit that you will not bring
to gain ground in financial services. In Mobeewave, which uses technology to Diem to market.’
2020, investment in fintech companies allow merchants to use smartphones As the payment landscape evolves at
by big tech hit $2.2bn. While this as payment terminals. By incorporating lightning speed, regulators and policy-
marked a 4% drop from the previous Mobeewave’s features into Apple Pay, makers will need to act fast to ensure
year, the number of deals made Apple can offer quick payments and the system remains stable, channels
increased 52% year-on-year, with 32 transfers using an iPhone. In China, are transparent and that frictionless
agreements in total. Alipay and WeChat Pay, owned by payments benefit the end user.
Facebook – or Meta as it has e-commerce giant Ant Group and tech Indeed, well-established payment
rebranded itself – has made a strong conglomerate Tencent, respectively, providers may have something to learn
push for payments in particular. In have created a new paradigm with from big tech as they work towards
August 2020, Facebook announced ‘super apps’ as payments platforms. these goals. As Sissens says: ‘In the
the creation of Facebook Financial to But there has already been some future, with finance and technology
build a cohesive payments strategy push back against big tech’s foray into becoming increasingly intertwined, big
across Facebook, Instagram, WhatsApp payments. In September, as China tech companies have an obvious role
and Portal. In May 2021, WhatsApp continued to double down on national to play in the global financial services
relaunched its P2P money transfer tech giants in its anti-monopoly drive, sector. Without a shadow of a doubt,
services in Brazil (after it was blocked Beijing ordered Ant Group to create the public and private sectors must
by the central bank nearly a year ago). a separate app for its microloans work hand-in-hand to make this future
And while Meta’s first digital currency business. Then in October, an open possible.’
idea, Libra, fell by the wayside, the tech letter to Facebook’s CEO Mark ‘The public sector has an essential
giant is taking another stab at it by Zuckerberg from Democrat senators role in terms of regulation, compliance,
being involved with a slightly watered- in the US stated: ‘Facebook cannot stability and enabling competition.
down version, Diem. Novi, Facebook’s be trusted to manage a payment In turn, the private sector will drive
digital wallet project, will underpin the system or digital currency when its innovation. Both sides are just as
payment system. existing ability to manage risks and important.’ 
‘Open banking and

its international
iterations have
thrown open the
payments landscape
as banks, fintechs
and API developers
leverage the latest
technology to win
over business.’
Instant and frictionless cross-border

payments: interoperability is king
SWIFT’s head of banking strategy, Harry Newman, stresses the importance of
interoperability in addressing the challenges facing cross-border payments, stating there
are no silver bullets.
WHILE PROGRESS has been made in recent years, integrates with the domestic is critical.
there are still many challenges facing cross-border The issues within that integration are varied –
payments. The Bank for International Settlements’ perhaps the biggest reason is the differing controls
committee for payments and market infrastructure that many countries exercise, for entirely valid
highlights several key areas to address relating economic reasons. ‘This can mean payments end
to international transactions. These tend to be up queued at the border, just like lorries at customs
expensive, can be slow and suffer from problems control do,’ says Newman. Other issues include
of limited access and transparency. The key lies in differences in operating hours, legacy infrastructure,
addressing the underlying issues in a structured way. data inconsistencies and tighter financial crime
‘Technology is tremendously important in controls around international payments.
improving some of these issues,’ says Newman, ‘but Some of these issues can be resolved with new
it’s not a magic wand. Given the number of countries, technology, others less obviously so. The key is to
each with their own approach, integrate the international and
the key is interoperability. The domestic space in a standardised
adoption of a common standard, and efficient way.
ISO 20022, will be critical and Many domestic payments
financial institutions need to act ‘The adoption of a common systems were developed without
collaboratively and innovatively to standard, ISO 20022, will be much attention to international
build solutions that are mutually critical and financial institutions needs. ‘It’s only natural that
beneficial to all.’ need to act collaboratively and they were built for local needs,’
innovatively to build solutions says Newman. ‘But the result is
Compliance, regulatory and that are mutually beneficial to all.’ that different jurisdictions have
data standards different data requirements.
Cross-border payments are Crossing multiple jurisdictions for
inherently more challenging cross-border payments can raise
than domestic ones because major compliance issues because
they move between different jurisdictions with some domestic solutions aren’t equipped to provide
different currencies and varying regulatory and the same data as receiving systems expect.’
data requirements. They are often faster than many The fundamental problem is one of
realise – the majority of payments on SWIFT, for interoperability. ‘Whatever solution we pursue for
example, move across SWIFT gpi which means most cross-border payments,’ says Newman, ‘it is vitally
are credited to the beneficiary within an hour and very important that they interoperate to create a global
few take longer than one day. solution rather than be a series of closed loops and
Perhaps paradoxically, cross-border payments digital islands.’ Once data consistency between
spend, on average, 80% of their transit time in the different international systems is achieved, new
receiving country. Cross-border payments also possibilities emerge, such as cross-border interlinking
use domestic systems to reach their end point of the new breed of domestic instant payment
much of the time; that’s how the industry achieves schemes, which have aligned on the ISO 20022
global reach. Therefore, how the international space standard. SWIFT is involved in several such initiatives,
omfif.org 27
leveraging its deep understanding of international be based on different technologies in different

payments, technology and data standards. jurisdictions. Various distributed ledger technologies
SWIFT is launching a new, more integrated approach are being trialled and some systems will use other
to managing cross-border transactions. ‘Our new technologies. ‘This is normal,’ said Newman. ‘These are
model harnesses a transaction management platform choices driven by the goals of each system and no one
to put the business transaction at the centre,’ says technology is likely to serve all local needs. DLT, for
Newman. ‘This ensures complete, up to date data is example, may have advantages in some cases but also
available to all transaction participants and unlocks the has its challenges in terms of scalability and ease of
potential for value-added services to be harnessed by adoption.’
all participants in the transaction.’ Whether or not CBDCs operate on distributed ledger
architecture, fully digital, easily tradable versions of
CBDCs: exciting, but interoperability is still key central bank currency under the control of the central
A great many central banks around the bank could produce valuable savings,
world are working to create their own but only, says Newman, if they are
digital currencies — digital versions of designed to be interoperable from the
central bank cash. CBDCs will require start.
new technology and while they could ‘CBDCs are a new form of money,’
result in improvements to domestic ‘Our new model harnesses continues Newman. ‘It’s an important
payment networks, they will not a transaction management development. To get the most value
offer any benefits to cross-border platform to put the business from them they need to be designed
payments systems unless they are transaction at the centre.’ to integrate with other forms of money
developed with an eye for international domestically and be interoperable with
standards. other solutions of different design and
Newman argues that pursuing technology on an international level.’
interoperability as a foundation will be One of the key experiments
more successful than attempting to SWIFT’s innovation team has run this
adapt a system later. ‘We need everyone to start with year is to orchestrate payments across two CBDC
that in mind,’ he says. ‘It needs to be developed as an solutions (on different DLT technologies) via the new
open solution; retrofitting the international dimension platform and bridge those with an RTGS system. These
will be very expensive.’ have been very successful. It is therefore possible, as
For CBDCs to be useful for international payments, long as the systems have the necessary rich data and
the essential step is again interoperability and adopting are designed to be open.
an interoperable data standard that has already been Cross-border payments have improved significantly
defined. ‘The versions of ISO 20022 that allow for over the past five years, and SWIFT and the financial
rich data internationally have been worked out by the community continue to evolve and improve the
industry, so if new systems are designed with this in international payments experience. Interoperability is
mind, there should be fewer problems of incompatible achievable, and frictionless payments from account-to-
data formats,’ argues Newman. account, anytime, anywhere in the world, will soon be a
CBDC-based payments systems are likely to reality.
Chapter 3
Wholesale payments: curing

the pain points
Corporates are crying out for quicker, cheaper cross-border payments. Banks and fintechs
have to work together to make them happen. By Rebecca Brace.
CORPORATE TREASURERS are on a massive exercise to map out all the opportunities to cross-sell other
constant mission to look for solutions individual requirements per restricted products – the report also warned that
to long-standing pain points in country’ and introduce extra processes new competitors and technologies
wholesale payments. These range from to ensure those requirements are have the potential ‘to profoundly
a lack of transparency over the status met when payments are made. reshape the industry’.
of payments to the need for efficiency ‘Unfortunately for us this means that Since then, the world of wholesale
and automation. ‘What’s the one thing we have had to introduce variances to payments has continued to evolve.
I would like to see available today? our payment process, some of which Developments, including the rise of
I want payments to be seamless, to are manual,’ she continues. instant payments, the industry-wide
be automated, to be secure, to be Corporate clients are looking move to the ISO 20022 standard
transparent,’ says Royston Da Costa, for faster and more transparent and the impact of open banking, are
assistant group treasurer at plumbing payments. The pandemic has led to all playing a part in reshaping this
and heating products distributor some significant shifts in companies’ landscape, as is the Covid-19 crisis.
Ferguson. ‘And it’s frustrating that payment needs. As Tom Halpin, A report published in October 2020
we’re still talking about this.’ global head of payments products by Boston Consulting Group, ‘Global
Cross-border payments tend to be management at HSBC, observes: Payments 2020: Fast Forward into the
particularly problematic. ‘The biggest ‘Whereas treasurers previously sought Future’, noted that most wholesale
pain point we face is the paperwork certainty, transparency and efficiency, payment providers would face revenue
involved when making commercial now it’s all this and more. There is challenges in 2020 and 2021 ‘as a result
payments across borders to and from demand for speedy, friction-free of pandemic-related reductions in
“restricted countries”, i.e. those where payments to meet evolving business trade volumes, business spending and
there are currency controls,’ explains needs. Payments are becoming a by- interest income.’
Mumtaz Dole, director, cash and product of business operations rather The concept of wholesale payments
liquidity management and treasury than an operation in themselves.’ is itself something of a moving target.
business partner, Asia-Pacific at ‘In my mind, “wholesale payments” is a
sustainable energy solutions company Blurred boundaries tricky term,’ says Mark McNulty, head
Vestas. At the same time, companies are of payables and receivables, Europe,
Vestas is present in more than facing new challenges. The payments the Middle East and Africa, at Citi.
80 countries, but as it enters more landscape has evolved considerably in He notes that only a small portion of
challenging markets, payment recent years. Wholesale payments are the payments that might fall under
processes are becoming more no exception. this heading fit into the narrowest
complex. ‘Almost all of these complex A 2018 report by Oliver Wyman, definition of wholesale payments
markets have currency controls that ‘Wholesale Payments: Disrupt from as business-to-business payments
require central bank reporting and/or Within’, noted that wholesale payments made between financial institutions
submission of physical documentation and cash management generated and ‘that definition could become
to make payments,’ says Dole. $250bn of revenue in 2017. As well as more problematic as we move to the
In order to ensure the company being ‘an important source of stable future’. For Citi, he says, ‘when we look
can safely pay and receive funds, she funding for banks’ – and an anchor at what would be traditionally called
adds, ‘we have had to undertake a relationship product that provides our wholesale payments business,
omfif.org 29
we are seeing significant growth and their order-to-cash processes, so

‘The payments landscape
opportunity in business-to-consumer that they can quickly identify when
has evolved considerably
flows and consumer-to-business flows, a payment has been made and ship
in recent years. Wholesale
in addition to the traditional business- the relevant product. In Europe, this
payments are no
to-business flows.’ As a result, he says, is being facilitated by the single euro
exception.’
the consumer intersection point ‘has payments area direct debit or request-
become, and will continue to be, a very to-pay schemes, explains Bruno
important lens to apply.’ Mellado, global head of payments and
There are a number of reasons for receivables at BNP Paribas.
this increasingly blurred definition. ‘But internationally, this still needs
One notable development is the to evolve – if a French company sells
extent to which the pandemic has products in Chile, for example, you
prompted companies to initiate or don’t know when your international
speed up a transition to new direct-to- payment will hit your account. So it’s
consumer business models. Lockdown important to speed up information
conditions, with the closure of bricks- about the date that a payment is made,
and-mortar stores and the arrival of so that you can ship the product.’ He
social distancing, have played a part adds that this type of cross-border
in prompting companies to embrace use case is ‘the major challenge in
e-commerce models and this, in turn, payments today’.
has necessitated the adoption of new
payment methods. Visibility and transparency
Adapting to these new models On one level, treasurers’ requirements
and methods may require something
of a shift in mindset. ‘There are
huge changes in the customer
3.1 Wholesale
payment landscape, particularly for
Quick rebound Slow recovery Deeper impact payments
B2C companies,’ comments David
set to grow
Stebbings, director, head of treasury 4.4% 5.6% 2.7% 5.0% 1.1% 4.4% even under
advisory at PricewaterhouseCoopers. Revenue ($B)
2,374 pessimistic
‘For treasurers, it’s important to 2,127
model
7.3% 1,915
1,810
understand these changes – but 1,670
1,464 1,542 Wholesale
treasurers may not be the people who payments revenue,
1,031
have been traditionally responsible for %bn
this area.’ Source: Global
As well as needing to understand Payments Model
2020
the payment methods available, the 2014 2019 2024 2029 2024 2029 2024 2029
shift to e-commerce may also mean

CAGR 2019–2024 CAGR 2024–2029
that companies need to improve
are the same as they have always

3.2 Payments remains most popular bank product area for review
been: the more visibility treasurers
have over the status of payments, the Responses to ‘What bank product areas are you reviewing?’, %
better placed they will be to manage Source: CGI Banking Transaction Survey 2021
cash effectively and make well-
informed decisions about funding
2020 2021
and investments. But in today’s
Payments 72.9% 59.2%
environment, these requirements
are increasingly accompanied by Cash management services 67.7% 56.3%
an appetite for rapid, frictionless
Foreign exchange (including hedging) 45.1% 39.4%
payments, and for more visibility over
both the status of payments and the Liquidity solutions (including pooling/netting)
42.9% 39.4%
associated fees.
The last few years have brought Reporting 39.8% 35.2%
some progress in this area. One
Credit/lending 38.3% 31.0%
notable development is SWIFT
global payments innovation, which Payables 34.6% 23.9%
was launched in 2017. Among other Receivables 33.1% 25.4%
benefits, the service enables banks
Trade finance (letters of credit, collections) 30.1% 39.4%
to track payments as they progress
through the correspondent banking Depository services 24.8% 28.2%
network. Banks can also use it to let
Investment banking/capital markets 24.8% 19.7%
clients to track payments.
Mellado describes SWIFT gpi Forecasting 24.8% 25.4%
as a ‘major evolution in payments’, Open account (supply chain financing) 20.3% 21.1%
adding that the reason it has made
a difference is the number of banks Other (please specify) 20.3% 2.8%
that participate in it: ‘It’s not the same None of the above 6.8% 9.9%
if you have a super service that is only
good for a few banks.’ According to
SWIFT’s website, more than 4,000
financial institutions have signed up ‘One notable development the same basis, using the same type
to gpi, with more than $3tn sent over is the extent to which the of payment messaging standards and
it every day. pandemic has prompted means of initiation.’
However, different banks offer companies to initiate or The need for efficiency is another
different levels of access to the speed up a transition to important consideration for companies
payment tracking capabilities enabled new direct-to-consumer handling large payment volumes.
by gpi, notes Da Costa. ‘It’s a bit hit business models.’ In practice, companies don’t only
and miss,’ he says. ‘There are some need to make payments in a timely
banks that are very much ahead fashion – they also need to ensure that
of the game, but not everyone’s payments are accompanied by the
providing that functionality and that right kind of data in a structured way,
visibility.’ so that payments can be automatically
reconciled and applied.
Globalisation and standardisation ‘The devil is in the detail as you look
Other drivers affecting companies’ to execute across this new scale of
payment needs include globalisation payments – hyper-efficiency is a must
and the accompanying need for for both the client and the provider,’
standardisation. ‘We’re more McNulty notes. ‘From the foundational
connected globally, which means things, like rejects and returns rates
that cross-border payments are to the reconciliation of incoming
more commonplace – and there’s payments, those all have to be super-
an expectation that those payments efficient – or else clients are going to
flow across borders as seamlessly as seek alternatives.’
they do domestically,’ explains Jacqui SWIFT and high-value payment
Kirk, co-head of product for global clearing systems are in the process of
transaction services, EMEA, at Bank migrating to the ISO 20022 standard,
of America. ‘People want to be able to paving the way for richer structured
move payments around the world on data, more interoperability and more
omfif.org 31
straight-through processing. This,

in turn, will enable banks to operate 3.3 Cross-border
20.5tn
more efficiently, as well as allowing transaction
them to help clients benefit from more volume, cost and
efficient compliance and reconciliation time
processes. Source: WTO, World Transaction volume
Trade Statistical Flows in cross border transactions in 2020
Vestas’ Dole sees extensible markup
Review 2021, UNCTAD,
language-based payment solutions as World Investment
a particularly interesting development. Report 2021, JP
120bn
‘At Vestas, we use SAP in-house cash Morgan, Oliver Wyman
and payment factory to automatically
transmit mass payment files using XML
directly from our enterprise resource Transaction cost
planning to our banks. Subsequently (excluding FX costs) spent
we introduced a robot who runs this to facilitate cross-border
process for us daily,’ she explains. transactions in 2020
Dole adds that this fully automated which equates to 1/3 of
payment process has brought Singapore's GDP
significant time and resource savings as
well as efficiency gains. ‘We don’t need
2-3 days
an army of people keying in payments
into online banking portals and more
people having to approve these
payments and worry about the four-
eye principle. We must, however, have Settlement time
a very strict process when it comes to to clear a cross border
master data maintenance in order to transaction on average
avoid payment fraud.’
Speed and security

Alongside the need for security, you have companies that integrate
another notable driver is the rise of that instant payment experience very
real-time and instant payments. ‘If you clearly into their overall business model.
look at the major platform companies But we’re also seeing more and more
around the world, it’s increasingly core interest and a growing set of use cases
to their proposition to be distributing from traditional corporate customers.’
and collecting payments in a very He adds that use cases include
instant way, and as 24/7 as possible,’ activities such as dividend distribution,
says McNulty. ‘More and more, we with companies seeking to distribute
are seeing a demand to make those dividends through a relevant instant
payments to the “platform supplier” payment scheme.
on a transaction-by-transaction basis, An important challenge is the need
as opposed to on some sort of daily or not only to initiate a real-time payment,
weekly schedule. This very real trend to but also to receive confirmation in
“micro payments” will only continue and real-time that the payment has been
be a significant driver of volume growth completed. If a payment arrives
in the years to come.’ instantly, but the company is not aware
But while there is growing demand of this until six hours later, it will not be
for instant payments, there is still more able to benefit from the speed of the
work to do to ensure global consistency payment.
– not least because different schemes Meanwhile, the need for robust
vary considerably in terms of rules and security remains a priority. As BoA’s
the payment experience they provide. Kirk explains, ‘As the payments
What’s more, not all instant payment infrastructure becomes more complex
systems can be accessed on a cross- and sophisticated, so too does
border basis. the threat from financial criminals.
McNulty comments that the most So, there’s a lot of work needed
significant use cases are currently to make sure the whole payments
still in the digital native space, ‘where ecosystem remains secure from
fraud, cyberattacks and money

laundering.’ Associated with this is the
rise of more stringent requirements
as regulators work to tackle financial
crime and increase transparency over
transactions.
Need for integration

