The internationalisation of business activities, whether commerce or sourcing staff, is crying out for a cheaper, faster cross-currency payment solution. Could interoperability between domestic infrastructures, such as automated clearing houses, be a solution? Heather McKenzie reports.


In April 2020, the Financial Stability Board (FSB) presented its report on the development of improved cross-border payments to the G20, which has identified addressing frictions in these transactions as a priority for the year. The report provides an assessment of existing arrangements and challenges for international payments.

The G20 believes that faster, cheaper, more transparent and more inclusive cross-border payment services, including remittances, would have widespread benefits for citizens and economies worldwide, “supporting economic growth, international trade, global development and financial inclusion”.

Despite these benefits, currently there is no global infrastructure for low-value cross-border payments. While the Single Euro Payments Area (SEPA) is physically a cross-border infrastructure, it is essentially a single currency system.

A starting point

The FSB report lays the groundwork for further investigation. It points out that financial innovation is creating opportunities to make payments more efficient and could build on existing cross-border and domestic payment arrangements or take the form of new structures.

One question the report raises is whether key payment infrastructures, such as automated clearing houses (ACHs), could be made more interoperable. At present, most cross-border payment services rely on domestic payment systems such as ACHs to process transactions.

The FSB suggests the “interlinking between the national payment infrastructures of different countries can be established by the private or public sector payment systems of those countries”. It cites as examples of such interlinking the FedGlobal Mexico service, which enables US financial institutions to send ACH credit transactions to some financial institutions in Mexico, and the ACH co-operation in the EU.

Integration efforts

In a February 2018 report on cross-border retail payments, the Committee on Payments and Market Infrastructures (CPMI), detailed the two projects. It pointed out that many regional integration efforts in the payments space did not necessarily involve the establishment of a dedicated, centralised infrastructure. “These initiatives are, in effect, enabling the integration of different national payment systems under a set of defined rules and business practices to enable faster and more efficient cross-border payments,” it said.

For example, the European Automated Clearing House Association (EACHA) has developed interoperability frameworks for credit transfers and instant payments, based on the scheme rulebooks applicable under SEPA. While the interoperability framework can form the basis for establishing links between ACHs, it is up to the individual ACHs to choose whether to establish interoperability links and, if so, with which ACHs. If ACHs choose to establish interoperability, the EACHA framework enables parties to use the same technical standards and procedures and to exchange data fully automatically.

Directo a México, established in 2003, links the Federal Reserve-operated ACH service, FedACH, to the Mexican RTGS (SPEI) operated by the Bank of Mexico. The Bank of Mexico translates the ACH files into domestic Mexican formats and uses SPEI to distribute payments to Mexican depository institutions. The processing timeframe for posting the funds to the payee’s account after the payer initiates a payment is typically one banking day.

Inefficient and expensive

The FSB says existing cross-border payments arrangements present a range of challenges: high cost, low speed, limited access, and limited transparency. Even when questions of interoperability have been addressed, cross-border connections between public sector infrastructures may also raise additional foreign exchange (FX) and financial stability challenges.

“We now have a truly global economy, but the inefficiency of payments across borders has slowed things down,” says Andy Schmidt, vice-president and global industry lead for banking at IT consulting firm CGI. “There is no such thing as a cross-border payment at the moment. If I am in the US and want to pay someone in the UK, I have to find a bank that has accounts in both countries. A lot of work goes on behind the scenes in an international payment – it can take days and is expensive.”

Gareth Lodge, senior analyst, global payments at research and advisory firm Celent, says there is “no such thing” as a global ACH. “Possibly Earthport, which was acquired by Visa, came closest to it. But there is a gap in the market for lower value transactions across borders,” he adds.

However, as the workforce becomes more global and the payments factories created by large corporates are consolidating their operations in particular countries, there is a need for a global ACH. “There has been pent-up demand for cross-border ACH for many years. We are now getting to the point where the technology and standards are in place, so some – but not all – of the barriers are being lowered,” Mr Lodge adds.

As more countries complete the implementation of domestic immediate payment infrastructures, says David Bannister, senior analyst in research firm Aite Group’s wholesale banking and payments team, attention is turning to the development of mechanisms to link them to enable cross-border, multi-currency payments. “While this will be hugely beneficial to corporate treasurers, the financial institutions that service them, and the wider economy, the reality is that despite the efforts of standards bodies, central banks and financial market infrastructures, banks have substantial issues – individually and collectively – to overcome.”

Different approaches

In looking to develop a cross-border ACH, two specific issues that are inherent in international payments cannot be ignored, Mr Bannister adds. The challenges of FX and time zones can be overcome only by agreement between counterparties.

“On the currency front, initiatives in different regions are taking different approaches to the FX element of the process, particularly in standardising where the currency cross takes place, with important implications for banks’ ability to monetise new products and services. It’s harder to deal with the time zone issue – how do you make a same-day payment to a country where it’s still yesterday or already tomorrow?” he says.

Another development that has implications for financial institutions’ cash management is the advent of open banking. This will allow “anyone” who becomes a payment initiator to initiate a payment, says Mr Bannister. “From a bank treasurer’s point of view that means unpredictable payments flows – and it doesn’t really matter if they are cross-border or cross-currency. Being able to move liquidity around like that creates a problem for bank treasuries and their liquidity. On the one hand, banks want to help their clients move money around, but on the other, it may create problems for them.”

According to CGI’s Mr Schmidt, an important step forward in the creation of a cross-border ACH is the industry’s adoption of the ISO 20022 standard for payments messaging. “As we move on to ISO 20022, a significant language barrier is falling away. While there are some differences in how each country interprets the fields, these are mappable,” he says. “The fact is that the industry is getting everyone speaking the same language. There is still some way to go in integrating some aspects such as payables and receivables, however.”

Given the challenges of cross-border clearing, it is unsurprising some industry observers are keeping an eye out for any move by Brussels-based financial messaging co-operative Swift. In March, Swift announced that it would become a global connector for account-to-account payments. Its solution will combine international and domestic capabilities.

“For the first time, they have declared their intention not only to strengthen their relationship with institutions and large corporations, but also to move into the small and medium-sized enterprise and consumer payments space,” says Mr Schmidt.

Central push

He believes Swift could act as a “central connector” in providing cross-border ACH services. “Having a central infrastructure, you can route a payment to wherever you need it to go. That creates efficiency at a low cost,” he says.

Celent’s Mr Lodge points out that to create a cross-border ACH, a centralising body is probably necessary. “There needs to be at least a scheme in place that sets the rules and standards. The secret of success, however, has as much to do with the organisational body as with the technology that is being used to solve the problem.” A global ACH would have to work “across the value chain”, which is a complex endeavour, he adds.

This is not an inconsiderable problem. In its 2018 report, the CPMI assessed the scale of the challenge: “While linking multilateral systems may, in theory, streamline certain processes, this is difficult in practice and may create other operational and financial risks that would need to be managed. It requires the harmonisation of legal, technical and operational aspects, a complex undertaking that requires political will, commitment from participants in both payment systems, and a convincing business case to be made for each jurisdiction.”

Working through these challenges can lead to compromises in the arrangements, which might mean reduced efficiency in the final implementation, the CPMI warned in its report. Additionally, interlinked systems usually offer a narrower range of currencies and countries than a network of correspondent banks.

Consequently, individuals, small enterprises and their banks will almost certainly need to supplement their use of interlinked structures in order to reach more countries using a wider range of currencies in a growing global marketplace.

With such challenges still to be resolved, the existence of a truly global ACH may still be some years away.


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