Even as India is making concerted efforts to expand the international reach of the Unified Payments Interface (UPI), including via interlinkage with the fast payments systems (FPSs) of other countries, a top US Fed official said he is not entirely convinced that interlinking arrangements will necessarily deliver on the goals of more cost-effective and timely cross-border payments for consumers and businesses.
“Today’s consumers and businesses can generally send a payment anywhere in the world, but they all seem to want faster and cheaper global payments, just like we always want faster flights and cheaper airfares. However, I am not entirely convinced that interlinking arrangements will necessarily deliver on those goals,” said Christopher J Waller, Member, Board of Governors of the Federal Reserve System, at the Global Fintech Fest.
As part of its interlinkage initiative with FPSs of other countries, RBI, last month, joined Project Nexus, a multilateral international initiative to enable instant cross-border retail payments by interlinking domestic FPSs.
Nexus, conceptualised by the Innovation Hub of the Bank for International Settlements (BIS), aims to connect the FPSs of four ASEAN countries (Malaysia, Philippines, Singapore, and Thailand); and India, who would be the founding members and first mover countries of this platform.
Currently, the countries that accept UPI include Bhutan, France (E-commerce), Mauritius, Nepal, Singapore, Sri Lanka and UAE.
Waller said: “Not all frictions that slow payments down are bad. Certain frictions are purposely built into the global payment system for compliance and risk-management reasons. Slowing down the speed at which payments are cleared and settled helps banks prevent money laundering and counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments.
“Granted, the practice today of sending payments through an often complex chain of correspondent banks contributes to slower payments that could benefit from efficiency enhancements. However, there is no silver bullet that increases speed and efficiency without tradeoffs,” he said.
He observed that unless new solutions are found, interlinking fast payment systems might increase the risk-management burden for banks that participate in them.
“That is, legal, compliance and operational considerations are critical to the discussion of the promise and challenges of interlinking. Governance, oversight and settlement arrangements also need to be thought through, along with considerations for data privacy,” he said.
Referring to the basic economic theory that payment systems are similar to other networks, in that greater participation is necessary for the network to grow and increase value to its users, Waller emphasised that this is true on a global scale, which in practical terms means that valuable global interlinked networks would have to be founded on underlying domestic networks with a breadth of senders and receivers.
“Domestic networks need to be developed first. If this condition is not in place, interlinked networks could end up being a road to nowhere….We have seen widespread adoption of the FedNow Service in just a little over a year since implementation, with close to 1,000 depository institutions on the network including many of the largest banks that will drive origination volume,” he said.
“Yet, we are still at the beginning of a multiyear journey of establishing a ubiquitous network covering the majority of institutions in our country. Variation around the world in domestic fast payment network adoption means that the value of globally-interlinked systems is not yet clear,” he said.
Waller underscored that he does see the value of a coordination role for the public sector to improve cross-border payments, an effort in which the Federal Reserve has been and will continue to be heavily engaged.
“We will continue our engagement with international fora to improve the speed and efficiency of cross-border payments and to investigate the issues critical to interlinking payment systems. Our chief focus in the near-to-mid-term, however, is continuing to build the FedNow network domestically and increasing participation in the service,” he said.
“We are also improving existing cross-border rails by considering expanded operating hours on our large-value, real-time gross settlement system, the Fedwire Funds Service, and by adopting ISO 20022, a globally accepted messaging standard,” he said.