For companies looking to take
advantage of a wider range of payment
methods, consideration needs to be
given to how these can be incorporated
into existing systems and processes.
‘Offering and accepting more
payment methods gives a competitive
advantage to a company,’ comments
François Masquelier, chair of the
Luxembourg Association of Corporate
Treasurers. ‘The difficulty lies in the
treasurer’s ability to integrate them
into existing systems such as treasury
management systems and payment
factories.’ He adds that new players
in the payment market are forcing
fragmentation and are multiplying
the payment methods available – a
development which will complicate
treasurers’ lives and ‘force them to
automate everything’.
For treasurers, says Masquelier, the
challenges presented by the changing
payments landscape include difficulties
navigating the array of solutions and
payment methods available, as well as
the lack of standards. He also notes that
modern treasury systems need to adapt
to accommodate the different payment ‘In practice, companies just so much to do’. From evolving
methods that are emerging – and that don’t only need to make and innovating to partnering with new
emerging solutions will force traditional payments in a timely players – all while dealing with legacy
solutions to adapt. fashion – they also need to infrastructure that has been built over a
What treasurers expect, he continues, ensure that payments are long period of time – banks are tackling
is a standardisation of methods to avoid accompanied by the right multiple challenges as they work to
a level of complexity that would make kind of data in a structured modernise wholesale payments.
their lives impossible. ‘They want secure way.’ Also significant is the potential for
and fast payment methods – time has new providers to make inroads in this
become a vital differentiating factor in market in the wake of the EU’s revised
optimising the financial supply chain. payment services directive, which has
They also want competition between opened up competition to non-bank
players to put pressure on prices and payment providers. ‘The competitive
costs. Finally, they expect TMSs and landscape in payments is intensifying
other IT tools to adapt to the new and customer expectations are higher
e-payments, to be able to manage than ever,’ says Halpin. ‘Organisations
them all through a single platform. that are just entering the market are
Unfortunately, we are still far from these leveraging new and existing payment
expectations.’ rails for simple value propositions and,
as a result, there is an unprecedented
Challenges for banks level of choice for consumers as to how
So, where do these developments leave to move money.’
banks? As BoA’s Kirk comments, ‘There’s Finastra’s Soundalgekar notes
omfif.org 33
that new providers like Wise, Revolut, ‘For companies looking with 35 of them. ‘And we ended up
Tide and Ripple are creating pressure to take advantage of a working with fewer than 10,’ Mellado
on banks’ fee income, as traditional wider range of payment says. ‘We invest in some of them as a
players previously had a monopoly over methods, consideration minority stakeholder, especially the
corporate balances. He adds that open needs to be given to how ones with which we combine our offers,
banking and APIs are enabling new these can be incorporated so we can show commitment and take
players to provide a seamless customer into existing systems and part in their strategic decisions.’
experience when making or receiving processes.’ Beyond co-operation between
payments. In particular, he says, the use banks and fintechs, other types of
of QR codes and real-time payments collaboration are also important. ‘It’s
is making it simpler for customers to only through collaboration that some
raise invoices and receive payments points of friction can be removed,’ says
instantly using the RTP framework. Halpin. ‘While banks are competitors
with each other, it’s vital that they work
From competition to collaboration together to drive common standards
The role of fintechs in this market which will take cost out of the system
continues to be hotly debated. While and drive a more interoperable
fintechs have a clear advantage when system that can be consumed more
it comes to harnessing new technology effectively.’ He adds that this is all the
in a more agile way, they lack the more important as more infrastructure
scale and extensive relationships that and rails come to the fore, such as
banks bring to the table. As such, CBDCs.
treasurers are often cautious about The potential benefits of CBDCs
working with fintechs that lack scale were outlined in a recent report
and a proven track record. At the same by Oliver Wyman and JPMorgan,
time, payments tend to form part of ‘Unlocking $120 billion in Cross-
broader relationships. ‘Most of our Border Payments’, which found that
relationships with financial institutions global corporates spend $120bn in
are underpinned by their balance sheet transaction charges annually due to
being open to us for facilities,’ explains the cost of wholesale cross-border
Da Costa. ‘So, we would probably payments processes. The report
only consider fintech-based payment argued that a multi-currency CBDC
solutions if those were offered through network could ‘provide an effective
banks.’ blueprint’ to tackle many of the pain
Consequently, the conversation points associated with cross-border
is increasingly about how banks and payments.
fintechs can work together. Mellado
says that BNP Paribas is collaborating Speaking the right language
closely with new entrants, which means Banks also need to stay up to date with
looking closely at what added value companies’ evolving payment needs
services fintechs can offer and how and priorities.
best to work together. The nature of Enrico Camerinelli, a strategic
these collaborations can also vary adviser at Aite-Novarica Group, says
considerably. that corporate users are increasingly
‘Sometimes these fintechs end up looking for the ability to run all their
being our clients in a specific country operations directly from their ERP
– they may also become our partner or treasury management systems,
for a specific use case,’ he explains. without having to move from one bank
‘Sometimes we are suppliers to them portal to another. ‘The first reaction
for payments. They are interested in to this is to provide as many APIs as
our robust payment infrastructure and possible, so that users can consume
security and know-how, which enables products and services in a more
them to focus on the front end and the seamless way,’ he says. ‘But that then
digital journey.’ requires banks to attract and work
That said, not all fintech more closely with fintechs.’
partnerships under consideration can In this environment, Camerinelli
ultimately come to fruition. Last year, says that banks increasingly need to
BNP Paribas looked at over 80 fintechs ‘speak the corporate user language’
and entered into deeper discussions and understand the dynamics of how
different departments within the

organisation interact. ‘Treasurers are
trying to have a more strategic role
within their companies, which means
negotiating and talking to other
departments – mainly procurement
and IT. And so, banks also have to talk
to these individuals that have never
been the typical counterparts of bank
relationship managers.’
What are banks doing?

How are banks adapting their services
to evolving payment needs? From
optimising customer experience to
supporting companies’ adoption of
e-commerce models, these are some
of the key areas of focus.
• Payments as a journey
Ad van der Poel, co-head of product
for GTS EMEA at Bank of America,
says BoA is designing a payments
service that is more tailored towards
different types of client to maximise
the customer experience. ‘We are also
looking at payments as a journey,’ he
says. ‘As the payment flows, what are
the adjacent services we can offer the
client as well as part of the payment?
It’s a lot more now about data – and
even operational data, such as knowing
that your payment has been processed
and knowing that immediately.
Because often that triggers another
action or process on the client side.’
Van der Poel also cites the bank’s
‘open approach’ to partnering with
different players in the market, as well
as the importance of finding a balance
between the level of security and the
usability of a solution. Kirk adds that
‘Also significant is the potential for BoA engages with industry bodies to
new providers to make inroads in this talk about how the market is evolving.
market in the wake of the European ‘We’re active in that dialogue, to help
Union’s revised payment services ensure we and the regulators work
directive, which has opened up towards keeping the whole ecosystem
competition to non-bank payment safe, as things are evolving so quickly.’
providers.’
• Collaboration and co-creation
Mellado emphasises the importance of
working closely with corporate clients,
citing BNP Paribas’ treasury board
event, which focuses on identifying
opportunities for co-creation. He notes
that the bank’s strengths include the
ability to address treasurers’ key pain
points by following up on feedback
and through close relationships with
omfif.org 35
corporate clients. ‘While fintechs have a online selling,’ says McNulty. ‘We are
‘As a global payments leader, and clear advantage when building that out in partnership with
a cash management leader in Europe, it comes to harnessing other major players such as Mastercard
we need to have a strong influence on new technology in a from a payment gateway perspective,
the agenda in terms of co-operation more agile way, they lack PPRO for a connection to alternative
for better services for business-to- the scale and extensive payment mechanisms and global
business payments with technology/ relationships that banks payments for the cards processing.’
messaging operators like SWIFT, as bring to the table.’ Other areas of focus include
well as clearing houses and central continuing to expand the bank’s
banks,’ Mellado adds. ‘That enables connections to instant payment
us to address the pain points that schemes, as well as ensuring the
treasurers are bringing to us through continual evolution of system
different forms.’ architecture to handle increased
volumes in the future. The cross-
• Digital transformation border space is also a major focus.
Halpin says that HSBC is taking a ‘Historically, our ability to leverage
customer-first approach, which means our network across 96 countries to
‘making significant investments in transact cross-border payments is
infrastructure, client outreach, digital a huge differentiator,’ McNulty says.
transformation, upskilling our staff ‘That continues to be a major focus
and continuing to hone a culture of and differentiator for us. We continue
innovation to help our clients. Our large to leverage everything we’re doing in
footprint means we’re able to share those 96 markets, including access
best practices across the globe, as well to new instant payment schemes and
as harness datasets to provide better wallet ecosystems, and wherever
insights and services to our clients.’ possible we’re making sure our cross-
At the same time, he says, the border proposition connects into these
bank has accelerated its own digital ecosystems.’
transformation. ‘Our UK digital To compete effectively in this
business banking proposition, HSBC market, says Soundalgekar, banks
kinetic, has onboarded over 14,000 ‘need to focus on digitalising and
customers in 2021, while HSBC global automating the complete value chain
wallet, our multi-currency digital wallet of payments, from order management
which enables customers to pay and to settlement and reconciliation, using
receive cash “like a local”, has boosted the ISO 20022 framework.’ This, he
transaction volumes almost five- says, will enable banks to ‘reduce the
fold since it launched in the second cost of processing, monitoring and
quarter.’ The bank has also deployed reporting payments internally and to
API capabilities across 31 markets, the regulators.’
enabling clients to initiate real-time He adds that the resulting savings
payments and receive instant payment need to be invested in innovations
confirmations. around customer journeys, seamless
‘Finally,’ says Halpin, ‘we’ve integration and embedded
announced a banking-as-a-service finance – both to retain customers
proposition to enable us to distribute and, potentially, to offer the new
products via APIs into third-party infrastructure to other, smaller banks
platforms, beginning with Oracle through the agency framework.
NetSuite, the cloud ERP software.’ It’s clear that banks are working to
harness innovation, partner effectively
• Enabling e-commerce. with fintechs, adapt to real-time
For Citi, meanwhile, key initiatives payments and meet the needs of
include the recent launch of spring by companies moving into e-commerce.
Citi, a full stack payment processing But while the payments landscape
solution that allows institutional clients is increasingly complex, treasurers’
to collect from consumers using a wide priorities remain largely the same as
range of payment options. ‘In essence, they have always been. As Da Costa
it allows us to be that e-commerce comments: ‘It’s not rocket science
payment collection provider for our – payments just need to be fast,
clients as they make that shift to accurate, efficient and secure.’ 
Chapter 4
Taking tokens into account
In the private sector, tokenised cash solutions for payments networks are already
gaining substantial traction and user-bases. Could public sector tokens have a similar or
even greater impact? By Lewis McLellan.
MANY RETAIL CONSUMERS already credit card information for a pseudo- The problems of cross-border
experience the reality of digital cash randomly produced token, which can payments
when they buy coffee with a card, be shared without compromising the The problems of the present cross-
phone or watch. Generally, the system original. border settlement infrastructure
is sophisticated enough to prevent you For the purposes of this report, are laid out in detail elsewhere in
from buying the coffee if you don’t we will be leaving the conventional this report. The BIS committee on
have enough money to do so. payment world’s definition of payments and market infrastructures
Although the plumbing required tokenisation aside. highlighted four challenges: high cost,
to facilitate this process is not ideal, Tokenisation, for our purposes, is low speed, limited access and limited
the user experience is certainly much a form of dematerialisation, creating transparency.
better than it is for cross-border a digitally tradeable representation Correspondent banking networks
payments, where consumers can find of an object. Often, this creates a do not always share standards of
themselves waiting two days for funds version of the object where ownership transparency and data formatting.
to arrive and absorbing the high costs can be transferred and tracked on a This can lead to manual reconciliation
required to keep the process afloat. distributed ledger. processes, which increase processing
Should these problems be Within the crypto space, ‘token’ time and costs.
addressed by facilitating peer-to-peer is something of a catch-all term, Regulators also impose complex
value transfers, disintermediating a including cryptocurrencies like bitcoin compliance requirements, which may
costly and inefficient correspondent and ethereum, as well as tokenised differ across jurisdictions.
banking network? Will banks effectively representations of assets — stocks, Many bank settlement systems
preserve their status as the dominant bonds, digital images, ownership do not run 24/7. Differences in time
providers of international payment certificates and so on. zones might mean limited or no
networks? Will central banks step in and The 2021 surge of non-fungible overlap in operating hours between
create their own technological solution? tokens, reflecting ownership of digital correspondent banks, which can result
All three options will almost art, may be an early indication of in delays to settlement. Delays don’t
certainly make use of tokenisation and what could form the backbone of the just slow down transactions. They
distributed ledger technology. economy in Facebook’s metaverse. increase settlement risk, which adds
The term ‘token’ has held a variety Facebook, now rebranded Meta, Chief cost in terms of posted collateral.
of meanings over the past few years, Executive Officer Mark Zuckerberg is Banks may also be relying on
depending on the background and investing heavily in a plan that seems old systems that can slow down
ideology of the speaker. That has led to involve a marketplace for cosmetic transactions.
to some vagueness about a token’s digital assets within the metaverse. These problems are compounded
qualities. Is a token programmable? Leaving to one side this burgeoning by the fact that direct connections
Must a token operate on distributed field of asset tokenisation, the between banks are costly, with
ledger technology? tokenisation of cash — either by central some payments requiring multiple
In payments, but outside of the banks or by private sector payment intermediaries.
cryptocurrency world, tokenisation providers — has the goal of improving The problems are particularly acute
typically refers to a process of the efficiency of cross-border for more exotic currencies, which are
substitution of sensitive data like payments. rarely served by efficient payments
omfif.org 37
networks. Delays and volatile exchange over payments. The degree to which
‘In payments, but outside
rates can drive up transaction fees this scrutiny is allowed is an important
of the cryptocurrency
because of settlement risk. issue for policy-makers.
world, tokenisation
The debate is sometimes
typically refers to a
Tokens versus accounts for characterised as ‘token versus account’.
process of substitution
compliance The centralised payments networks
of sensitive data like
Transparency into the current in use today rely on systems of bank
credit card information
payments process and oversight to accounts, which are only granted when
for a pseudo-randomly
ensure regulatory compliance are both various identity verifications have been
produced token.’
lacking. With the right governance conducted.
architecture, tokenisation provides an Despite the relative simplicity of
avenue to combat money laundering, the transaction process, tokens are
fraud and terrorist financing. fundamentally bearer instruments — a
Accounts are the dominant structure that has historically carried
representation system underpinning risk of abuse.
payments networks. They are, as ‘Often in the literature a distinction
Tony McLaughlin, managing director, is made between account-based
transaction banking at Citi puts it, ‘an systems, requiring the verification
artefact of double-entry bookkeeping’. of the identity of the payer, and
As a means of keeping track of token-based systems, requiring the
liabilities, it is an appropriate system. verification of the validity of the
Transactions consist of a message payment instrument. We believe tokens
from one bank to another to make can co-exist with accounts,’ said Pietro
a payment, followed by a separate Grassano, business solutions director at
settlement process. Algorand. ‘The vast majority of digital
Many digital currencies, bitcoin currencies are pseudonymous rather
for example, are token based. This than anonymous. The combination of
means that the transaction verification public key and private key is a way to
process relies on checking the validity verify the identity. From the institutions’
of the payment token. With tokens, perspective, I think it’s a question of
the transaction process is simpler. how much [know-your-customer]
‘The functions of messaging and information we want to require of
settlement are collapsed into one,’ says people to set up a digital currency
McLaughlin. wallet.’
The ability for tokens to carry Even the purest token architecture
additional information represents also involves the verification of identity
both an opportunity and a danger. through public and private keys. This
Digital currency could potentially offer makes bitcoin pseudonymous, rather
regulatory authorities greater scrutiny than anonymous.
And, of course, the purity of bitcoin’s

