Fintechs to play transformative role in cross-border payments: MAS

MAS said the current state of cross-border payments is unfit for the 21st century.

FinTech can potentially play a positive transformative role on two challenges in cross-border payments, Ravi Menon, Managing Director at the Monetary Authority of Singapore said during a keynote speech at Sibos 2022.

According to Menon, challenges in cross-border payments are ‘foundational issues’ that need to be addressed before broader progress can be made.

This is because payments are the lifeblood of the modern economy. Menon said payments connectivity, especially across borders, is a key ingredient for digital connectivity, financial inclusion, and economic integration. 

Unfit for the 21st century

Menon said that currently, the state of cross-border payments is unfit for the 21st century.

“It is slow, costly, opaque, and inefficient, relying on an archaic network of correspondent banks. According to the World Bank, the global average cost for sending remittances is 6.4% of the transfer value. This is particularly painful for the migrant worker who wants to send money home or the small business which wishes to reach overseas markets through e-commerce,” Menon explained.

Menon enumerated three ways to solve challenges in cross-border payments. One is linking up faster payment systems. The second is to build a multi-CBDC common platform and the third is to expand private sector blockchain-based payment networks.

“Linking the faster payment systems of countries is an efficient way to carry over the benefits of cheap, fast, seamless payments from the domestic to the cross-border arena. Singapore has been actively working to connect our PayNow with the faster payment systems of other countries. We started with Thailand’s PromptPay, with a bilateral linkage launched last year, and are now completing our linkages with India’s Unified Payment Interface and Malaysia’s DuitNow. These linkages allow users in Singapore and our partner jurisdiction to transfer funds directly to one another’s bank accounts,” Menon said.

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However, such bilateral linkages are time-consuming and expensive to implement. Menon said Singapore is solving this by creating a multilateral solution that can efficiently link up countries’ faster payment systems. They call it Project Nexus.

Project Nexus aims to address the challenges of speed, cost, access and transparency, in line with the G20 goals set out for enhancing cross-border payments. 

With Project Nexus, users can look forward to faster speed, lower costs, wider access, greater transparency, and higher security.

MAS believes Project Nexus will be a key enabler towards realising the vision of the 10 members of the Association of Southeast Asian Nations (ASEAN) aim to have multilateral payment linkages across the region by 2025.

Linking faster payment systems solve the cross-border payments problem but not settlements. This is where the second solution comes in: a multi-CBDC common platform.

“A common ledger utilising distributed ledger technology can potentially act as the global settlement layer for participating banks. Wholesale CBDCs, which are direct liabilities of central banks, are well suited to be used on such a distributed ledger to support simultaneous settlement or the exchange of two linked assets in real-time,” Menon said.

The third pathway to solving the cross-border payments problem is through private sector led blockchain-based payment networks. Securely-backed stablecoins or tokenised bank deposits issued by private sector players can also be used to enable cheaper and faster cross-border payment and settlement. 

“Unlike private cryptocurrencies, whose prices fluctuate wildly, these digital currencies are suitable as payment instruments on distributed ledgers as they combine the advantages of tokenisation with the reliability of fiat currencies,” Menon said.