Are Policy and Safety Enhancements Enough to Make Cross-Border Payments a Game Changer in Today’s Marketplace?
Cross-border payment systems provide businesses with a way to internationally manage their money just as if they were local in each individual country. This type of technology is not only convenient for users, but also lowers the cost of doing business across borders.
So why haven’t we seen cross-border payment systems become a new standard adopted by all banks and financial institutions?
There are several reasons why most payment systems are still based on local laws and practices within existing domestic banking and financial structures. One reason is that the majority of banks were initially built in one particular country, causing their goals to be geared towards addressing problems locally as opposed to globally. Moreover, most banks typically require individuals to meet certain qualifications in order to open a bank account, which creates variations in risk appetites and internal Know Your Customer (KYC) processes among different entities and locations. Further, cross-border payment systems are fairly new to the marketplace, and thus, are still in the process of improving inefficiencies.
While cross-border payments offer several benefits, such systems currently utilize multiple ubiquitous global payment systems, causing many issues such as lack of common message standards. External factors such as government regulations, also stifle initiatives to further integrate cross-border payments. Lack of a common global standard and variations between payment systems has also reduced the ability of both bank and corporate treasury systems to easily pass data using cross-border payments.
What initiatives are being taken to further enhance cross-border payment systems?
According to a report provided in April 2017 by the Federal Reserve Board to U.S. Congress, Cross-border payments are achieving some improvements. The report states that over the past two years, there have been several efforts to reach desired outcomes for consumer and business payments. Such outcomes, which include speed, security, efficiency, international (cross-border payments) and collaboration, were outlined in the Federal Reserve’s Strategies for Improving U.S. Payment Systems (Strategies Paper), which was published in 2015.
The Strategies Paper included a plan related to cross-border payment efficiency and in March 2016, the Reserve Banks and The Clearing House (TCH) announced their plan to implement the ISO 20022 payment format standard for their domestic and cross-border wire payments systems. The ISO 20022 format facilitates efficiency of cross-border payments by streamlining the exchange of payments information across payment systems that have also adopted the ISO 20022 standard in various countries. The roll out of this standard will occur over several years as outlined by the Reserve Banks and TCH.
Recent developments in rules and regulations relating to cross-border payments in 2016 and 2017 have also assisted improvements in cross-border payments. Such regulatory changes include modifications to record-formatting rules to help create more transparency around the origin of funds and technical changes to allow for additional information to be provided about parties. An amendment to the Consumer Financial Protection Bureau’s (CFPB) remittance transfer rule has also established disclosure, error resolution and other requirements for depository institutions that offer cross-border remittance transfer services. The CFPB also issued consumer protection rules for prepaid accounts, including prepaid cards used for cross-border payments, which are scheduled to become effective next year.
Certain banks and financial institutions are also seeking solutions that can promote efficient cross-border payments. Recently, Wells Fargo enacted a system to reduce the chances of a beneficiary bank returning a wire by using new requirements for initiating cross-border wire payments within the Commercial Electronic Office® (CEO®) Wires service. Wells Fargo’s new policy will require the beneficiary account number, city, and country information on cross-border wire payments and new cross-border wire templates beginning September 25, 2017. The objective of this new process is to create a convenient and secure single point of access to a broad offering of online banking services such as, cash management, credit, investments, and foreign exchange. Additionally, the portal is intended to protect companies from fraud and send alerts when risks are present.
Wells Fargo believes that the CEO system is safe and secure because of its multiple sign-in identifiers, additional requirements for security credentials to make payments and transfer money, and an improved browser equipped with 128-bit Secure Sockets Layer (SSL) encryption that is required to access the payment portal.
What challenges do cross-border payment systems still face?
Despite efforts to improve cross-border payments, concerns around economic sanctions and money laundering activity persist throughout the marketplace. According to the Federal Reserve, data analysis of Society for Worldwide Interbank Financial Telecommunication (SWIFT) correspondent payments from 2011 to 2015, which include remittance payments, suggest an increase in payment volume while value declined. The data further suggests increased concentration in correspondent banking activity due to an increase in the amount of active correspondents declined over the time period. Correspondent banks are financial institutions that provide services on behalf of another financial institution and can facilitate with activities such as wire transfers, business transactions and deposits.
How does this research impact the movement towards cross-border payments? The conclusions above along with additional surveys vetted by the World Bank in various jurisdictions indicate a few outstanding issues: a trend of some global banks withdrawing from correspondent banking relationships, imposing additional requirements for remittance transfers, heightened supervision and the need for continued compliance guidance. The research also suggests that banks may not feel as though they can rely on correspondent banks or money transfer operators (MTOs) to inform risk-based decisions with customers. Trends towards shying away from correspondent relationships hinder the ability of cross-border payments to expand in the industry.
Additionally, cross-border payments are vulnerable to criminal activity such as money laundering or fraud specifically because of irregularities between country regulations. An array of criminal opportunities arise from cross-border transfers, such as Card Not Present (CNP), Cross-Border Card Fraud, Alternative Payments Methods (APMs), and Chargebacks. Risks of such activity are heightened when coupled with the current issues that permeate the correspondent banking industry. The exposure of such situations along with government observations of current payment activities recognize that without a proper anti-money laundering (AML) security system, companies and their customers are at risk to these criminal behaviors.