architecture is not, in fact, especially
popular. Generally, people prefer not
to hold their own bitcoin, favouring
custody services that can provide
convenient platforms for trading and
spending, and reduce the risk of losing
access to their bitcoin permanently by
losing their private key.
Such custody services will,
particularly if they are to form the
basis of a regulated payments network
with mass adoption, almost certainly
require users to complete some level of
KYC and identity verification, blurring
the lines between token-based and
account-based payments networks.
This could result in a hybrid
payments network. Consumers
would have digital accounts requiring
identity verification, but each unit of
digital currency would be a token, and
therefore capable of carrying its own
metadata, affording a greater degree
of scrutiny for regulators.
This could give enforcement
agencies the opportunity to prevent
crime — fraud, money laundering,
terrorist financing among others — but
it implies a trade-off between privacy
and oversight.
‘There is a political choice to be
made here, not a technical one,’ says
Grassano. ‘How much traceability do
we want to build into a decentralised
payments network? That might depend ‘Digital currency could data, which might flag up suspicious
on the type of transaction. Regulators potentially offer transactions.
might decide they don’t need much regulatory authorities He believes the range of conditions
oversight over small domestic greater scrutiny over is versatile enough to be suitable for
payments. Large, cross-border payments. The degree cross-border payments, when multiple
transactions might merit more scrutiny.’ to which this scrutiny is jurisdictional standards might apply.
It is possible to imagine a system allowed is an important
where cross-border payments via issue for policy-makers.’ Solutions for the problems of cross-
tokens are subjected to a greater border payments
degree of oversight than domestic There are several possible avenues
payments. to alleviate the problems in cross-
Daniel Hardman, principal border payments. The first solution,
ecosystem engineer at SICPA, has and intuitively the simplest, would be
highlighted that there may not in fact to attempt to improve the present
be any need to compromise privacy architecture. Many countries have real-
and regulator oversight. His process, time gross settlement systems that
which he calls reciprocal negotiated provide high-efficiency domestic inter-
accountability, gives regulators access bank settlement. Making these systems
to encrypted transaction data, but effectively interoperable could reduce
holds the key to the encryption in the reliance on the correspondent
escrow. The key is only released under banking network and lower costs and
predetermined circumstances — settlement times.
perhaps based on the results of zero- Second, the private sector could
knowledge proof interrogations of the provide a payments network either
omfif.org 39
based on blockchain or on some other ‘It is possible to imagine and userbases. Some, like China’s
centralised architecture. a system where cross- WeChat and AliPay duopoly, are
Third, central banks could issue border payments via digital payments networks without
digital currencies and co-operate on tokens are subjected distributed ledger technology. Others,
the establishment of a cross-border to a greater degree of like JPMorgan’s JPCoin, operate on
settlement network, whether on oversight than domestic a blockchain (a private fork of the
blockchain or otherwise. payments.’ ethereum blockchain).
Some are payment solutions driven
Improving present systems by finance incumbents, including
The committee on payments and JPMorgan. Others, by new players
market infrastructures drew up a in technology, particularly in the
19-point roadmap for improving cryptocurrency space.
cross-border payments in July 2020. Within the latter category sit
Blocks 9-13 outlined ways in which the stablecoins — cryptocurrencies
existing payments infrastructures and pegged to sovereign fiat currencies. A
arrangements could be improved to global stablecoin, of the sort pursued
support the requirements of the cross- by Meta in its Diem (formerly Libra)
border payments market. project, might ease many of the
Though improving existing frictions of cross-border payments
infrastructure might seem easier than and would certainly disintermediate
developing a new system with new the incumbents, cutting not just
standards from scratch, in fact, many of correspondent banking networks
the same challenges of finding mutually but banks themselves out of the
agreeable standards still apply and transaction chain.
retrofitting is often more difficult and However, there are two separate but
less effective than starting over. related problems with this approach.
The ISO 20022 standard is First, a global stablecoin poses
an attempt to develop a single, risks to financial stability. A globally
standardised approach to harmonise accessible payments network based
the data formats used internationally to on a stablecoin might prove dangerous
reduce problems of incompatibility. for small economies, which could see
But some argue that even modern demand for their domestic currencies
RTGS systems are not as reliable as collapse. The FSB recommends 10
they should be. ‘Centralised systems, points of regulatory architecture that
by definition, have a single point of must be globally agreed to address
failure,’ says Grassano. ‘Decentralised the potential risks posed by a global
systems are the only way to avoid that stablecoin.
issue.’ Second, a global stablecoin, by
Target2, the European Central definition, operates beyond the reach
Bank’s RTGS system, failed completely of any single jurisdiction. Domestically,
for almost eight hours in October a stablecoin could operate as a
2020. The ECB blamed the outage payments solution under the scrutiny
on a third-party service provider, but of its national regulator, but without a
Grassano believes that the only way to global body to provide oversight and
completely avoid such vulnerabilities enforcement, it would be difficult to
is to use a decentralised architecture effectively regulate a private sector
because the failure of any single point global payments network.
will not bring down the system. Can a global payments network of
It is worth noting, though, that systemic importance be left to the
should the node representing, for private sector? Private sector actors
example, the UK go down, although the exist within jurisdictions under the
rest of the network might continue to oversight of national regulators.
function, that would not be any help to These objections formed the basis
transactions involving the UK. of some of the objections raised
during the House Financial Services
Private sector tokenisation of cash Committee hearing on Libra (now
Across the world, tokenised cash Diem).
solutions for payments networks are That does not mean there is no place
already gaining substantial traction for private sector involvement. Partior,
CBDC as part of the token economy

Tokenisation has the potential to transform payment methods, minimise the risk of fraud
and improve customer trust. It’s a topic that everyone’s talking about and has implications
for the future of payments, writes Raoul Herborg, business lead digital currencies at G+D.
TOKENISATION refers to the process of assigning just as cash is. Same-currency payments are one
digital identities to physical (or other) assets. A transfer of data from sender to recipient, and by their
token is a piece of data that can be used to prove very nature, offer borderless payment solutions.
or transfer ownership, and as such it is an electronic With G+D Filia®, G+D has developed a token-
bearer instrument. Digitalising an existing asset class based CBDC solution that ensures the highest levels
through tokens enables the seamless trading of of security, maximum resilience with no single point
that asset, including exchanging one class of asset of failure and the right balance of respecting user
for another (such as currency for securities). The privacy and ensuring transparency, through the
use of tokens has the potential to reduce friction separation of information, access and systems. It
in trade and – if available universally – can enable also supports consecutive offline payments, again
new business models, reducing the reliance on fostering inclusion.
intermediaries.
In combination with central bank digital currencies, Tokenisation in cross-border payments
tokenisation could revolutionise the future of At present, cross-border payments are plagued with
payments. Central banks have considered a great challenges. Fragmented data formats, high costs,
many critical design features of CBDCs, with legacy platforms, compliance difficulties, lack of
resilience and universal access frequently topping transparency and lack of inclusion are just some of
the list. In terms of resilience, the design architecture the issues that have long caused headaches for users
is key. looking to make international transactions. A lack of
Moreover, as a digital form of cash, CBDCs ought standardisation leads to a lack of interoperability,
to be more a means of payment than a means meaning transaction time is long, costs are high and
of storage and governments are keen to impose frustration is amplified. A common standard would
thresholds on how much can be stored, in order to help address the issue of interoperability, but how
combat money laundering. In terms of universality, can tokenisation help overcome other challenges?
a token-based CBDC approach has the potential to In terms of cross-border payments, trials have
help ensure it’s a payment method available to all. demonstrated that CBDCs could be implemented
to help overcome the hurdles of high costs, long
Understanding token-based CBDC solutions transfer times and complex transfer processes. The
It is important to distinguish between the two types global use of token-based CBDCs would significantly
of CBDC models. Account-based CBDC models reduce technical hurdles for a decentralised currency
require identity-based accounts for transactions to exchange.
take place, while a token-based CBDC approach is Today, currency conversions are a particular
based on cryptographic key pairs – ensuring high hassle. The main challenge is that interbank
levels of privacy for the user, similar to cash. While settlement requires central bank money, and many
account-based technologies can use technical different parties are involved in the transaction
solutions to protect user privacy, fully anonymous process. As a result, the applicable fees are opaque
transactions are not possible. and the process is inefficient. Currently, fintechs
Token-based CBDCs would be available to all, avoid traditional currency conversions in payments
accessible to consumers and businesses alike. by using multiple omnibus accounts in various
Offering high levels of privacy, the possibility for denominations. CBDCs can solve this challenge too,
seamless offline payments and universal availability, in another way. By providing one universal payment
token-based CBDCs can be seen as cash’s instrument, a CBDC-based infrastructure would
counterpart in the digital economy. Payments are not eliminate problems of multiple involved parties.
redeemed – instead, CBDC tokens are respendable, Clearance is immediate, meaning transactions
omfif.org 41
cannot be reversed, thus ensuring mutual trust and the ball when it comes to evolving technology – with
lowering risk, and regardless of transaction volume, legislation comes stability, integrity, and protection.
the fees and transaction duration would be the same.
In terms of bonds, several banks have successfully Hurdles still to overcome
tested tokenised securities transactions in delivery Besides the need to manage legislation in a timely
versus payment transactions. Atomic swaps allow manner, other challenges remain when it comes to
for quick exchange and can be used to make the digitalisation of existing processes. Distributed
trades more efficient, reducing the counterparty ledger technology is an innovative infrastructure
risk for intermediaries like order matching for recording and transferring tokens, but its
engines. G+D Filia® has the potential to provide an performance is not yet sufficient to base an entire
additional business model for commercial banks, country’s financial system upon. The infrastructure
and can support non-currency tokens with wider for asset tokenisation needs further development
functionalities. and DLT is not a strict requirement for this.
Some design questions are still open. How does
Underlining new possibilities through legislation interoperability work exactly? How can legislation
For all of the innovative possibility that tokenisation support the introduction of CBDCs and cross-border
brings, there is still much to bear in mind. For central payments? Central banks will have to find common
banks, the question of design must ground to coordinate efforts and
be considered: should securities and thus ensure compatibility and
currencies be based on the same Regulatory frameworks interoperability.
token infrastructure? And in terms for asset tokenisation are The other question is how
of securities and CBDCs, legislation materialising and legislation intermediaries would evolve with the
remains a challenge. will help to pave the way introduction of tokenised CBDCs.
In January 2020, Liechtenstein’s for a decentralised, token- In our ever digital, ever developing
token and trusted technology based economy. world, adaptation is key to survival.
service provider act was introduced. That’s why a CBDC infrastructure
In summer 2021, the eWpG, the should open up opportunities for
German electronic securities act, went into effect. innovation. G+D Filia® focuses on an approach that
These are just two initial legislative examples within will ensure CBDC is benefiting consumers, central
Europe that enable the trading of tokenised assets, banks and commercial stakeholders.
including securities. In general, the question of acceptance will
Regulatory frameworks for asset tokenisation determine the success of CBDCs and this is where
are materialising and legislation will help to pave tokenisation offers clear advantages. As a public
the way for a decentralised, token-based economy. payment method, CBDCs must be secure and
The classification of digital assets is one measure interoperable, offer high levels of privacy and be
necessary for regulation purposes. Not all digital resilient, thus preserving financial stability. If these
assets are the same and different legislation is design criteria are met, we can look forward to the
necessary for different assets. introduction of tokenised CBDCs as a game changer
The technology’s potential is promising, yet in the payment world, fostering payment efficiency
acceptance remains one major challenge. If token- and representing a viable alternative payment
based CBDCs are to be widely accepted, they must method with many benefits. Cross-border CBDC
balance anonymity with transparency. Legislation will payments will help promote economic development,
help to pave the way to help the widespread adoption making international trade faster, more efficient and
of token-based CBDCs. Regulators must remain on less cost-intensive.
a public-private partnership between ‘Across the world, ‘the first, best outcome’. ‘There’s a
JPMorgan, DBS and Temasek with the tokenised cash solutions clear need to improve cross-border
collaboration of MAS, is an example of for payments networks payments, and this will need public
a project where the public and private are already gaining intervention. The other systems are
sectors have been able to collaborate. substantial traction and good and still developing, but it will be
userbases.’ difficult to achieve the most ambitious
Public sector tokenisation of cash outcomes like that. Wholesale CBDC
CBDCs are perhaps the most promising might be one way of achieving real-
area for development in cross-border time settlement of transactions across
payments, if only because of the sheer currencies, but I don’t think it’s the only
number of projects underway around way.’
the world.
But individual central banks Blockchain or centralisation
producing individual tokenised versions The excitement around DLT can
of their own currencies will not get us sometimes blind people to the fact
closer to a cross-border payments that many of the qualities of an ideal
solution. Interoperability between cross-border payments network —
systems is its own challenge and a great one that is cheap, provides instant
deal of work will be required to ensure settlement, is widely accessible and
that individual CBDCs share enough has an appropriate level of privacy and
technical and regulatory ground to regulatory oversight — can be achieved
ensure that they can operate on a without the means of a distributed
common network for payments. ledger, or might require infrastructure
The Banque de France and changes beyond the introduction of a
MAS, working with JPMorgan’s distributed ledger.
Onyx platform, have successfully It is certainly possible to create a
demonstrated the technical feasibility blockchain-based solution for many
of a multi-currency CBDC bridge. of the problems of speed and cost
The experiment simulated a number affecting cross-border payments.
of transactions between fictitious However, it is important to identify if a
banks in France and Singapore, benefit is a consequence of blockchain
modelling cross-border and cross- architecture or whether it could be
currency transactions. achieved with modern centralised data
In one instance, a bank sent euros architecture.
to another bank, which received an For example, blockchain settlement
equivalent amount of Singapore dollars systems are sufficiently automated
provided via a liquidity pool. In another to operate 24 hours a day. Because
instance, the banks completed a PVP shared data standards are built into the
transaction, exchanging euros for an architecture of blockchains, payments
equivalent amount of Singapore dollars can be processed automatically without
directly. the need for manual oversight.
This system is, as yet, only bilateral, However, this is not something that
but Onyx’s report claims that it is can only be achieved with blockchain.
structured in such a way that it can Any system where all participants are
be easily scaled to incorporate other sharing the same data standards and
central banks and their currencies. infrastructure could be automated to
Rather than maintaining a network this degree. Around the clock operation
where every participant connects to is not a consequence of distributed
every other participant, each simply architecture.
connects to a common platform. In any case, while such a settlement
It is worth highlighting that, although system would go some way to
central banks are eager to improve alleviating these delays, the form of
cross-border payments and to keep the its implementation is important. If
transaction network in the regulated the around-the-clock cross-border
space, they are not necessarily keen to settlement layer occurs between
own the process themselves. central banks, then the settlement may
The Bundesbank’s Schrade points still be delayed by commercial bank
out that a central bank monopoly over operating hours.
international payments might not be It’s also important to note that some
omfif.org 43
of the delays in cross-border payments Algorand’s Grassano would argue

‘CBDCs are perhaps the
stem not from technical inadequacies, that such a system would be more
most promising area for
but from political and economic vulnerable than a decentralised system
development in cross-
institutions like currency controls. because of the presence of a single
border payments, if only
There is no guarantee that DLT would point of failure.
because of the sheer
obviate these delays. Of course, such a system, while
number of projects
Scott Hendry, senior special director technically possible, would be
underway around the
of fintech at Bank of Canada, sums extremely hard to implement because
world.’
it up, saying: ‘The fact is that the it would almost certainly require
true advantage of blockchain is not countries to devolve some of their
decentralisation; it’s centralisation. ability to oversee and control their
The big benefits come from getting currency to an offshore party.
everyone on a single system. If Hendry, who is otherwise sceptical
everyone could agree to use a single of the value proposition of digitalised
payments network provided, for cash on a blockchain, does concede
example, by someone like JPMorgan, that the decentralised structure might
then that would work just as well.’ make it easier to get countries to agree
Hendry believes that, if the whole to shared standards.
world were to access the same ‘An mCBDC bridge, if it allows each
platform, we could achieve instantly country to control their currency while
settled, frictionless transfer of value being part of a monolithic system,
within a centralised architecture. could be easier for central banks to
Even programmability and smart agree on,’ he says. ‘Decentralisation
contracts, often touted as benefits only might be a means of ensuring that each
achievable via blockchain architecture, participating central bank feels it has
can technically be produced within a sufficient control and ownership of its
centralised context. country’s money to participate.’ 
Five things we learned building a

blockchain-based CBDC
CBDCs can create as much value as the internet, if they are designed correctly,
writes Co-Pierre Georg, member of the Algorand Foundation’s economic advisory
committee and associate professor at the University of Cape Town
OVER 80 CENTRAL BANKS, representing more decentralised payment instrument like cash does.
than 90% of global gross domestic product, Second, a seamless user experience is key to
are currently in various stages of evaluating adoption. It is tempting to think that a retail CBDC
whether or not they should introduce a central can be turned into legal tender by decree. The
bank digital currency. Among the most exciting limits of this approach can be seen in countries
projects are those that study whether central like Zimbabwe, where a shadow monetary base
banks can open their balance sheets to the withstood all attempts by the government to
broader public. This could be done either with enforce the legal status of their own notes.
the help of intermediaries or in a hybrid system Instead, central banks need to ensure that a
where balances are held directly at the central CBDC is usable by customers and merchants
bank, but access is facilitated by payment alike. This means near-instant settlement and
service providers. These retail interoperability between devices
CBDCs have the potential and payment methods. For a
to completely reshape our medium-sized country with about
existing financial infrastructure. 50m people who transact on
Through our engagement It is no coincidence that the average twice per day this means
with various central banks, we majority of respondents in the blockchain needs to facilitate at
have identified five common the European Central Bank’s least 1,100 transactions per second.
questions and trade-offs. digital euro survey named During busy shopping days before
First, it is paramount that privacy as their number one Christmas, for example, this number
the public trusts the payment required feature. easily increases by a factor of five.
instrument unreservedly to What seemed like an impossibly tall
ensure it maintains its value order only a few years ago is well
as highly as cash. The length within reach of modern blockchains,
to which central banks go to even in a highly decentralised and
ensure that cash is a universally trusted payment resilient setup.
instrument is one of the main reasons why Third, we need to strike a balance between
the cost of cash is so high, totalling about 2% privacy and auditability. It is no coincidence that
of GDP in the euro area, for example. Luckily, the majority of respondents in the European
counterfeiting a CBDC is not possible on a Central Bank’s digital euro survey named privacy
decentralised blockchain, although additional as their number one required feature. Privacy is
cybersecurity risks naturally arise for any new a non-negotiable feature of any CBDC system if
digital means of payment. This implies, however, it hopes to gain mainstream adoption. Even if the
that central banks designing retail CBDCs need system does not provide the same level of privacy
to ensure that the nodes validating transactions as cash which, after all, is also not fully and truly
are properly decentralised. It also implies that anonymous because bank notes can be traced,
centralised digital solutions will always struggle there are some principles central banks should
to generate the same level of trust that a highly heed. Chief among these is that a separation of
omfif.org 45
concerns is a powerful last line of defence. intermittent connectivity.

