Optimising and simplifying the cross-border payments model

Cross-border payments are the backbone of international trade.  It should therefore be no surprise that G20 member states have made improving them a priority by approving a roadmap that sets out quantitative targets aimed at reducing their costs and speed of execution and increasing their accessibility and transparency by 2027.

Although the aim is to improve the client experience while maintaining a high level of controls, the difficulty lies in the fact that payment service providers operate within regulatory frameworks that differ by country or geographical area, with various specificities and requirements for currencies. Therefore, the context is, and will remain, complex. Building a single cross-border payments model that suits everyone would thus seem somewhat utopian for economic reasons as well as geopolitical reasons, currency being a sovereign issue. However, it is possible, from the existing system, to optimise the model to make it more efficient and better meet clients’ expectations. The entire market is actively working to improve these payment services that are increasingly seen and thought of as a commodity.

Strengthen interlinking

Admittedly, artificial intelligence or blockchain can improve operational efficiency in some stages of the model where there is friction or by geographical zone, but it’s about having a more interlinked and therefore more fluid transaction. One of the solutions consists in combining domestic instant payments and cross-border channels by interlinking domestic market infrastructures more. Interlinking shortens the transaction chain, contributing to greater speed, lower costs and increased transparency. Faced with these improvements, the challenges for traditional commercial banks, and for the system as a whole, are still optimising liquidity, reducing risks and meeting compliance requirements.

In Europe, interlinking initiatives are emerging, such as OCT Inst* launched in November 2023 by the European Payments Council – a Market solution in which Societe Generale is a stakeholder and is participating in the various workshops and studies on this topic. Euro-zone payment service providers can best use SEPA Inst domestic systems for instant cross-border transfers to and from Europe. Although the initiative has been warmly welcomed, it is technically complicated to deploy because screening and compliance requirements are different between an international payment and a European domestic payment, but also between European banks. But, for risk control and financial security reasons, it is essential for a payment service provider to control the cross-border payments they receive. It is therefore necessary to converge on similar control rules and payment screening techniques, which takes time and represents a significant investment for the players involved. However, there are opportunity effects, notably on forex operations, albeit with management obstacles on the liquidity part. In relation to interlinking, the bank’s cash flow is impacted because, to be able to deliver a payment, it needs to have the necessary funds in its accounts. There is therefore a liquidity supplying issue in order to be able to reuse it instantly.

Intensify research on investigations

The Exceptions & Investigations Market initiative aims to improve the cross-border payments processing chain’s operational aspects on the investigation component. In practical terms, this service aims to rationalise the management of requests for information relative to “uneven” or incomplete payments in order to repair them via interlinked shorter circuits. This avoids intermediaries, and thus extra costs and time. The idea is to resolve the answer to the question faster via exchanges by API.

Develop and balance access authorisations to local systems

Moreover, while there are geographical zones where it is possible to provide instant payment service symmetry at an attractive price, this is not the case everywhere. The lack of instant payment mechanisms or their non-availability for processing cross-border payments – i.e. instant solutions exclusively used on a domestic level – can result in frictions and a lengthening of the settlement time with possible consequences on cash flow.

The same rules for everyone 

All payment service providers are seeking to access the same system by region. While the trend to achieve this is towards a harmonisation of the rules, these can still differ from one region to another, whether you are a bank, a fintech or a payment institution. This asymmetry between the rules applicable to the various players according to certain regulations creates risks and competitive disadvantages. Yet it is in end-clients’ interest for all players to be treated the same way and for them to meet the same control, audit, security standard and transparency requirements. This is why a risk-based approach is favoured by banks, as players that ensure the cross-border flow of money are fundamentally exposed in the same way. The system’s international responsibility is thus to have the same security and control levels for everyone.

Facilitate regulatory and compliance controls

Currently, when there is a compliance alert on an international payment, no tracking is possible for the client. Yet, for a more fluid system, it is important to be able to provide the client with transparency and timeframe commitments on the outstanding payment part. The migration of cross-border payments to the ISO 20022 standard will facilitate regulatory controls and therefore improve the model’s flow. Here too, it is in the interest of all the payment chain’s players to be able to process high quality, enhanced and properly structured information, thus reducing errors and the volume of suspended payments.

Improve fraud management

Just like compliance, fraud management also needs to be improved. This requires action regarding two elements: anticipation and the sharing of experience. In anticipation of the transaction, initiatives are currently being deployed in Europe such as the “verification of payee”, which consists in ensuring that the name corresponds to the account number, or the pre-validation of the recipient’s account before sending the funds via Swift. As for the sharing of experience after the fact, here again a thought process is underway in order to capitalise on acquired knowledge to prevent future cases of fraud. It is in everyone’s interest to prevent such cases.

Interlinking market infrastructures, establishing the most consistent quality of services possible in processing methods and harmonising access rules between payment service providers are all the subject of work that has been launched to create a more seamless model that will eventually benefit all payment stakeholders.

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