If nothing else, the coronavirus pandemic has proved that our lives are intrinsically related to the lives of people all around the world. Even while national borders have been closed, trade in goods and services has continued to flow between them at increasing rates.
The majority of cross-border trade is proximity-based, most often taking place between close neighbours than it does between distant ones. Intra-continental trade is highest in Europe, (69 %), Asia (59%), and North America (31%). The share of intra-African exports as a percentage of total African exports increased from about 10 percent in 1995 to around 17 percent in 2017, giving reason to suggest that trade will be a key driver of growth in Africa as it is elsewhere.
But interbank account payment systems (otherwise known as automated clearing houses, or ACHs) are typically domestic in nature. With no central scheme or network operator, there is very little interoperability between different countries. This makes payments complex and expensive when trading with countries abroad and represents a barrier to fast, predictable and certain movement of money.
Consumers and businesses are calling for better regional payment system interoperability. The benefits are multifarious: it allows payment system users to transact more seamlessly and securely across borders; it helps payment service providers reduce their operational costs, and it enables innovation of financial products and services at scale. Regional interoperability also supports increased velocity and volume of cross-border trade, which promotes global economic stability and growth.
It’s a heavy lift to modernise a critical national payment infrastructure, says James Sherwin-Smith, general manager of international managed services at Mastercard. “It's the way that people get paid; it's the way people and businesses pay their bills; it's the way a government collects taxes and pays out benefits. And you typically have multiples of gross domestic product travelling through those systems.” Operators have understandably focused their efforts on domestic needs — modernising their infrastructures to support real-time payments and advanced data standards — over international ones.
The world is growing ever more connected, and people’s expectations for fast, secure and frictionless cross-border payments (and the seamless end-to-end experiences they enable) are increasing. In context of an accelerated shift to digital, this is proving a catalyst for change: “While domestic systems have been fit for the economies of old, they're not necessarily fit for the economies of the future,” says Sherwin-Smith. “People and capital are more mobile and more fluid than they once were, and an increase in international trade means we have more payments happening across borders than in the past.”
Last month, Mastercard convened industry representatives to discuss the future of payments beyond speed: powering economies in 2020–50. Panellists included Claus Richter, chief operating officer for P27 Nordic Payments Group. On the topic of regionalisation, Richter agreed consumer and business “expectations for real-time payments are growing with the eCommerce wave… with much more cross-border payment traffic [during COVID-19] than we have seen before.”
“We see this starting in the near regions around our countries: for example, between Denmark, Sweden, Norway and Finland, but also across the rest of the Eurozone. In time, I think we will see this expectation beyond regions; to the US, et cetera.”
Pressure has reached a tipping point, and payment system operators are taking note.
In 2019, P27 selected Mastercard to build a world-first multi-currency cross-border platform, which will enable real-time and batch payments between people, businesses and other organisations in Norway, Denmark, Sweden and Finland. “P27 is an interesting model for how multiple countries within a region can collaborate with the goal of building a common central infrastructure,” says Stephen Grainger, executive vice president for cross-border services at Mastercard. “The advantage of this approach is that the scheme is built from the outset with cross-border payments in mind – and enables participating countries to share the costs.”
Indeed, regionalisation helps payment system operators and the financial institutions they support to rationalise their operations. By consolidating the batch and real time clearing and settlement infrastructures across four different countries and currencies into one platform, with common scheme rules, software and digital overlay services, the P27 project will improve efficiency in the Nordic payment system and provide a platform for further innovation in payments. One single interface will make it easier for banks to process all payments — both within countries and beyond.
The savings from payment system consolidation aren’t just technical – having to provide liquidity across all of these payment systems is expensive and complex for banks. A single system can allow for much more dynamic management of liquidity and a clearer understanding of a regional bank’s liquidity position across multiple countries. There is also a benefit to regulators for simpler risk management.