It is tempting to create a central repository Fifth, it is paramount to ensure interoperability
of users’ personal information, which has to be and facilitate competition. The hardest part
collected for know-your-customer compliance, of designing new financial infrastructure is
and their wallet addresses on the blockchain. developing the protocols and processes in a
But this would give the central bank the ability to robust and resilient way that is compatible not
monitor the economic activity of each individual just with legacy systems but also with future
in the country. A better way of organising the requirements.
system is to ask individual payment service The choice that policy-makers and industry
providers to hold the personal data of only a practitioners today face is between an open
fraction of the total population. This would system like the internet or a walled garden like
also ensure that law enforcement agencies can Facebook. If central banks want to design an
approach individual PSPs open system, they should
and request that the wallet spend less time picking
ID of a suspicious owner commercial solution providers
is revealed or, vice versa, and more time supporting
that the owner of a wallet While there are many laudable efforts academics and engineers
engaged in suspicious underway to create protocols and actively involved in designing
activity is revealed. ensure interoperability, we should not CBDC protocols. While there
Fourth, for a payment forget that it took 25 years to develop are many laudable efforts
instrument to be universally the internet to where it was ready for underway to create protocols
accepted and trusted, it commercial use. and ensure interoperability,
needs to be available to we should not forget that it
everyone in a country. This took 25 years to develop the
is a significant challenge internet to where it was ready
for central banks because for commercial use. Driven
smartphone penetration is far from universal, by concerns about competition from private
even in the US where it stands at about 80%. stablecoins, central banks are now trying to
This is even more the case in emerging markets achieve a similar task in just a fraction of the time.
like India where smartphone penetration sits The design choices policy-makers make today will
at around 37%. Consequently, any retail CBDC have far reaching consequences, not only for the
design must make provisions for users without future of finance, but for society at large.
smartphones. Similarly, CBDCs need to make If we can resist the temptation to take
provisions for users who have intermittent shortcuts that lead to closed-loop systems, and if
connectivity. During our CBDC journey, Algorand we can find the right balance between privacy and
has come up with several ideas for how to auditability, CBDCs have the potential to become
facilitate blockchain transactions for users the same massive value creation machines as the
without smartphones and for users faced with internet.
Identity-based token blockchain eliminates

many of the technology’s drawbacks
MetaMUI shows how blockchain’s limited volume of transactions per second,
as well as other issues, can be overcome, writes Cizar Bachir Brahim, chief
strategy officer, Sovereign Wallet Network.
Anonymity is the fundamental characteristic of key pair. Since these records are stored in the public
blockchain. In the anonymous token-based blockchain, permissioned blockchain, all public keys are known to
every transaction is written based on an anonymous all other users. In MetaMUI, the user still has to sign the
address, derived from the public and private keys of transaction to authorise transfers with a private key.
the user. The problem with this approach is that the The user’s authorisation signature can be verified by
ownership of an asset is bound to the private key. Proof checking the corresponding public key in the identity
of ownership can only be provided with the private key. blockchain.
This means that if a user ever lost their private key, If a user lost their private key, they can simply verify
proof of ownership is also lost. If central bank digital their identity and reset the private key in the identity
currency is implemented this way, users could lose their blockchain by re-registering the identifier and public
entire balance. key pair. In this way, the user can relieve the burden of
MetaMUI is the first identity-based token keeping the private key safe and secure. In addition, if
blockchain. While most token technologies follow the hackers steal the private key and illegally transfer funds,
design of cryptocurrencies, such as bitcoin, MetaMUI it is possible to suspend the account by invalidating the
redesigns the blockchain structure based on the public key of the hacker’s account. Also, transferring
concept of identity. The main reason for this is to the stolen asset back is possible by resetting the
satisfy the regulatory framework of current financial public key with a bank node-generated public key and
systems, such as the Financial Action Task Force’s initiating the transfer. With an identity-based token
travel rule. blockchain, current banking practice can be emulated
If a user’s private key is hacked, then there’s a in the digital world.
problem of ownership. The hacker and the original An identity-based token blockchain also solves
owner both have the same private key and both can the CBDC design trilemma, where identity, privacy
control the account. Users can lose all their assets. and programmability cannot be achieved at the same
There’s no way for banks to transfer back stolen assets. time. Identity-based token blockchain can be used to
These kinds of problems can be solved with an implement privacy-preserving digital currency. Since
identity-based token blockchain. MetaMUI’s blockchain MetaMUI uses the identifier of the user to record
ledger records transactions using each user’s identifier, transactions, the user’s private information is never
instead of an address derived from the public key. stored on the blockchain. Similarly, privacy-preserving
The identifier format follows Web3’s decentralised programmable money can be implemented with an
identifier (DID) standard. A DID is a simple text string identity-based token blockchain. This requires another
consisting of three parts: the DID uniform resource blockchain technology, allowing smart contracts to run
identifier, the identifier for the DID method and the DID on the edge of the node.
method-specific identifier. MetaMUI has the meta-blockchain capability to
Therefore, it is a globally compatible account achieve this. Once the decentralised operation of smart
address that allows users to send and receive tokens contract code is achieved, decentralised machine
over the internet. Since it is a random identifier and learning technologies, such as federated learning,
doesn’t contain any kind of private information, can be applied. Private information is processed on
the level of privacy protection is equal to that of an the user’s device and only the processed metadata
anonymous token blockchain. can leave the device. User’s personal information will
MetaMUI has an identity blockchain that contains never have to go outside of their device. This way,
a decentralised public key infrastructure. The identity personalised service is achieved without violating
blockchain registers a user’s identifier and public privacy.
omfif.org 47
One of the major problems hindering the use status of a generated token, information that might sit
of blockchain technology for CBDCs is how slowly outside the blockchain. To properly solve this problem,
it processes transactions. The fastest anonymous the real-world asset must be connected to the digital
token blockchain, such as Solana, can achieve up to token. It could be possible for the token generator to
50,000 transactions per second. Most enterprise prove the existence of real-world assets with the help
token blockchains, however, can only reach 5,000 of trusted parties such as government organisations.
transactions per second. This would be inadequate for MetaMUI makes it possible to create a digital ID on
even lightly populated countries. For large nations, such the blockchain and issue certificates, called verifiable
as the US, these numbers are prohibitively small. credentials, that are signed by the issuing entity. The
This slow performance is due to two major design issuer can not only create the token but also issue the
problems in the protocol and structure of blockchain. certificate to prove the existence of the corresponding
Blockchain is structurally decentralised, but from the real-world asset. Issuers can also get certificates from
operational point of view, it is a heavily centralised third-parties with a public identity on the blockchain.
and serialised system. All the nodes of the blockchain Transfers of tokens also takes place between the
form a single virtual computer that can process the sender’s identity, the seller, and that of the receiver, the
transactions one by one. It cannot buyer. This identity-based change of
process the transactions in parallel, possession transfers ownership. With a
limiting the total number it can handle. ‘If the user’s private key proper regulatory framework, the need
Another problem is the lack of is hacked, then there’s a for registering the transfer is gone.
peer-to-peer money transfers. problem of ownership. The Identity-based token blockchain
Bitcoin requires the consensus of all hacker and the original could transform the non-fungible token
participating mining nodes to process owner both have the same market. NFTs represent the ownership
transactions. This means there are private key and both can of unique irreplaceable assets, such as
many decentralised mediators. It is control the account.’ digital art, in-game items or clips from
not a true peer-to-peer payment basketball games. But they cannot be
system where the sender and receiver recovered if a user forgets their private
can process and finalise the transaction directly, key. Implementing NFTs on an identity-based token
without intermediation. blockchain overcomes these difficulties.
With parallel and independent processing of As blockchains become more important in the
transactions, a true peer-to-peer payment protocol, financial system, inheritance becomes a problem. The
millions of transactions can be processed per second. ownership records of NFTs could disappear forever if
MetaMUI is the first blockchain technology that has a person dies suddenly, without ensuring an executor
implemented this true peer-to-peer payment protocol. has access to their private key. If NFTs are implemented
In MetaMUI, the receiver can verify the sender’s on an identity-based token blockchain, however, after
signature using the identity blockchain and accept the appropriate identity verification, bequeathed NFTs can
payment without a mediator. By adding more nodes to be transferred to their intended new owner.
process payments in parallel, it is a scalable solution. MetaMUI’s identity-based token blockchain
Identity-based token blockchain can be used to innovates major blockchain applications, including
implement asset tokenisation services. It can solve the CBDCs, NFTs and asset tokenisation. MetaMUI
oracle problem, where isolated chains cannot read or proves that combining decentralised identity with a
write information from other networks. decentralised token is a powerful concept and could
There is a race to find the solution to prove the legal improve banking, the digital asset market and more.
Chapter 5
The road to better remittances
Remittances are a lifeline for the families of millions of migrant workers. Going digital will
remove limits on how cheap, fast and convenient they can be. By Kanika Saigal.
IN ETHIOPIA, the war in Tigray has of the population is poor and often physical cash to digital wallets and the
displaced 2m people while 400,000 unbanked. move away from informal channels of
people in the region face famine. The Remittances are an important money transfer to formal ones.
conflict has rippled through the country, source of income, not just for Although remittances support
spilling into nearby regions in Oromia individuals receiving the funds, but economic development and widen
and Amhara. for emerging market countries as financial inclusion, they face greater
Unfortunately, national relief efforts a whole. Remittances to low- and challenges than any other type of
have fallen short. Ethiopia’s blanket middle-income countries in 2020, worth payment in the peer to peer retail
supplementary feeding programme $540bn, surpassed the equivalent value space. All cross-border payments must
– the distribution of food to prevent of foreign direct investment ($259bn) adhere to regulation set by multiple
widespread malnutrition – only reaches and overseas development assistance authorities and apply for relevant
40% of the population. Domestically, ($179bn) combined. licences. Remittances, however,
financial support is limited as the Ethiopia receives around $5bn- are typically received by people in
government grapples with the fallout of $6bn in remittances each year, largely emerging markets. As a result, they
the Covid-19 pandemic. from the diaspora in the US, Europe are disproportionately affected by
Cash transfers have helped plug and the Middle East. Private, individual volatile foreign exchange rates, legacy
the financial support gap. Often transfers, including remittances, are technology and de-risking much more
arranged through non-governmental the single most important source of than remittances and cross-border
organisations and supported by foreign currency for Ethiopia, covering payments sent to developed markets.
international banks, cash transfers are 35% of imports. In 2019, remittance Navigating the licencing and
payments made directly to affected flows to sub-Saharan Africa reached regulatory landscape can also be tricky.
populations during humanitarian crises $48bn, with Nigeria accounting for In some jurisdictions, money transfer
that individuals receive as cash, credited half the total. Within the same period, operators are required to obtain a
into a mobile wallet or pre-paid debit Asia received $315bn in remittances licence – for example, a specific money
card. with India accepting the lion’s share of remitter licence or a licence as a bank
Remittances – the non-commercial about $80bn. Neither figure considers or payment institution – while in others
transfer of money from migrant workers informal flows of cash, however, which they are required to enter into an
to friends and family back home – are is likely to make the true value of agreement with banks. At the same
another source of financial support. remittances to emerging markets much time, payment infrastructure operators
Around 200m migrant workers higher. – systems used to settle financial
across 40 countries transfer money to Even as the Covid-19 pandemic transactions – may not be subject to
800m people in 125 countries. In these unfolded, remittances remained any licensing requirements, supervision
countries, cash received via remittances resilient. While World Bank estimates or even oversight, especially if they
represents, on average, 60% of suggested that the level of remittances operate retail payment systems that
household income and is spent on would fall globally by 20% in 2020, are not considered to be of systemic
essential items such as food, medicines, instead, remittances declined by just importance within a particular
education and housing expenses. 1.6% to $540bn. This was largely down jurisdiction.
Half of the total value of remittances to better than expected fiscal stimuli of As such, remittances are usually
is received in rural areas, where much developed economies, the shift from much more expensive, take longer and
omfif.org 49
can be much less convenient when ‘The combination of bank button. Removing physical agents and
compared to other cross-border P2P fees, compliance checks transferring and storing cash via mobile
payments. ‘Remittances provide a and managing foreign networks reduced costs, supported
lifeline to families struggling to make exchange risk kept financial inclusion and overcame
ends meet,’ says the Visa Economic remittance costs high.’ national geographical limits. Mobile
Empowerment Institute's Harper. money took off.
‘These global money flows are Fast forward 10 years and the
hugely important for hundreds of landscape is unrecognisable. The
millions of individuals and for many introduction of mobile money paved
countries. We all should be innovating to the way for mobile wallets – which store
make them more efficient,’ he says. card information and can be used in
person to make transactions without a
Smart remittances physical debit or credit card – and digital
Just a decade ago, limited cross-border wallets, which are mainly used to carry
transfer options forced migrant workers out online transactions.
to travel in person to banks or MTOs Digital remittances grew alongside
to send cash back home. After cash mobile money. As opposed to having
was deposited at an MTO, it made its to travel to MTOs to send and receive
way through correspondent banking in cash, fintech companies emerged
channels before beneficiaries could it that allowed the transfer of remittances
pick up from their nearest agent. from mobile phones, mobile wallets
The combination of bank fees, and digital wallets to another across
compliance checks and managing borders. Technology accelerated the
foreign exchange risk kept remittance
costs high. The manual nature of the
process meant that cross-border
61% 5.1 Cashless
payments took a long time to carry GROWTH
transaction
out. MTOs such as MoneyGram, which 82% volume will
GROWTH Total 3,026
was established in 1940, and Western 2030 more than
Union, founded in 1851, dominated the 1,818 double by 2030
market. In 2014, these two companies Number of
Total 1,882
represented 37% of the market. 2025 cashless
But widespread access to mobile 1,032 transactions, bn
Total 1,035
phones from the mid-2000s onwards 2020 Source: PwC
brought change. At the time, access 494
375
522
111 349
73 105 258
to basic cellular services such as short 59
494 229 180 172 165
message services (or texting) meant

Asia-Pacific
Africa
Europe
Latin America
US/Canada
Asia-Pacific
Africa
Europe
Latin America
US/Canada
Asia-Pacific
Africa
Europe
Latin America
US/Canada
that users were able to initiate, send

and receive payments at the touch of a
change. Fintechs leverage biometric ‘While there is growing regulated by the Financial Conduct
technology to verify identities and competition in the Authority in the UK. WorldRemit, for
automate know your customer checks. remittances space, example, allows beneficiaries to accept a
These checks can be carried out by banks and incumbent bank transfer, cash or even hold money
assessing available and submitted credit MTOs, such as Western in a mobile wallet. Wise allows users
information to verify identity in person Union and MoneyGram, to send money cross-border but also
or online. They can also take place benefit from experience, allows customers to hold a variety of
before a transaction is accepted and geographical reach and currencies in one account. And Stellar –
processed, limiting money laundering a deep understanding of an open-source network for currencies
risk. the market and existing and payments – allows for cross-border
There are now more than 1bn mobile corridors.’ money flows in fiat and cryptocurrency
money wallets around the world and and has a built-in decentralised
remittance providers continuously exchange for cryptocurrencies, foreign
integrate with mobile money providers exchange and securities.
to build scale and reach. The abundance While there is growing competition
of mobile money transfer services in the remittances space, banks and
and MTOs has driven down costs and incumbent MTOs, such as Western
increased efficiency. Those receiving Union and MoneyGram, benefit from
remittances have multiple ways in experience, geographical reach and a
which to use money deposited in their deep understanding of the market and
accounts, making such services much existing corridors. Western Union and
more convenient. MoneyGram, for instance, still lead in
‘Fintechs haven’t necessarily created terms of cash-in, cash-out remittances.
new technology or formed new payment Moreover, incumbents have deep
rails, but they have used what was pockets. This means that they can invest
already out there to create frictionless in technology, acquire or partner with
cross-border payment experiences,’ fintechs and ensure that they are up to
says Derrick Walton, head of emerging date in terms of licensing and regulation.
payments, global transaction services at ‘It is a trend we have seen for
Bank of America. some time,’ says Genie Gloria, senior
As such, the key to building market vice president, head of remittances,
share in a crowded market is finding a transaction banking group at BDO
niche – a jurisdiction or sector that you Unibank. ‘But what is new is how some
understand better and can serve better of these MTOs are starting to rebrand
than another fintech out there. themselves as fintechs while some
fintechs appear to be able to offer
Finding a niche everything a bank can – and more.’
Migrant workers send between $200 ‘In fact, remittance companies
and $300 home every one or two benefit from working with banks, who
months. Finding a niche is important have good relationships with remitters,
in an industry that profits on volume. have bricks and mortar branches in
Companies such as World Remit, places where recipients may need to
Remitly, Wise (previously TransferWise) cash out and have the capital to ensure
and Stellar have all emerged as regulations are met, licences are paid
prominent players in remittances. and they have the necessary liquidity to
But each provides a slightly different mitigate against foreign exchange risk,’
product to appeal to a certain customer. she says.
In some instances, an MTO may focus on As such, cross-border partnerships
specific cross-border corridors, where in payments and remittances abound.
it understands the market better than In October 2021, MoneyGram joined
any other service provider. Others may forces with the Stellar Development
target a specific type of migrant worker. Foundation to integrate with the Stellar
Another may highlight its unique use blockchain and allow cash funding and
of technology as a way to differentiate pay out in multiple currencies, including
itself from others. USD coin, a stablecoin governed by
Remitly believes that its major unique Coinbase and Circle. In May 2021,
selling point is safety – it is registered Google Pay launched international
as a money services business with the money transfers with Wise and Western
US Treasury, licensed in Canada and Union, which will allow US users of the
omfif.org 51
‘Mobile money providers

have evolved and new players
have emerged to offer credit,
insurance and other financial
products to small businesses
notoriously underserved by the
financial sector.’
Remittance lessons for MSMEs

APPROXIMATELY THREE-QUARTERS of between countries freely,’ says Von Kemedi.
remittances are used to cover essential items such as But there are obstacles to the free flow of cash.
food, medical expenses, school fees or housing. But Non-convertible currencies, protectionist financial
they can also be used for commercial endeavours. policy and limited access to foreign exchange can
In emerging markets, where interest rates can be hinder cross-border trade and business development.
extremely high, micro-, small- and medium-sized Reliable access to liquidity is essential to support
enterprises sometimes support themselves with businesses focused on cross-border trade. As such,
remittances. some fintechs follow a model used by the remittance
The strength of remittances combined, with a lack sector.
of traditional financial support for MSMEs in emerging Wise has access to local pools of liquidity to settle
markets, has opened another niche in the payments cross-border transactions domestically. AZA Finance
industry. Mobile money providers have evolved and leverages a similar model in the business-to-business
new players have emerged to offer credit, insurance space in emerging markets and the company has
and other financial products to small businesses white labelled its API technology to allow money
notoriously underserved by the traditional financial transfer companies to access liquidity through its own
sector. And it’s quick. The plethora of data available network. In fact, because of their reach across Africa,
creates a reliable profile of users, which means that the Middle East and Europe, MTOs can integrate their
credit can be offered within minutes. API to facilitate and distribute remittances.
In east Africa, Safaricom now offers products ‘This hub and aggregator model is growing
such as health insurance, credit and savings options. rapidly because it reduces the cost and the risk for
Established in 2019, Nigerian company Lidya provides companies that do not have the same physical reach
working capital to small businesses via an app in as we do,’ says Charlene Chen, board member at AZA
seconds. In the Philippines, Mynt provides money Finance.
transfer, savings, credit and investment products via Global blue-chip companies do not have the same
an app. In November 2021, the company became the concerns, however, and have made successful forays
first Filipino fintech unicorn. into MSME lending, leveraging existing customer
‘Remittances are an important use of funds for networks and digital reach. Amazon has started to
businesses, but they shouldn’t be the only source,’ attack financial services from all directions. Amazon
explains Dimieari Von Kemedi, chief executive officer Lending extends working capital to affiliated business
of Angala Fintech. Remittances, by their nature, serve and, in June 2020, Amazon and Goldman Sachs'
specific cross-border corridors, usually one way. Marcus unit announced a partnership to provide lines
‘If we want trading blocs such as the African of credit of up to $1m to merchants selling on the
Continental Free Trade Area to succeed, businesses e-commerce platform. Globally, regulators are keeping
in countries outside of important remittance corridors a watchful eye as big tech marches into payments and
will need access to capital and to move money beyond.
payment app to send money to 80 5.2 How fast

countries served by the MTOs. 8
transaction
In June 2020, WorldRemit 7 costs are
announced its partnership with Alipay. 6
falling varies
Through the partnership, consumers will depending on
5 method used
be able to use the WorldRemit app or
website for cross-border remittances. 4 Cost of sending
In 2019, Western Union developed a 3
$200, % of total
transaction
white label digital partner solution,
2 Source: World Bank
which allows financial institutions to use
their own branded interface to provide 1
international money transfer services 0

Bank account Cash Mobile money Bank account
to their customers via Western Union’s (same bank)
infrastructure. Transfers can be made to
bank accounts, digital wallets, cards or
in cash depending on Western Union’s
network. appetite. Those that fail to meet high
‘The combination of bank
Wise allows banks to integrate with global standards when it comes to
fees, compliance checks
its ‘Wise for banks’ product, to offer cross-border payments risk hefty fines.
and managing foreign
their customers cheaper cross-border Around the same time, banks
exchange risk kept
payment solutions. In April of this year, began to consider payments as a
remittance costs high.’
JPMorgan, DBS Bank and Temasek secondary business to other, more
joined forces to launch distributed lucrative investment products, selling
ledger technology payments platform off payments assets as a result. In
Partior, for clearing and settlement of 2012, Deutsche Bank sold Deutsche
payments and securities. Card Services to EVO International, a
This is all part of the evolution US company. In 2015, digital debit and
of payments. Newer remittance credit card company InterCard was sold
companies make a name for themselves to Verifone. In 2017, digital payments
by finding a niche. They build scale company Concardis, of which Deutsche
by partnering with larger, well known Bank, Commerzbank and UniCredit
MTOs and banks. Incumbents pay to were shareholders, was sold to Advent
leverage technology developed by new and Bain. Between 2011-19, the number
entrants without having to upgrade of active correspondent banking
legacy infrastructure all at once, while channels worldwide fell by 22%.
they ensure licences are up to date and Meanwhile, the value of cross-border
regulatory requirements are met. At the payments is increasing. According
same time, banks, fintechs and MTOs to the Bank of England, the value of
are adopting mobile wallet technology cross-border payments is expected to
to provide customers with more options increase from $150tn in 2017 to over
when it comes to remittances. $250tn by 2027. Moreover, with global
‘All of this brings down cost and growth expected to rebound in 2021
increases efficiency and creativity,’ and 2022 as the world recovers from
says Walton. ‘The interconnectedness the pandemic, remittance flows to
of the payments landscape is mutually low- and middle-income countries are
beneficial and we are likely to see much, expected to increase by 2.6% to $553bn
much more of this in the future.’ in 2021 and by 2.2% to $565bn in 2022.
The decline of correspondent banking
Unbundling payments combined with the rise of cross-border
The vigour of banks to partner with payments has made way for payments –
companies in the payments and and remittances – to flourish outside of
remittances sector comes in stark traditional banking networks.
contrast to the derisking drive that ‘But we mustn’t forget that fintechs
has characterised the cross-border will most likely need correspondent
payments landscape over the banking channels to support cross-
last decade or so. Since the 2008 border payments,’ says Walton at Bank
financial crisis, banks have pared back of America.
correspondent banking functions due Banks will carry out due diligence
to tighter regulation and a lower risk in line with international regulations
omfif.org 53
1bn
and provide the required liquidity to But some of this may be unwarranted.
access remittances at the last mile. As banks blame a lack of transparency
As such, derisking and the decline in of the underlying transaction as one
correspondent banking has created reason to derisk, the reality is that MTOs
significant problems for the remittance
There are now more than 1bn
and fintechs gather a lot of data about
mobile money wallets around
industry as a whole. Through derisking, transactions. ‘If the risk is passed on
the world and remittance
banks terminate or restrict business to MTOs to carry out their own AML
providers continuously
relationships with a whole category of integrate with mobile money and KYC checks, perhaps the decline
businesses, including MTOs, without providers to build scale and in correspondent banking channels will
considering the individual circumstances reach. abate,’ says Gloria.
of the operator in question. Without The Philippines is the fourth largest
correspondent banking channels, some beneficiary of remittances in world,
MTOs may struggle to survive. with $35bn sent to the country in 2020.
Derisking can also have a negative Despite the pandemic, remittances to
effect on financial inclusion, as it limits the Philippines fell just 0.7% that year.
access to important channels for Indeed, the cost of sending remittances
humanitarian aid agencies and can push to the Philippines is relatively cheap, at an
the cost of remittances up – despite all average of 4.6% of the total transaction.
the ground gained in making them much Part of the reason is down to recent
more affordable. Derisking may also changes in how non-banks in the country
encourage the use of informal channels operate. Recent regulation changes in the
to move money across borders. These Philippines streamlined the registration
channels can destabilise the entire process for non-banks and authorities
system as they bypass essential KYC allow remittance providers to carry out
and anti-money laundering checks in their own due diligence of cross-border
the process. There have been accounts payment partners at the other end of the
of banks and aid organisations forced to corridor.
move large amounts of cash by car, van As a report by the World Bank
and helicopter to those in need when highlights, MTOs usually send remittances
formal money transfer channels have to and from a multitude of country pairs
been too difficult to navigate or closed and some global MTOs cover a multitude
all together. of countries in the sending and receiving
market. And because money is fungible,
remittances can always be netted if the
MTO has enough liquidity in the system.
Wise, for instance, has local pools of
capital to settle cross-border transactions
domestically. When local funds are
unavailable, Wise leans on intermediaries
and partners with liquidity in specific
jurisdictions to settle payments. AZA
Finance does something similar in the
business-to-business space in emerging
markets and the company has white
labelled its application programming
interface technology to allow third-party
companies to access liquidity through its
own network.
Driving down costs

Despite some of the issues in the
remittance landscape, the plethora of
options has driven up competition and
pushed down costs. According to the
latest figures compiled by The World
Bank’s remittance prices worldwide, the
proportion of corridors with average costs
of less than 5% has increased from 17%
in the first quarter of 2009 to 38% in the
first quarter of 2021. markets. ‘While the cost of remittances Bank, the average cost of remittances
But there is still some way to go. to Africa has come down over the past to Ethiopia is approximately 6.9%. In
The average cost of sending $200 to decade in some cases, intra-African Nigeria, the average cost is 7.1%. ‘A lot
low- and middle-income countries in remittances can still cost 20% or even of the time, foreign exchange allocation
2020 was 6.58% of the total, more than 25% in transaction fees depending on is prioritised for large companies and
double the sustainable development the corridor,’ explains Chen. multinationals over individuals,’ says
goal target of 3%. Currently, sub- ‘A remitter may be able to access Chen.
Saharan Africa remains the most better exchange rates if they remit It is important to understand,
expensive region to send money to, using a G10 currency, but this depends however, that the landscape is
costing on average 8.02%. on whether the remitter has access to nuanced. In February 2021, a Visa
Banks remain the most expensive these currencies in the first instance,’ Economic Empowerment Institute
type of service provider, with she says. In Ethiopia, which suffers study examined the costs associated
average transaction fees of 10.66%. from a large trade deficit, access to with sending $200 and $500 of digital
Mobile money remains the cheapest foreign exchange is limited to several remittances via debit or credit in 28 key
instrument to disburse remittances companies that import essential corridors. These corridors represented
while debit/credit card overtook mobile items into the country. In Nigeria, it is a mix of G20 sending countries, large
money as the cheapest way to fund notoriously difficult to access foreign remittance receiving countries and
remittances in the first instance. exchange when the oil price is down. receiving countries that are dependent
Foreign exchange risk in emerging Where foreign exchange is hard on remittances. ‘We found that the
markets is one of the biggest to come by, parallel markets thrive. In average cost of sending remittances
obstacles to overcome when it comes Ethiopia, while the official rates can get within these corridors was around 4% of
to remittances and will keep prices you 47 Ethiopian birr for every dollar, the total for a $200 transaction and a
high, says Charlene Chen, board on the black market you can expect it consumer that was able to shop around
member and former COO of AZA to cost nearly double. In Nigeria, the would be able to find a price of under
Finance, an international payments, official exchange rate is around 411 naira 3% in 21 of these corridors,’ says Harper.
foreign exchange and treasury fintech to the dollar versus a black market rate ‘I’ve been asked before why it’s
company with a focus on emerging of around 570. According to the World free to send a high-resolution photo
to someone in another country in
seconds, but payments aren’t as easy,
cheap or quick,’ says Walton of Bank
of America. ‘The reason lies in the vast
variation of financial regulations across
’Since the global financial crisis, banks have pared back
borders, which can be expensive to
correspondent banking functions due to tighter regulation
navigate.’
and a lower risk appetite.‘
Mastercard’s Evers agrees:
‘Remittance companies grapple with
regulation and compliance, foreign
currency risk, capital controls and
clearing and settling issues – and a
growing expectation that senders
and recipients expect payments and
transfers to be instant.’
All of this still comes at a cost. In any
case, when savings are made, it isn’t
guaranteed that they are always passed
on to the customer.
Global cross-border peer-to-peer
standardisation would allow greater
competition, cut costs of remittances
and allow policy-makers to share best
practice. But this is difficult to achieve
given the different stages of digital
and financial development between
countries. The Financial Stability Board
cross-border payment roadmap aims
to coordinate regulatory, supervisory
and oversight frameworks, improve
existing payment infrastructure
and explore new roles of payments
omfif.org 55
’Global cross-border
peer-to-peer
standardisation
would allow greater
competition, cut costs
of remittances and
allow policy-makers to
share best practice.‘
infrastructure and arrangements. Until Perhaps the rise of digital remittances This doesn’t just mean having a mobile
then, remittances will remain a complex might not be as strong as remittance phone and being able to receive money
business to be in. companies and fintechs will have directly into a mobile wallet but being
you believe. ‘For one, there is a trust able to spend money digitally as well.
The role of cash issue. For Filipinos, there is something ‘It’s all well and good to send money
Some overseas Filipino workers who comforting about dropping off cash from a more developed economy with
did lose their jobs in the service and physically – checking that it is in the right the tap of a button, but if the recipient
hospitality industry, still sent money hands – especially for larger transaction is not near a shop that accepts digital
home – albeit in smaller, more frequent amounts,’ says Gloria. payments, they will still need to travel
amounts. ‘This is because they are duty It is also much more than that, she to a remittances agent and cash out,’
bound to their family back home,’ says says. ‘Talking to friends, sharing stories, says Chen. ‘Only when these smaller,
Gloria at BDO Unibank. travelling to cities and towns where rural vendors are able to process digital
As a result of the pandemic, digital authentic Filipino food is available is a payments will digital remittances take off.’
remittances to the Philippines increased. social event for many Filipino workers China might be the closest to
According to data from the Philippines who miss their family and friends back achieving this, with plans for a digital
central bank, the volume of P2P home. It is much more of a ceremony currency that could rival cash given
monthly digital payments hit 42m, an than a chore,’ she says. the prevalence of digital wallets and
18.1% increase, in 2020 and the change The Philippines remains a cash-based mobile money beyond large cities. But
was completely driven by remittances, economy. As such, cash will continue to until then, cash users will not be able
says the central bank. Out of the 157m play an important role in sending and to fully participate in the evolution of
transactions made by individuals each collecting remittances. The fact remains payments that leads to lower costs and
month in 2020, valued at $9.2bn, 27% that most emerging markets rely on faster transactions when it comes to
were digital. cash despite the drive towards financial remittances.
‘Overseas Filipino workers adapted,’ inclusion through the adoption of digital ‘Picking up remittances in cash is
says Gloria. ‘They downloaded money cash. inefficient and adds costs to the overall
transfer apps to send money back home ‘Until digital infrastructure and process,’ Chen says. ‘Without a truly
as stay at home orders prevented them financial education is widespread, the digital end-to-end experience, there
from travelling to MTOs to send money bulk of remittances will continue to end will be limits to how inexpensive they
physically.’ up in cash,’ says Chen at AZA Finance. can be.’ 
Roundtable
REMITTANCES: CONTINUING THE

JOURNEY BEYOND CASH
An OMFIF roundtable discusses how an accessible, easy to use and low-
cost global remittance market is within reach if private sector providers
can work with regulators to build, monitor and support it.
Moderator,
Philip Middleton, Dong He Alex Holmes Matthew Saal Ruben Salazar
chairman, OMFIF’s Deputy Director of the Chief Executive Digital Finance Specialist, Genovez
Digital Monetary Monetary and Capital Markets Officer, MoneyGram Financial Institutions Global Head, Visa
Institutee Department, International International Group, International Direct
Monetary Fund Finance Corporation
Philip Middleton: The volume of remittance is about 6.3%. It is coming example, it outlines that 75% of all
global remittances is increasing down, but it is still much higher than the remittances should be available
year on year. There are a number the United Nations sustainable within one hour of initiation from
of countries that depend on development goal for the cost to sender to the receiver. Ideally, within
remittances to support economic be 3%, on average, by 2030. Banks one business day, everybody should
growth. Families across the are the most expensive way to send have their funds available. Another
globe, that may be excluded from remittances, charging more than 10% goal is that no corridor should have
conventional banking systems, may for a $200 remittance. an average cost of higher than 5%.
rely on remittances for their day-to- Under the coordination of the Meeting the goals set out by the
day lives. But remittances, as they of the Financial Stability Board, the FSB and the SDG will be a huge
stand, are expensive and can be International Policy Committee undertaking but also a massive
difficult to send. is exploring how we can enhance achievement.
Dong He, what is the international cross-border payments. This is
community doing to try and bring more than just remittances, but PM: Alex, how easy is it to cut costs
down the cost of remittances and remittances are an important part of remittances and the time it
make them easier to send and of this effort. To a certain extent, takes for remittances to reach the
receive? the FSB’s reaction was due to the recipient?
launch, or planned launch, of global
Dong He: There are 190 countries stablecoins such as Libra – now Diem Alex Holmes: It is not free to move
that are part of the International – back in 2019. money cross-border, largely due
Monetary Fund. Many of them Nevertheless, one way to enhance to the fact that most countries are
are small, low- to middle-income cross-border payments is to reform structured as sovereign nations.
countries for which the value of the existing infrastructure to International banking isn't really
remittances is often larger than make it more efficient. Enhanced designed to facilitate the free flow
foreign direct investment and competition from alternative of funds over borders because of
official assistance flows combined. instruments has also energised compliance and other risks. That
According to the World Bank, efforts to reduce costs and increase being said, I think there is a lot that
remittance flows to low- and middle- access to and speed of remittances. can be done. For instance, cash
income countries reached $540bn Digital service providers, for handling is increasingly expensive
in 2020. example, have much lower charges. and complicated. This means that
Given the value of remittances, we The FSB report from October this smaller denominations tend to be
can see that this is a very important year outlines an ambitious target more expensive to send and I think
topic. Yet the cost of sending a $200 around cross-border payments. For you see that in most pricing. Indeed,
omfif.org 57
as you scale up in value, the prices ’One way to enhance network so MoneyGram and our
tend to come down. cross-border payments other money movement partners
Unlike the World Bank, we look is to reform the existing can provide differentiated solutions
at the cost of sending $400 at infrastructure to make it to their customers. The best user
MoneyGram. Currently the cost is more efficient.‘ experience should win and our role is
below 3%. But, to Dong’s point, we to empower our partners to leverage
understand that this is not consistent this connectivity.
across corridors. In certain markets,
exotic currencies are much more PM: Essentially, what you're saying is
expensive to source and there are that you are building a highway that
central bank restrictions on the types will reach into all parts of the world,
of currencies allowed in and out of regardless of whether people have
some countries. There are several bank accounts, and that that highway
other factors that affect the cost and will be available to all drivers.
speed of remittances.
At MoneyGram, we operate our RG: That's correct. Today we are
system by prepositioning funds connected to around 65 automated
around the world and having pre- clearing houses, seven different
funded bank accounts to settle real-time payment networks
flows in real time. Broadly speaking, and, I believe, five or six different
however, simplification through how important they are for the payment gateways. This means that
technology, enhanced connections resilience of households, poverty a transaction may end up in a bank
on the banking side and initiatives alleviation and financial literacy. We account in Bangladesh instead of in a
and partnerships – for example, our cannot lose sight of these ancillary Visa card. Whoever wants to use the
partnership with Visa Direct – will features because they really make a network can and this will improve the
enhance the free flow of currencies. difference in people's lives. user experience.
But there are risks associated
with this. The highest fraud rates in PM: Visa have been doing a lot PM: What is Visa doing to educate
the world today are all associated of work around the wider digital people who may be reluctant to use
with online and digital payments, financial economy. So, Ruben, what digital payments?
and this is one of the reasons we do you think the key issues are with
haven't seen the complete fall off this and where should we be going? RG: We work with our partners to
in cost. Nevertheless, I do think show how digital payments benefit
the combination of what we're Ruben Salazar Genovez: Visa consumers and the community.
doing today is going to continue to exists to displace cash. We have For instance, some studies show
facilitate improvements for the free been doing this for the last 50 that managing cash can cost [an
flow of funds across the globe. years, effectively eliminating cash economy] anything between 2%
from billions of transactions. But and 3% of gross domestic product,
Matthew Saal: We are headed in the to continue with this journey, our so there are significant benefits
right direction in terms of lower costs network needs to participate beyond for markets to move to a cashless
but there are a couple of things to the traditional payment-purchase society.
consider. transactions that eliminates cash. But there are other implications
From our perspective, we're very What we are doing with Visa of this. We have talked a lot about
much interested in competition and Direct, for example, is to empower financial inclusion and we have made
new entrants – not necessarily using consumers, not only to pay, but significant improvements around
ground-breaking new technology, also to get paid via our network this, but what is happening is that
but sometimes using better so we can connect a consumer while a consumer may have a bank
applications of existing technology. using a Visa card in the US with a account or pre-paid card, they
This aspect of competition is consumer using their Visa card in may be completely alienated from
important. But we also must Egypt, India or anywhere else their participating in digital commerce.
recognise that the prepositioning of Visa credentials are stored. This This is where our effort should also
liquidity that Alex describes is a real eliminates a lot of friction in the be – pursuing financial inclusion and
cost, particularly for newcomers. transaction because user one can digital inclusion as well.
One approach that will reduce costs use their Visa credentials to ‘upload’
is the digitalisation of the end-to- funds, while user two can use their PM: What, then, should the public
end remittance process and this may Visa credentials to ‘download’ funds. sector be doing to support this
be a reality for the next generation. This doesn’t need any other physical transition, Matthew?
Another point to note is that or digital interaction.
research on remittances shows Our role is to create an open MS: We need to facilitate innovation
‘One approach that