“P27 serves as a viable model for those regions – like the Nordics – where countries are closely integrated in terms of business, trade and culture,” Sherwin-Smith adds. Indeed, the P27 project is just ahead of a broader trend towards regionalisation around the world.
For example, the Association of Southeast Asian Nations (ASEAN) which includes Indonesia, Singapore, Thailand, and Vietnam, is looking into making its payment systems interoperable, as is the West African Economic and Monetary Union (WAEMU). Elsewhere on the African continent, initiatives in both Eastern Africa and Southern Africa to harmonise domestic payment systems and schemes are underway.
Of course, more broadly in Europe, the single euro payments area (SEPA) establishes a single set of tools and standards that make cross-border payments in euro as easy as national payments. The resulting advantages include ensuring cheaper, safer and faster cross-border payments and more transparent pricing thanks to the single set of payment schemes and standards.
Payment system operators can achieve significant time, cost and resource efficiencies by collaborating to modernise their domestic payment systems as part of a regional infrastructure. The same is true of financial institutions, which include banks, non-banking financial institutions and third-party providers.
For financial institutions, especially those that conduct business across borders, a fragmented market can be extremely inefficient and costly, and deprive them of new sources of revenue. On-boarding to multiple systems is time-, resource- and cost-intensive, as is operating, updating and upgrading systems to meet evolving regulatory changes.
“Payments is ultimately a scale game,” explains Sherwin-Smith. “The more you can harmonise, the more efficient it becomes: it’s easier to maintain, it’s easier to protect, and it’s easier to use,” Ultimately, this comes down to scheme rules, standards and processes as they relate to:
From a consumer’s point of view, they simply want their experience to be as seamless as possible, and know they are protected should anything go wrong. That poses a challenge for their financial institutions, which are responsible for ensuring their customers’ good experience. Common ways for dealing with enquiries and disputes will increase transparency and most importantly secure trust in the global payment ecosystem.
Harmonisation of rules, standards and processes also encourages payment service innovation. While domestic payment system operators are increasingly concerned with providing the tools for banks to innovate, this is still heavily localised; for smaller markets there simply isn’t enough reach for banks to validate a business case for new propositions. But with alignment between domestic systems within a region, it is more efficient — and there are greater commercial opportunities — to innovate and scale.
“I can build a product [for one market] and I can launch it across the region,” explains George Evers, senior vice president for real-time product at Mastercard. Not only does a regional system make it more viable to develop new solutions, but it also makes the proposition consistent across markets, improving the customer experience for the regional citizen.
“Technology is the enabler,” Evers says, for the industry to materially improve the lives and experiences of people at a regional scale.
Challenges to reaching the full potential of regional harmonisation
Capturing the benefits from regional harmonisation should not be taken for granted. In the absence of currency union, each currency in a region will be supported by a different domestic payment system representing the needs of its stakeholders, including banks, central banks and regulators. Achieving alignment across currencies and countries requires stakeholders to deliberately design and implement new payments systems with greater harmonisation in mind.
Banks therefore need to collaborate to capture the full benefit of harmonisation, both at a domestic and regional level. This usually requires strong engagement from regulators and central banks – and not just on how data is exchanged, but also how payments are processed and how risk is managed, such as settlement models.
Together with partners like P27, Mastercard is embarking on a strategy to regionalise payments around the world. In addition to the Nordics, we’re developing regional managed services in Asia-Pacific, Latin America and soon in the Middle East & Africa that will lower costs other barriers for operators and schemes that are looking to modernise their payment systems.
It’s part of our strategy to democratise access to real-time payments for financial institutions and their customers around the world. “We'll be able to efficiently and easily bring digital payments to more communities,” says Evers.
“Our vision is to empower an entire region of people and businesses through one safe, robust and centralised payment platform,” explains Sherwin-Smith. Creating a future where making cross-border payments is as seamless as domestic ones, and money keeps pace with the way we live, work and do business.