will reduce costs is the
digitalisation of the
end-to-end remittance
process and this may
be a reality for the next
generation.’
and upgrade infrastructure, to allow maintains integrity and financial regulators can explore the appropriate
for things to move much more easily stability. regulation to ensure integrity and
behind the scenes. We need to upgrade the compliance within those structures,
It's important to recognise that infrastructure not only around the whether it’s a more distributed or
the balance has shifted between funds transfer, not only around decentralised approach. I think those
public and private infrastructure. settlement but also around digital things have yet to be fully resolved.
When it comes to domestic identity to enable instantaneous Either way, you do not need to
payments and settlements, public validation for more people – not sweep away the existing infrastructure
sector infrastructure plays an just those with the right type of in order to get closer towards
important role. In the international identification or history in the real-time, efficient payments. For
sphere, it has been the private sector system. example, Singapore and Thailand
– traditionally correspondent banks have connected local retail faster
– that has bridged across separate PM: What is it, then, that regulators payments infrastructure, PayNow and
national jurisdictions. can do to facilitate this? Do they PromptPay, allowing users to make
It is important to find links simply stand back and allow transfers between accounts in both
between the public and private decentralised finance to take over, do countries.
sector, and enable public sector they lighten know your customer and
infrastructure and the regulatory anti-money laundering regulations or DH: Traditionally correspondent
environment to facilitate private is it something else? banking relationships are multilayered
sector innovation. For example, and complicated. Alex described how
the current functions served MS: I don't think there needs to be many accounts he must maintain
by interlinked ledgers might be a trade-off. In fact, you can improve across the world and how this kind of
more efficiently executed with a KYC and AML checks by putting in split liquidity is expensive, and part of
distributed ledger system. While place digital identity systems and the reason why we have a high cost.
we understand that distributed create recognition of this across I think a number of panellists
ledger technology is extraordinarily different jurisdictions. It may mean brought up the question of
inefficient in terms of processing a move towards a 24/7 operation compliance checks as an important
power and electricity, it may be more of some of the real-time payment factor around cost. Here, again,
efficient in transferring funds than systems, and while this may be technology can help to standardise
the system we have now. expensive, you can explore options compliance procedures, for example,
We also need to look at how we and create an optimal mix to speed the use of digital identities. Of course,
can adjust both the public and the up and improve the efficiency of the it's not only a technology issue, it’s
emerging private infrastructure existing system without sweeping it regulatory consistency. But all of
– whether it's payment service all away. this would likely make it much easier
provider networks, telecom based That said, there's a lot to to automate, not only compliance
mobile money, or something else – be explored in terms of new checks, but a lot of the middle office
so that all of these different pieces of infrastructure. Certainly, DLT could and back office operations
local and international infrastructure solve some of these key challenges In 5-10 years’ time, the picture
can link up efficiently, in a way that and should be looked at. Then is going to look very different. The
omfif.org 59
cross-border payments landscape ’International banking there tremendous efficiencies to be

will be flatter, around the clock and isn't really designed to made through these partnerships?
regulatory compliance will be simpler, facilitate the free flow Yes, absolutely. Are there an equal
standardised and automated. All this of funds over borders number of challenges and obstacles
will contribute to a reduction of cost. because of compliance to overcome? Yes, 100%.
We want to encourage competition and other risks.‘ For example, it costs today on
and we want to make regulatory average about 1.5% to buy bitcoin and
frameworks conducive to efficient it costs you about the same amount to
improvement. Official means of cash it out. Moreover, it's going to take
payment will also have to catch up or several days to move it back and forth.
move with the times. If crypto is not taken at the point of
sale, it's not a utility and ubiquitously
PM: I suspect that access to central used and you're going to have to
bank digital currencies may be able exchange it. Whether it is crypto to
to deliver some of the identity and fiat, or fiat to fiat, you are going to
conflict resolution approaches that saving for themselves. This means have to go through an exchange
you were outlining. Alex, where do you that when they return, they have funds process, which is still slow and clunky.
see things going? at home. This is an interesting pattern As such, it's not just about utility, but
and is something we should continue about interoperability. I think we are
AH: I think that competition and to promote – particularly given the seeing some huge improvements
increased push for innovation is increased digitalisation on the receive to this, but it will take time and a
crucial, but it goes both ways. There side. conscious effort on everybody's part
is a lot of activity in the private sector, Blockchain, cryptocurrency and to participate actively and to drive
but I do think we need upgrades stablecoins could also greatly improve forward improvements.
– through blockchain or other things. There's equal amount of
technology – to current systems, such competition there and where there is PM: Ruben, where do you think we're
as real-time payments. so much competition, there's always heading? And what is it the public and
At the end of the day, there going to be disparate systems, which the private sectors are going to do
will always be conflict because of disaggregate the ability for continuity. together to get rid of the blockages?
the cross-border point. There will But I think it's on all of us to continue
always be conflict around sovereign to push for efficiency and lower prices, RG: I agree with Alex in that the
nations and there will not always be and to facilitate the flow of funds, system is not broken and will continue
interoperability between foreign because it's in everybody's interest to make significant progress towards
currencies. But this shouldn’t mean to do so. And I think we've taken that both digital and financial inclusion to
that we stop looking at improvements initiative, responded to it well and benefit the user.
to the freer flow of funds. we are trying to use technology to We must remember, however,
We talked about prepositioning improve that to the greatest extent that there is probably no larger
cash. One of the most illiquid times possible. contributor to poverty alleviation than
we have is across weekends and remittances around the world and
holidays. This should not be the PM: Is cryptocurrency, such as yet there is very little focus in some
case, but it is. Banks aren't open for bitcoin, part of the problem or is it a markets to promote competition and
settlement over the weekend, so we red herring? Does the solution need to eliminate barriers to entry.
end up sitting on piles of cash, long come through fiat currency? There is a legitimate issue around
on various currencies. I do think we terrorist financing and anti-money
have a long way to go but I believe it AH: I don’t think that it’s a mutually laundering but the costs for players
is moving in the right direction. And I exclusive exercise. And that is to comply with this is increasing. As
do certainly think that technological something that I’m a bit frustrated such, I think it's important also to start
improvements are helpful. by in terms of the way that some adding transparency in the course
One of the most interesting things of the new crypto and blockchain of compliance. This is because, even
that I've seen in our businesses companies position themselves – though we have this aspiration to
is the propensity for me-to-me as if it’s something exclusive. The reduce the cost of remittances to
transactions. This means that people global financial system needs a lot of 3%, we don't have a clear roadmap to
are sending money back from improvement, but it’s by no means say that the cost of compliance will
whatever country they are working broken. I mean, it clearly functions. reduce to a specific amount over time.
or living into their bank account in Could it be better? Absolutely. But this This is the type of thing that will also
their home country. This, I think, is doesn’t mean it has to be completely help set the right conditions for more
illustrative of people who have left replaced. competition, more innovation and
their home country and rather than We have partnered with Ripple. for others to solve problems around
just supporting their family, they are We're now partnering with Stellar. Are remittances that we have discussed.
Digital remittances bolster

economic empowerment
Digital remittances are improving lives, but more can be done to improve
their reach and effectiveness, writes Chad Harper, senior fellow, Visa
Economic Empowerment Institute.
TRANSFERS OF MONEY by migrant workers to their an automated telling machine or agent and walking
home nations provide a lifeline for millions of families, around with a significant amount of money. There
as well as a boost to the gross domestic product of is some sense of physical security in having funds
many countries around the world. According to the directly deposited into a debit card or e-wallet, which
World Bank, as many as 28 countries receive up to allows greater access to other digital functions such as
10% of their GDP via remittance flows. Historically, ecommerce and peer-to-peer transfers.
the cost of sending and receiving money across There is a savings dimension too. Enabling women
borders has created barriers, but many money transfer to receive remittances digitally, in addition to providing
organisations are now offering solutions. more physical security and convenience, helps them
Key among the innovations are digital remittances, keep more of their own money and manage it. For
which bring with them the advantages of ecommerce. example, research from Women’s World Banking
These digitally-initiated remittances have proven has shown that women save on average 10%-15% of
indispensable during the pandemic, as physically their earnings despite low and often unpredictable
visiting an office and using cash became difficult. incomes. However, low-income women often face
Digital remittances frequently take advantage of some barriers to accessing a safe place to save — due
newer money-movement networks to mobility and time constraints,
and capabilities, and, in addition to as well as lower levels of financial
‘While the sender of a
being faster and more transparent literacy. The research suggested
digital remittance is
than traditional remittances, digital that women can be forced to save
moving money across
remittances are more affordable and in less reliable ways — at home in a
borders from a smart
secure. drawer or under a mattress, by buying
phone or computer, the
World Bank data show some excess stock for their businesses or
recipient, often a woman, is
interesting trends in the average cost through a neighborhood savings club.
frequently picking the cash
of sending a $200 remittance using Remittances received digitally can help
up in person.’
different payment methods. As of them store the money they receive.
the first quarter of 2021, only card- This added safety and convenience
initiated remittances offer an average cost below 5% should not be accompanied by digital insecurity, so
and have costs that have declined for the last five first digital remittances and methods for receiving them
quarters. It is the only method currently on a path to must provide safety, resilience and reliability.
meet the UN’s 3% cost target in the near future. So, what do we need to do to bring the benefits
Digital remittances are also important for the of digital remittances to more people? We need to
economic empowerment of women. Currently, the enable more migrant workers to move money digitally,
term ‘digital remittance’ describes how a remittance of course. Money transmitters and fintechs are making
is initiated — through a digital payment method. great progress here. Other important steps include
However, the vast majority of digital remittances are leveraging networks in innovative ways to reach
still picked up from a physical location in cash. While more people and digitally enabling the people and
the sender of a digital remittance is moving money communities who receive remittances.
across borders from a smart phone or computer, the
recipient, often a woman, is frequently picking the cash Networks of networks are key to global reach
up in person. Next generation money movement capabilities are
This is a problem. The act of receiving these funds playing a starring role in the rise of digital remittances.
may involve traveling from remote locations, going to Visa direct is one of these capabilities. It is a fast
omfif.org 61
'In 2021, Visa direct facilitated over 5bn transfers and

leveraged a variety of card, automated clearing house
and real time payment networks to move money.'
Bank
Remmitance cost trends by funding method; Q1 (2017-21) account Cash
Mobile Debit/
money credit card
Source: World Bank Remmitance worldwide quarterly transfer
and secure push payments platform that enables digitally, otherwise we will just continue to see the
financial institutions to offer person-to-person, remittance process end with a cash withdrawal, which
business-to-small-business, business-to-consumer has societal costs. For a person to be able to spend
and government-to-consumer payments. There digitally, there has to be broad digital acceptance
are dozens of use cases, but the global reach of Visa among businesses in that person’s community, which is
direct is important to remittances. Visa direct can no small feat in many countries.
reach more than 5bn accounts and cards in more than This means that policy-makers must think about
170 countries, greatly expanding payout and money many things, some of which are quite fundamental.
transfer opportunities beyond what we typically think Beyond electricity and broadband availability, things
of as the card network. In 2021, Visa direct facilitated like digital identity can also be thought of as helpful
over 5bn transfers and leveraged a variety of card, infrastructure. And then there is digital payments
automated clearing house and real time payment acceptance by sellers. Policy-makers must think
networks to move money. In the future, we hope to of consumers and merchants together. Promoting
deliver money to digital wallets to reach even more access to digital infrastructure is just as important as
people who do not have access to traditional banking. encouraging digital payments. Countries that have
driven digital most successfully over the last decade
Increasing access to digital services have worked to drive adoption on both sides, through a
At a basic level, digital enablement would mean that variety of tools and incentives.
a person has an account, card or wallet which would In the end, true digital remittances will be achieved
allow them to receive and hold funds sent digitally. when families can receive money digitally then use it
But this alone is not true digital enablement. Digital nearly ubiquitously in their everyday lives. This is where
enablement means that there is an ecosystem we want to be. Getting there will require the public and
available for the recipient to spend their money private sectors to work together.
Chapter 6
Balancing regulation with innovation
A new emphasis on resilience rather than cybersecurity is a first step but regulators want to
go further. Should nascent resilience regulations be strengthened? By Simon Brady.
CYBERATTACKS ARE NOW the continues to grow in scale and technological innovation, so too have
foremost risk to the global financial sophistication at an alarming rate. In criminals. Hackers are now using the
system. In the words of Fed Chairman terms of overall losses, Cybersecurity same behavioural analytics and artificial
Jerome Powell, ‘I would say that the Ventures expects global cybercrime intelligence and machine learning tools
risk that we keep our eyes on the most costs to grow by 15% per year over as cybersecurity firms. It is not fanciful
now is cyberrisk… That's really where the next five years, reaching $10.5tn to foresee a looming battle between
the risk I would say is now, rather than annually by 2025 from $3tn in 2015. machines in cyberspace.
something that looked like the global As it points out: ‘This represents
financial crisis.’ the greatest transfer of economic Hyperconnectivity dangers
Powell is hardly alone. The Bank wealth in history, risks the incentives The increasing interconnection
of England’s systemic risk survey has for innovation and investment, is of businesses and their financial
consistently cited cyberrisk as one of exponentially larger than the damage counterparties means that third-
the top threats to the financial system. inflicted from natural disasters in a year, party suppliers can be the trigger for
Elisabeth Stheeman, an external and will be more profitable than the domino-effect breaches in which a
member of the Bank of England’s global trade of all major illegal drugs hacker gains access to one organisation
financial policy committee and its combined.’ and jumps from there to other client
financial market infrastructure board, This acceleration in attacks and and supplier systems. BlueVoyant
has emphasised the significance of losses is inevitable for a number of Research in 2021 showed that 82% of
cyberrisk to the ‘financial plumbing’ reasons. UK organisations who had experienced
that underpins the global financial Most obviously, extremely rapid a cybersecurity breach stated that the
system and highlights that ‘the FPC has digitalisation across both public and breach originated from vulnerabilities in
identified two priority areas to promote private sectors is expanding the so- their vendor ecosystem.
systemic operational resilience: called ‘attack surface’ available to These trends have been
cyber[risk] and payments.’ malicious actors. The attack surface is turbocharged by the Covid-19
And Pablo Hernández de Cos, chair every piece of information technology, pandemic. This has accelerated
of the Basel Committee on Banking every element of digital connectivity, the shift towards remote working
Supervision and governor of the Bank that is susceptible to hacking. As and created a host of new cyber
of Spain, referencing two recent BIS businesses move their customer or threats. The increased attack surface,
papers on operational resilience and supplier interfaces to mobile or the employee mistakes and weak
operational risk, emphasises, ‘The web, as they move storage, applications authentication practices are all factors
risks from cyber threats and incidents and processing to the cloud and as that cybercriminals have been able
to the global banking system have they and their counterparties rely to exploit when looking to breach a
been increasing over the past years. ever more heavily on digital tools to company.
Covid-19 has further heightened these move money and information, they
risks. In light of the evolving nature multiply the points of access that an Criminal nations
and scope of cyber risk, banks must unauthorised person could use to enter Another development makes
continue to improve their resilience to their systems. sophisticated attacks on financial
cybersecurity threats and incidents.’ This digital evolution works both infrastructure more likely. Over the
These fears are justified. Cybercrime ways: just as businesses have embraced past five years, the lines between
omfif.org 63
nation state-sponsored and organised ‘Cybercrime continues be completed. There are scenarios in
crime gang hacking activities to grow in scale and which a large financial institution would
has become increasingly blurred. sophistication at an lose the ability to track the payments
Traditionally, attacks which appeared alarming rate.’ that it's making and things like that,
to be financially motivated would be where you would have a part of the
ascribed to criminals and those aimed financial system come to a halt, or
at disrupting critical infrastructure, perhaps even a broad part.’
testing defences or disrupting political One reason for this concern is that
processes would be defined as nation much of the underlying infrastructure
state espionage or cyberwarfare. of the global payments system is more
These distinctions have broken organisations’ defences against than 20 years old. It comprises a set
down as governments conduct cyberattacks were solid. But they are of legacy components designed long
cyberattacks for financial gain, as they not. There is a significant problem before today’s cyberthreats emerged.
use or even nurture criminal gangs for around disclosure of successful attacks, This infrastructure includes that of
political operations or as sophisticated but the statistics that are available central banks, commercial banks
‘exploits’ (pieces of code that exploit suggest that hackers are getting better and their correspondents, the global
a particular vulnerability in a piece of at getting inside. For example, the automated clearing house network and
software) developed by governments CyberEdge Group’s 2021 ‘Cyberthreat local clearing houses, other regulated
fall into the hands of criminals. Defense Report’ found that 86.2% of financial market utilities, core payments
This blurring suits both sides. surveyed organisations revealed that backbones such as SWIFT and major
Nation states shield themselves they were affected by a successful card processors like Mastercard and
from attribution and culpability, while cyberattack, up from 61.9% in 2014. Visa.
criminals find someone willing to pay Many of these systems have
them for their services and stolen data. The cyberthreat to the payments had cybersecurity bolted on as an
Brad Crompton, cyberthreat system afterthought at a time when they
intelligence analyst, Intel 471, believes The global payments system sits at are under extreme stress from rising
that this trend is here to stay. ‘The the intersection of all these trends. volumes. For example, the total volume
trend of cross-over between nation This is perhaps why Powell, in defining of payments processed by the Fed’s
states and the criminal underground is cyberrisk as the greatest risk to the fedwire funds service is 50% higher
likely to continue for the foreseeable financial system overall, singled out as than a decade ago. And payments via
future, especially with this symbiotic particularly worrying a hack that might ACH payment networks − the type
relationship being a win-win for both shut down a major payment processor, that are used to process payroll direct
parties. Cybercriminals can monetise causing a domino effect that could deposits, utility direct debit payments
accesses and glean data of interest disrupt broad swaths of the financial and other common transactions − have
while nation state actors can gather system. nearly doubled.
confidential information or intellectual In his words: ‘There are scenarios The problem is not just the total
property.’ in which a large payment utility, for volume of payments. It is also the
The increase in attacks or threat example, breaks down and the payment timing and importance of transactions.
sophistication would not matter if system can't work. Payments can't As business moves to a 24/7 operating
model, and real-time payments 6.1 Cybersecurity

100
are becoming the norm, payments attacks are
90
infrastructure must accommodate becoming more
more payments, increasingly after 80 successful
hours and on the weekend, and the 70
Survey
need to transfer funds from sender 60 respondents
to receiver quickly. This creates both 50 saying their
organisation had
resiliency and security issues. Stressed 40 been compromised
systems are often vulnerable systems. 30 by at least one
Whatever the cause, hacks successful
20
associated with these legacy cyberattack, %
10
components are becoming more Source: 2021
brazen and more successful. The
0 Cyberthreat
2014 2015 2016 2017 2018 2019 2020 2021
Defense Report
Bangladesh Bank heist of 2015
showed how a combination of a nation
state attack, compromised SWIFT
credentials, malware and clever timing massive increase in payments value,
‘The resilience of core
could net criminals $81m stolen from requiring banks to process additional
payments infrastructure
a central bank even with the Fed payments equal to about three times
is inextricably bound up
watching. their daily reserves on average… We
with the resilience of the
Central banks also continue to be estimate that the impairment of any of
large commercial banks
targets. In 2018, De Nederlandsche the five most active US banks will result
that make it work and who
Bank President Klaas Knot reported in significant spillovers to other banks,
are all dependent on each
that their own website was being with 38% of the network affected on
other.’
attacked ‘thousands of times per day’. average.
In August 2019, the ECB reported that ‘The impact varies and can be larger
one of its websites had been hacked. on particular days and geographies.
In January 2021, the Reserve Bank of When banks respond to uncertainty by
New Zealand said that one of its data liquidity hoarding, the potential impact
systems had been breached by an in forgone payment activity is dramatic,
unidentified hacker who potentially reaching more than 2.5 times daily GDP.
accessed commercially and personally In a reverse stress test, interruptions
sensitive information. originating from banks with less
FMUs are also potentially the than $10bn in assets are sufficient
triggers for very significant feedback to impair a significant amount of the
and amplification of cyberattacks both system. Additional risk emerges from
against the utilities themselves and any third-party providers, which connect
large bank in the system. otherwise unrelated banks, and from
In ‘Cyber Risk and the US Financial financial market utilities.’
System: A Pre-Mortem Analysis’,
Fed staffers Thomas M Eisenbach, Systemic third-party risks
Anna Kovner and Michael Junho Lee Mentioned almost as an afterthought,
model how a cyberattack may be third-party providers are one of the
amplified through the US financial most significant emerging risks to the
system, focusing on the wholesale system. Having been reluctant to move
payments network. They find that ‘a to the cloud for a number of reasons,
successful cyberattack on a large US large global and regional banks are now
institution would also have a significant concluding that they have no choice.
impact on the liquidity of systemically This creates significant new third-
important FMUs. Vice versa is also true party dependencies with important
– breakdown in normal functioning of ramifications for payment system
FMUs that provide liquidity-savings, security and regulation.
such as the Clearing House Interbank Among many examples, at the end
Clearing System or Continuous of 2020 Deutsche Bank and Google
Linked Settlement, can dramatically Cloud signed a ‘cloud and innovation
affect liquidity if banks replace those partnership’ to create the next
intermediaries with payments through generation of cloud-based financial
Fedwire. services.
‘An FMU impairment would require a Around the same time, as part of a
omfif.org 65
$10.5tn
multi-year transformation to operate of new non-bank payment firms,
entirely out of the public cloud with many of whom are payment initiation
Amazon Web Services, Capital One service providers authorised to initiate
exited all of its remaining data centres, transfers directly to or from bank
moving all applications and systems to
Expected cost of cybercrime by accounts using the bank’s own tools.
2025
AWS. The bank’s senior vice-president In Europe, for example, according to
of technology, Chris Nims, explains, ‘We Mastercard, by the middle of 2021, 497
sought to completely redefine who we third-party providers were registered
are as a company, to build a technology to provide open banking services
company that does banking, instead of in Europe — in addition to regulated
a bank that just uses technology. We banks.
needed to become great at building In the US, the financial data
software. And we needed the top exchange — a group of banks, fintechs
engineering talents to do it.’ and financial services groups — has
And in September 2021, JPMorgan aligned around a single data sharing
announced that it was moving its US standard and is supporting the
retail bank onto an AWS-based cloud adoption of open banking frameworks
using software developed by UK across the country.
fintech Thought Machine. In Europe, open banking legislation
Given the concentrated nature of came into effect in September 2019
the market for cloud service providers, and the UK mandated data sharing
any large-scale move to the cloud by among its biggest banks the year
systemically important banks will create before.
a critical dependency on an opaque In Asia Pacific, the first phase of
and unregulated group of technology Australia’s consumer data right, which
providers, themselves already open facilitates open banking, went live in
to cyberattacks, and becoming more July 2020. In South Korea, the new
attractive to both criminal and nation MyData initiative builds on the existing
state actors as they become conduits
for the world’s financial transactions.
The new ecosystem 6.2 Phising

Overpayment attacks are the
Other connected third parties are
most widely
multiplying fast as digitalisation and Government impersonation
reported
deregulation accelerate. As a result, cyberattack
Advance fee
the payments system has come to
Types of
include a host of new and not-so-new Real estate/rental cybercrime
platforms, from veterans like PayPal most frequently
Tech support
to newer global payment service reported to the
providers of various kinds, such as Internet Crime
Employment
Complain Center
Stripe, Square, Adyen and Wise. Digital
Credit card fraud Source: Federal
wallets and mobile payments services,
Bureau of
from Apple, Google or Amazon Pay, to BEC/EAC Investigation
those created by large retailers, such
as Walmart, and phone providers, like Harassment/threats of violence
Samsung, are proliferating.
Confidence/romance fraud
And there are dozens of other
payment gateways and merchant Misrepresentation
services providers overlaid onto
Spoofing
the core payments infrastructure,
including the burgeoning peer-to- Identity theft
peer app market, names like CashApp
Personal data breach
(owned by Square), Venmo (owned by
PayPal) and Zelle (owned by Bank of Extortion
America, Capital One, Truist Financial
Corporation, JPMorgan, PNC Bank, US Non-paymnet/non-delivery
Bank and Wells Fargo.) . Phishing
In particular, open banking initiatives
0 50,000 100,000 150,000 200,000 250,000 300,000
around the globe are creating hundreds
2019 open banking regulation. In India, ‘To reduce cyberrisk to

the Unified Payments Interface is the payments system, Reducing cyberrisk: a policy
essentially an open banking platform. first that risk needs to roadmap
And there are initiatives from Nigeria, be defined. This means Tackling cyberrisks in this tangled
Brazil, the Middle East and Caribbean. moving away from payments infrastructure ultimately
All of these platforms and players talking about threats means ensuring that systemically
are vulnerable to cyberattack and, and cybersecurity – the important banks, central clearing and
because in most cases they are linked technical means with settlement mechanisms, core payment
via APIs to banking and card networks, which we attempt to stop gateways and platforms, and other
they vastly increase the potential attack threats – and towards a providers of technology upon which all
surface into those core elements of the strategy for mitigating these service providers depend, can
payments system. The fact that most the impacts that those maintain critical operations even when
of them are also mobile applications as threats may create.’ cyberattacks succeed.
well as web-based creates additional This will require a complicated mix
cybersecurity risks that must be of private sector technology, updated
managed. regulation and legislation, better
Digital payment services created collaboration between the financial
by central banks have already been services industry and law enforcement,
successfully hacked (see case study a better understanding of the key
on Pixstealer) and the level of attacks dependencies within the system and
on the big private sector platforms is a re-evaluation of the role of the large
astonishing. Alibaba Group thwarts payment platforms and the big cloud
300m hack attempts per day, providers.
according to founder Jack Ma, and it In this process, policy-makers
intercepted 2.2bn cyberattacks on a must distinguish between the overlay
single day – 11 November 2019, also systems that provide front-end
known as singles day, China’s version of services by using existing infrastructure
black Friday or cyber Monday in the US to process and settle payments, such
– according to Jessie Zheng, chief risk partner. That is new for Deutsche as ApplePay, Google Pay or PayPal,
officer at Alibaba. Bank — this was a closed shop. And and the core infrastructure upon
Smaller platforms are targets too now we want to integrate them into which they rely (the commercial and
and the pandemic has caused a rise our offering. We have a tremendous central banking systems and related
in downloads of payment apps and opportunity on giving them access clearing and settlement processes).
fraud attempts via those apps. One to our huge customer base, and while Understanding and managing the
example is CashApp. According to the on the other side, enabling them interplay between these newer fintechs
US Consumer Financial Protection to consume our services, because and the core payments system is
Bureau, the agency has ‘received 1,559 when we moved to the cloud, it was critical.
complaints concerning Square, under quite cumbersome for them to be Closed-loop systems which provide
which any Cash App complaints are complementary in the past. And why front-end to back-end services
filed. The majority of which involved not team up and offer the services proprietary to their respective firms,
money transfer, virtual currency or which we offer to the customers as well and do not interact with or depend
money services issues.’ to them?’ much on the existing payment
And in a notorious example, The complexity of this whole infrastructure, such as Alipay, M-Pesa
BuzzFeed News found US President system, the rapidity of its evolution and and WeChat Pay, should be considered
Joe Biden’s Venmo account after the fact that it is ‘where the money is’ separately.
less than 10 minutes of searching for makes it an ever more attractive target More controversially, systemically
it, revealing a network of his private for criminals looking for a financially critical payment functionalities now
social connections, ‘a national security rewarding target. For them, the faster depend (indirectly for now at least)
issue for the United States and a major and more efficient payments become, on commercial banks themselves
privacy concern for everyone who uses the faster and more efficient payment increasingly reliant on largely
the popular peer-to-peer payments fraud becomes. unregulated third-party providers
app.’ The system is also vulnerable to of public cloud services and other
This threat landscape is being politically motivated attacks. Disrupting fintechs. If large cloud providers end
further expanded by the desire banking, commerce and the flow of up as the de facto platforms upon
of banks to work with fintechs, as money through an economy is an which the global financial system
Deutsche Bank’s chief technology, data effective tool of cyberwarfare and ultimately relies, then do they need
and innovation officer, Bernd Leukert, attackers can cause havoc either by to be regulated as critical national
makes clear: ‘I want to reiterate that we targeting key payments providers or by infrastructure just as key banks are
want to onboard fintechs — we want to targeting individual banks. today?
omfif.org 67
So what can be done to reduce

the risk that a cyberattack will cause
material damage to a payment system ‘Pix has already
or, via a payment system, the wider reached 40m
financial ecosystem? transactions a day,
moving a total of
Strengthen policy framework around $4.7bn a week.’
resilience in regulated firms
To reduce cyberrisk to the payments
system, first that risk needs to be
defined. This means moving away from Pixstealer:
hacking Brazil’s
talking about threats and cybersecurity
– the technical means with which we
instant payment
attempt to stop threats – and towards a
strategy for mitigating the impacts that
those threats may create.
The core risks to the payment
system include: ecosystem
- A reduction in the ability of payment, To cope with demand and improve access to and awareness of
settlement and clearing providers to financial services, banks and governments are developing new
complete transactions in general infrastructure, protocols and tools. One of the most successful
- Damage to a systemically important examples of such initiatives launched during the pandemic is Pix, the
bank or FMU and the associated instant payments solution created by the central bank of Brazil. Pix
feedback loops is a state-owned payments platform that enables consumers and
- Disruption to payment gateways companies to make money transfers from their bank accounts without
reducing the ability of the public to be requiring debit or credit cards. Released in November 2020, Pix has
able to pay for goods and services already reached 40m transactions a day and moving $4.7bn a week.
- The escalation of a single incident into That large number of transactions attracts hackers. In April 2021,
a broader shock to confidence in the security researchers noticed that two newly discovered malicious
financial system. Android applications on the Google Play store specifically targeted
Pix users and tried to lure them into transferring their account
All of these could be triggered by balances to criminals’ accounts.
a cyberattack against a significant ‘The attackers distributed two different variants of banking
bank or platform. Even in the recent malware, named PixStealer and MalRhino, through two separate
past, it would have been left to the malicious applications… to carry out their attacks,’ according to
cybersecurity functions of each of Check Point Research. ‘Both malicious applications were designed to
the threatened organisations to put steal money through user interaction and the original Pix application.’
technology solutions in place to create PixStealer, which was found distributed on Google Play as a fake
an impenetrable perimeter around PagBank cashback service app, is designed to empty a victim's funds
the critical functions and data of the to an actor-controlled account, while MalRhino – masquerading as
organisations. a mobile token app for Brazil's Interbank – comes with advanced
That traditional view of cybersecurity features necessary to collect the list of installed apps and retrieve
has largely yielded to the realisation personal identification numbers for specific banks.
that digitally connected entities do ‘When a user opens their Pix bank application, Pixstealer shows
not have a securable perimeter, that the victim an overlay window, where the user can't see the attacker's
determined attackers will be able to moves,’ researchers said. ‘Behind the overlay window, the attacker
breach any security technology and that retrieves the available amount of money and transfers the money,
therefore organisations and regulators often the entire account balance, to another account.’
must strengthen the policy framework These malware do not by themselves represent a threat
around operational and cyber resilience, to Brazil’s core payments infrastructure. However, they do
and around collaboration between underscore the broader threat to stability. The more the public
regulated firms. moves to these types of platform, the more disruption threatens
Unlike approaches that focus on to undermine confidence in the broader banking system and
repelling cyberattacks, resilience economy. This worries central banks and shows how even
assumes process and service failure unregulated payment providers, if they carry enough payment
or degradation. It takes the traditional traffic, become part of the broader financial core national
concept of operational risk and business infrastructure of a country. Is it time to regulate them as such?
continuity planning and extends those
ideas to critical business processes. business.’

A bank or other financial services
provider is ‘operationally resilient’ if, in
the event of any operational disruption
2.2bn
Cyberattacks intercepted by
To achieve this objective, the Bank
has set out policies on the operational
resilience of FMIs, payment system
(no matter how big or small), it is able to operators, central counterparties
continue to provide critical services. Alibaba on a single day and central securities depositories.
Significantly, this concept of The FPC looks at the resilience of the
$81m
resilience is not related to levels of system as a whole and sets out its
harm to the affected organisation priorities twice a year in its financial
nor to financial losses incurred by it. stability report. The prudential
Institutions that have traditionally Amount stolen from regulation committee and financial
measured operational risk and Bangladesh Bank in a 2015 market infrastructure board focus on
identified critical operations in terms cyber heist the operational resilience of regulated
of their own financial loss now need to firms and FMIs. New rules will start to
think about external harm to customers apply from 31 March 2022.
and financial stability as a whole. The Bank’s basic approach to
The Bank of England, Prudential resilience and cyberrisk management
Regulation Authority and Financial is the same across all of the payments
Conduct Authority have taken infrastructure it identifies: core firms
the global lead in promoting the and financial market infrastructures
operational resilience of firms and must establish a penetration-
financial market infrastructures firms. testing programme as the heart of
And, as the FPC’s Stheeman highlights, their ‘prevention’ mechanism. More
‘The FPC has identified two priority importantly, they must satisfy the
areas to promote systemic operational authorities’ baseline expectations
resilience: cyber and payments.’ for resilience, tailored to reflect the
These priorities are reflected in importance of firms and the services
policy statements dating back to 2018 they provide for the financial system.
when the UK authorities published a Both the cyber and more generalised
joint discussion paper on operational resilience capabilities must be regularly
resilience. This was followed, in tested and firms should have clear
December 2019, by a suite of papers and robust arrangements to respond
to consult on the policy approach. to cyber incidents when they occur.
Payment system resilience is at their Regular cyber stress testing will be
heart. used by the authorities to test firms’
The Bank of England’s March 2021 ability to meet operational resilience
supervisory statement, ‘Operational targets.
Resilience: Recognised Payment
System Operators and Specified Theory versus practice
Service Providers, March 2021’, states: That is the theory. Difficulties begin
‘The Bank considers operational when regulators try to operationalise
resilience of payment systems to be a these ideas. Assessing and quantifying
key part of the task of protecting and cyber and operational risk is difficult,
enhancing financial stability. Payment as is measuring and testing resilience.
systems should be both efficient and The FPC approach is to set ‘impact
operationally risk-robust in order to tolerances’ for how effectively critical
play the critical role required of them financial companies should be able to
within the UK economy. This is to restore vital financial services following
ensure that they are both not a cause of a severe but plausible cyber incident.
financial instability and do not transmit Consistent with the FPC’s remit, these
and exacerbate financial instability that will be calibrated to ensure financial
originates elsewhere.’ stability and avoid material economic
Elsewhere the Bank describes harm. As such, these tolerances will not
payments resilience as a primary imply zero disruption.
objective of its entire resilience effort: However, at the moment, it has been
‘To keep retail and wholesale markets left to banks and other FMIs to identify
open and functioning… Specifically, we their own important business services
aim to keep payment and settlement (those that are systemically important).
systems open to complete the day’s It has been left to them to identify the
omfif.org 69
6.3 Many different types of attacks can cripple ability to settle transactions
Cyberattack types and impacts
Source: Depository Trust & Clearing Corporation, Oliver Wyman
Example Ransomware Malware attack on Disruption of a major Initiation of multiple Initiation of

attack involving stock exchange wholesale payments coordinated fraudulent trades by
deletion of data at data centres to system over a fraudulent insiders, using stolen
a custodian bank manipulate stock 24-hour period, transactions non-public press
or a large central prices, with the goal causing inability to leveraging a major release information
security depository, of financial gain and settle transactions, payments system, provided by hackers
disrupting the disruption of market potential failures of causing financial
purchase and sale of integrity banks and CCPs, loss and lack of
securities lack of confidence in the
confidence, and a integrity of the
direct impact on payments system
Increasing stock markets
systemic
consequences
Credit and
liquidity crisis
Widespread
loss of trust
Eroded
integrity
and efficiency
Inability to
settle
transactions
Outage of a
critical player
Signicant
financial loss
Cyberattack Deletion of critical Manipulation of Disruption of Fraudulent Theft of critical

data critical data critical industry- transactions non-public
categories
Compromise of Compromise of wide services Initiation of information
the availability of integrity of data Disrupted fraudulent Compromised
data critical for critical for the availability of critical transactions condentiality of
the accurate and accurate and payments, clearing, leveraging industry-critical non-
effective functioning effective functioning and settlement critical payments public information for
of payments, clearing, of payments, services of multiple infrastructure use in insider trading,
settlement processes clearing, settlement institutions for an market manipulating
through data deletion processes through extended period of action or intelligence
data manipulation time gathering
processes required to deliver those

services and to decide on the maximum ‘Last year, the Bank of
tolerable disruption to each of those England opened bidding
services. for a cloud partner, with the
Importantly, even the way that goal of creating a fit-for-
organisations test their resilience is left purpose cloud environment
to them. For example, resilience testing that could better support
is based on defining ‘extreme but operations in a digital-first
plausible scenarios’ and then modelling environment.’
the impact of these on the identified
important businesses services and
the knock-on effects on clients and
financial stability.
This leaves the regulators in the odd
position of not having defined the thing
they want to promote (resilience and
impact tolerance), the specific types
of systemic harm they wish to avoid,
the underlying systems and processes
they would like prioritised or any kind
of quantification of any part of the
process.
Predictably, institutions have
questioned this approach, arguing that
to achieve any kind of standardisation,
the authorities need to provide more
clarity on these key issues. Off the
record they describe the approach as
little more than a ‘fishing expedition’ in
which the regulators, unable to define
any of these elements themselves, are may vary according to the risks and Global convergence
waiting for the banks and other FMIs to vulnerabilities identified. As such, the Other regulators have followed. In late
do it for them. Bank does not consider that it would 2020, the board of governors of the
Worse, the lack of guidance has be helpful to provide a set of defined Federal Reserve System, the Office
meant that most organisations have scenarios.’ of the Comptroller of the Currency
taken a narrow business continuity- It is also easy to question the and the Federal Deposit Insurance
based approach to the notion of authorities’ resilience timeline. In a Corporation issued an interagency
impact tolerances. That is, they have world of extremely rapid change, paper on sound practices to strengthen
defined an impact as a disruption to from political to technological, ‘The operational resilience. In March 2021,
a key technology process and the Bank considers that the proposed a few days after the UK’s regulators
tolerance as a single time-based timeframe of 12 months from the finalised their supervisory approach
metric for returning that process to publication of the final policy is to operational resilience, the Basel
the desired operational state. This appropriate. This will provide enough Committee on Banking Supervision
is not a true resilience approach and time for CCPs to be able to identify published its finalised principles for
differs little from previous operational important business services, set operational resilience for banks. In the
risk management or disaster recovery appropriate impact tolerances and EU, political negotiations on the digital
processes. regularly test their ability to meet operational resilience act continue
An indication of the Bank of tolerances with due regard to the to proceed in both the European
England’s response to this type mapping of dependencies. CCPs will Parliament and European Council, and
of criticism is this pushback in one have up to three years from 31 March several EU financial supervisors have
consultation paper: ‘The Bank expects 2022 when the policy takes effect to clarified their plans and expectations
central counterparties (CCPs) to take all reasonable action to ensure of firms.
undertake an assessment of the they remain within impact tolerance There are differences in approach.
operational risks that are relevant for each important business service in The US paper is simply an aggregation
to their important business services the event of an extreme but plausible of existing regulations around
and incorporate those risks in the disruption. We believe this gives CCPs operational risk and supervision
design of disruption scenarios for the the necessary flexibility to take action rather than policy-making. The BCBS
purpose of testing. The nature and to enhance their resilience.’ restricts itself to banks. DORA is
severity of scenarios for CCPs to use more specifically tied to technology.
omfif.org 71
And, outside the UK, the emphasis is ‘The resilience of core being outsourced to the cloud. As you'd
still mostly on the ability of firms to payments infrastructure is expect, we track that quite closely.’
withstand loss, rather than to maintain inextricably bound up with The accelerating level of reliance
operations whose loss would threaten the resilience of the large on the cloud, and the fact that cloud
the stability of the national or global commercial banks that outsourcing has moved from peripheral
financial system. The definitions of core make it work and who are all banking systems to core systems,
business services, impact tolerances dependent on each other.’ worries regulators for a number of
and other key terms also diverge. reasons. Cloud giants are themselves at
However, the key jurisdictions risk of attack, putting their customers
generally converge on the idea that at risk. In addition, they are notoriously
operational resilience is the key to unwilling to provide information on
ensuring the stability of the financial their own resilience, to such an extent
system. They also share a belief that this opacity has been cited by
that cyberrisk is a critical threat and respondents to Bank of England
the payments system is the most consultancy papers as a stumbling
significant vector through which a block in their efforts to meet their own
systemic risk could spread. These obligations under the new resilience
papers represent a consistent global regulations.
push to make resilience a core aspect As Bank of England Governor
of how banks think about operational Andrew Bailey points out, ‘Cloud
risk, and how they construct and evolve service providers are an increasingly
their operating models. integral part of the infrastructure of the
financial system… but as they become
Regulate cloud service providers as more integral, obviously systemic risks
critical national infrastructure increase and it becomes much more of
The current resilience frameworks a matter of focus… [and] the model has
provide some confidence that been developed in quite an opaque and
regulators and the regulated can build closed fashion. Now I understand part
systemic durability in the face of the of the reason for that [is] we don't want
cyberrisks they can imagine today. But people publishing how this thing works
they leave out the most significant in great detail so that attackers get ‘the
vectors over which tomorrow’s guidebook’ as it were… but as regulators
cyberrisks will be transmitted. If concerned with financial stability, as
maintaining and regulating the current they become more integral to the
payments infrastructure is the right system, we have to get more assurance
model, then the regulators will need that they are meeting the levels of
to extend their reach to the digital resilience that we need.’
dependencies already emerging and In the UK, regulators have come to
those that will come after. the conclusion that additional policy
The resilience of core payments measures are needed to mitigate
infrastructure is inextricably bound financial stability risks in this area.
up with the resilience of the large In the July financial stability report,
commercial banks that make it work the Bank of England wrote of cloud
and who are all dependent on each service providers, ‘The FPC is of the
other. These, in turn, are becoming view that additional policy measures
increasingly dependent on a range of to mitigate financial stability risks in
unregulated third-party suppliers. Most this area are needed and welcomes
visibly, they are moving rapidly onto the engagement between the Bank,
public clouds. FCA and HM Treasury on how to tackle
The level of adoption has risen these risks. The FPC recognises that,
rapidly in the last 18 months and absent a cross-sectoral regulatory
regulators have noticed. As Sam framework and cross-border co-
Woods, chief executive officer of the operation where appropriate, there are
PRA, says, ‘Our position [on whether limits to the extent to which financial
or not to regulate] has moved on a bit. regulators alone can mitigate these
The reason for that is a very simple risks effectively.’
one. We've crossed a further threshold It’s not just the commercial banks.
in terms of what sort of systems and Last year, the Bank of England opened
what volumes of systems and data are bidding for a cloud partner, with the
goal of creating a fit-for-purpose

cloud environment that could better
support operations in a digital-first
environment. At the time, the institution
said that it had already been in talks
with Microsoft's Azure, Google Cloud
and AWS, and that it would likely be
targeting Azure. The possibility of
adopting a multi-cloud strategy was
also raised.
Extend the regulatory framework to

the broader payments ecosystem
If the principle is established that
critical third-party dependencies
must be regulated to preserve the
resilience of core financial services
entities, notably those that underpin
the payments system, then it is
difficult to stop at the major cloud
providers. The payments system, and
the institutions that provide its core, ‘This desire to widen the regulatory net is
depend increasingly on (or can be logical, but is it workable? Should fintechs
attacked through) a broad ecosystem that provide services to regulated firms
of unregulated payment gateways, but which currently lie outside the scope
internet providers, big tech payment of the rules be brought inside?’
services and even interdependent
groups of smaller vendors.
Global regulators have noticed
the implications. In the UK, the ‘As a result, the FPC announced payment chain provides vital services
FPC’s Stheeman says, ‘In the past last year that the current regulatory to the real economy, then that firm
the payments value chain – from framework will need adjustment in should be regulated with a financial
payment initiation, through processing, order to accommodate innovation stability objective, as with the systemic
authorisation and clearing – was in payments. The FPC has therefore payments systems the Bank currently
largely concentrated in a few entities. developed the following three regulates.
Payments used to be the preserve of principles for payments regulation and ‘The third principle ensures that
commercial banks and core payment supervision, which it has set out publicly sufficient information is available to
systems, with ultimate settlement and communicated to HM Treasury monitor payments activities so that
taking place on the central bank ledger.’ to be incorporated in the payments emerging risks to financial stability
‘Now new entrants have emerged landscape review. can be identified and addressed
that could alter the established ‘First, regulation should reflect the appropriately.’
value chain. These range from financial stability risk, rather than the In the same speech she makes it
small businesses and fintech start- legal form, of payments activities – or clear that ‘regulators should identify
ups (some rapidly achieving high said another way, the same level of firms that are not yet subject to
market valuations) to big technology risk should attract the same level of relevant regulation, but which might be
companies offering payment services regulation. Given the increasingly important for financial stability’.
in addition to their core business model, diverse nature of companies becoming Some regulators in the US have
such as Apple. The FPC has identified involved in payments, it is important to come to the same conclusion. In
two risks in particular from these focus on the functions they undertake, October 2021 the Consumer Financial
developments. First, these structural and the risks these functions pose, Protection Bureau issued a series of
changes could lead to systemically rather than the nature of the company orders to collect information on the
important activities increasingly being itself. business practices of large technology
conducted by non-banks. Second, the ‘Second, payments regulation companies operating payments
changes also mean that the complexity should ensure end-to-end operational systems in the US.
of the payments chain is increasing. and financial resilience across payment The initial orders were sent to
Therefore, it is becoming increasingly chains that are critical for the smooth Amazon, Apple, Facebook, Google,
difficult for any single regulator to functioning of the economy. This PayPal and Square. The Bureau will
assess risks across the payments principle simply says that if a firm is a also be studying the payment system
ecosystem. critical link in a payment chain, and that practices of Chinese tech giants,
omfif.org 73
including Alipay and WeChat Pay. ‘The problem with the even suggests the existence of
These orders are motivated by current approaches, interdependencies among third-party
consumer protection, not resilience, including DORA, is that suppliers (“fourth parties”). FIs may
but they show that regulators across they are whack-a-mole thus be reliant on an aggregation or
the spectrum understand that payment solutions to problems network of very disparate services.’
innovation creates new risks that need that will multiply and
regulatory attention. accelerate as innovation DORA – the way forward or a dead
Commercial banks too want more in payments and finance end?
regulation of non-financial players, continues. Regulators One regulator seems to have
and not just to be able to comply with are always playing catch understood the issues better than
new resilience regulations. They want up. Nowhere are they less the rest. The European Commission’s
a level playing field. In its response to qualified to do that than in draft digital operational resilience
the UK Treasury’s payments landscape technology. ’ act is unique in introducing specific
review's call for evidence, Barclays’ requirements for information and
published response agrees that communication technology providers.
‘policy-makers should look to regulate Primarily aimed at financial entities,
according to the principle of “same including credit institutions, electronic
activity, same risks, same regulation”. money institutions, investment
Given the rapid changes taking place firms, insurance and re-insurance
within payments networks, we urge the companies, it also covers critical ICT
government to consider how such an providers. It would mean that cloud
approach could be rapidly developed service providers would formally
and deployed.’ come within the scope of European
Furthermore, Barclays notes that ‘as supervisory authorities for the first
payments chains become increasingly time. Significant penalties can also be
fragmented (and in places opaque), imposed on the ICT service provider
there is a danger that smaller or And what about less visible for non-compliance. A periodic penalty
hidden players, currently outside of dependencies? The solar winds/ payment of 1% of the average daily
the regulatory perimeter, become sunburst ransomware attack targeted worldwide turnover of the ICT service
key and necessary linkages. Should software developed by US software provider in the preceding business year
these linkages fail, there is potential company Kaseya and used to manage can be applied daily until compliance is
for significant disruption. It is therefore networks, systems and information achieved.
vital the regulatory perimeter provides technology infrastructure. The Kaseya This approach goes far beyond
regulators with appropriate oversight ransomware attack occurred on 2 July other regulators’ resilience
across all of the payment ecosystem. 2021, when their servers were infected prescriptions and puts into draft rules
(including an understanding of where by ransomware which spread from the desires of the FPC and others to
such dependencies exist) and includes several managed service providers regulate according to risk and activity
protections and provisions to avoid any to their clients, infecting about 1,500 rather than by type of entity. It also
vulnerabilities. Building on the previous companies worldwide. One high-profile reflects the views of bodies like the FSB
paragraph’s recommendation, we victim was the Swedish Co-op, who which has accepted that dependence
therefore believe that policy-makers had to close 800 stores for a week as on tech firms ‘could lead authorities
should consider how the current the ransomware encrypted their point to consider new approaches to micro
regulatory perimeter could be updated of sale software. The attack didn’t and macroprudential supervision of
to reflect changes in the payment affect the Co-op’s IT infrastructure but firms, infrastructures and activities. In
landscape and bring into scope any targeted their supplier, Visma EssCom, some jurisdictions, they may also raise
parties currently outside the perimeter.’ which uses Kaseya technology and questions for FSB members around
manages the servers used for Co-op their approaches to third-party risk and
Where to stop? tills. give rise to the potential for greater co-
This desire to widen the regulatory net This so-called software supply operation between financial authorities
is logical, but is it workable? Should chain hack illustrates the difficulty with and non-traditional partners such as
fintechs that provide services to the ‘regulate all critical dependencies’ those responsible for IT and security.’
regulated firms but which currently approach. Which company in this chain It also goes some way to addressing
lie outside the scope of the rules be should be regulated – Kaseya, Visma that last issue: if financial regulators do
brought inside? Or should regulators EssCom or Co-op? Who is responsible not regulate the technology providers
rely on indirect mechanisms – for for uncovering this dependency? And as though they are financial firms,
example will the required resilience what about every other operational then who should regulate them? As
mapping exercises force institutions to dependency on pieces of low-level the FPC has said, ‘[We] recognise that,
re-evaluate the resilience of third party software? absent a cross-sectoral regulatory
providers? As the FSB notes, ‘This complexity framework, and cross-border co-
operation where appropriate, there are to high standards of resilience.’ ‘Authorities should promote
limits to the extent to which financial This suggests an entirely different decentralised and distributed
regulators alone can mitigate these path if regulators are willing to take models rather than traditional
risks effectively.’ it. Instead of trying to shore up centralised models. The
So, should everyone adopt a DORA- an infrastructure that was never former, like the internet and
like framework? Is this the solution both designed to be resilient through ever digital currencies, are more
to reducing cyber and other systemic more burdensome regulation that is resilient than the latter.’
risks in the payment and financial doomed to fail, why not accept that
systems? Does it remove the problem the underlying infrastructure, not the
of having to get both financial and non- regulations, is what must change?
financial regulators? In February 2021, there was a more
than three-hour disruption to over a
Embrace the payment revolution? dozen critical central bank payment
De-regulate not regulate? services forming the backbone of
The problem with the current the US banking system, including the
approaches, including DORA, is that Fed’s fedwire funds, fedcash, national
they are whack-a-mole solutions settlement service, fedwire securities
to problems that will multiply and service and some cheque clearing
accelerate as innovation in payments services. The episode followed two
and finance continues. Regulators are significant disruptions to the Fed’s
always playing catch up. Nowhere are payment services that occurred in 2019.
they less qualified to do that than in That disruption, which turned out to
technology. be nothing more sinister than a ‘glitch’,
Moreover, key regulators emphasised the limits of regulation and
acknowledge the benefits of cloud made modernisation seem the more
and other tech. The FSB’s recent logical approach.
report, 'BigTech in finance: Market former, like the internet and digital
developments and potential financial A vision of the future currencies, are more resilient than the
stability implications', agrees that the • Accelerate the modernisation of every latter.
entry of big tech firms into finance part of the payments lifecycle, from the In this version of the future,
has numerous benefits, such as the devices that initiate payments to those cyberrisk reduction and resilience in
potential for greater innovation that process payments such as banks, the payment system do not rely on
diversification and efficiency in the the Fed and other central clearing regulations which by definition cannot
provision of financial services, as well house providers. stay ahead of the problems. Instead,
as helping with financial inclusion and • Instead of penalising cloud usage, the technologies currently deemed
SMEs. prioritise it and ‘as-a-service’ models a threat are recognised for what they
A related report, 'Third-party of payments processing (and other really are: the solution to problems
dependencies in cloud services: banking services). The benefits, as that are caused mostly by the current
Considerations on financial stability outlined by the FSB and PRA, outweigh infrastructure’s increasing inability to
implications', also says that cloud negatives. cope with modern requirements.
service providers can offer benefits • Instead of stifling innovation by This leaves regulators and policy-
over previous technology, including casting the regulatory net ever wider, makers in a difficult position. In the
by creating geographically dispersed regulators and central banks should transition to the new digital world, they
infrastructures and investing in security. work with fintechs and big tech to must balance the needs for stability
Cloud providers may offer significant create the next stage in the evolution with those for the freedom to innovate.
improvements in resilience for FIs, as of the payments industry, with the Today, they, through the banks, may
well as enabling them to scale more encouragement of regulators. ultimately be responsible for ensuring
quickly, deliver improved automation • Make better use of existing standards: the security of the payment system.
and operate more flexibly. Economies for example, any ecosystem participant Tomorrow, as the FPC’s Stheeman
of scale could also result in lower providing payment processing and anticipates, the responsibility for
costs to clients. clearing and settlement services should ensuring the security of digital
And the PRA’s Woods stressed at ensure their services meet availability payments may lie with technology
a July press conference that, ‘I think and compliance standards such as companies themselves. 
it's important [to say that] we don't SOC1, SOC2 and ISO 27001:2013.
want to give the message here that • Most controversially, authorities
we think the cloud is somehow sort should promote decentralised and
of structurally unsound: it isn't... it is a distributed models rather than
robust infrastructure… being managed traditional centralised models. The
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The future of global payments, 2020 1

The future of cross-border payments 2021

Time for renewal in global cross-border payments

INTERNET OF SOVEREIGN DIGITAL CURRENCIES

Authors Report sponsors

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There’s a lot of room for improvement in 1.1. Central

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1.2. Current correspondent banking methods creates barriers for users

Originating Respondent Correspondent Receiving

Different opening hours

involved in settlement processes today.’

What policy-makers are saying

‘Central bank digital

‘While wholesale CBDC is extremely

Central bank digital currencies could

Evolution: upgrading payment

Public and private sector Regulatory,

Existing payments infrastructures cross-border Review interaction between data

not be able to adapt to more efficient 2.3 Big tech

pay later company Afterpay.

cashless have also set up their own programmes

development, SWIFT Go, is a product

by wholesale banking,’ explains Sissens.

‘Open banking and

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leveraging its deep understanding of international be based on different technologies in different

Wholesale payments: curing

we are seeing significant growth and their order-to-cash processes, so

shift to e-commerce may also mean

are the same as they have always

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Speed and security

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Need for integration

different departments within the

What are banks doing?

Taking tokens into account

And, of course, the purity of bitcoin’s

CBDC as part of the token economy

of the delays in cross-border payments Algorand’s Grassano would argue

Five things we learned building a

concerns is a powerful last line of defence. intermittent connectivity.

Identity-based token blockchain eliminates

The road to better remittances

message services (or texting) meant

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REMITTANCES: CONTINUING THE

‘One approach that

cross-border payments landscape ’International banking there tremendous efficiencies to be