- Key insight: RTP and FedNow are increasing their focus on international payments.
- What's at stake: Most real-time payment networks thus far have focused on domestic transactions over international payments.
- Forward look: RTP has loosened rules that allow foreign banks to participate in cross-border payments, a move that could bring more banks into the network.
Since inception, the Clearing House's RTP Network and the Federal Reserve's FedNow Service have focused on
While these are baby steps in the world of faster payments, industry participants hope the moves will eventually open the door to a more efficient and interconnected cross-border payment infrastructure. "It's a crawl-before-you-walk scenario," Mark Majeske, senior vice president of faster payments at Alacriti, a payments modernization company, told American Banker.
Here's what banks need to know about impending changes that could eventually propel cross-border payments:
Why these rule changes are important
Moving money internationally is riddled with friction, cost and inefficiency. Today, if someone wants to send money to the U.S. from an overseas bank, that payment instruction may go through multiple intermediaries before getting to the right account in the U.S. This process can be lengthy, opaque, and, as things stand today, the "last mile" may be an ACH or wire payment to the final account.
Data from Swift shows on average the international leg of a payment accounts for less than 20% of the overall journey, whereas roughly 80% of total processing time is spent in the last-mile stage.
Allowing the use of real-time payments networks for the last leg eliminates several common domestic delays, Hugh Thomas, lead analyst for commercial and enterprise payments at Javelin Strategy & Research, told American Banker. For example, an international payment arriving at 7 p.m. ET might currently wait until the following morning for domestic settlement. Or, a payment reaching the U.S. on Saturday could sit until Monday before entering the domestic payment system, he said.
The comment period on the Fed proposal closed in June. For its part, RTP Network, which garnered about 97% of instant payment volume in the U.S. as of the second quarter, is launching a pilot with banks to experiment with use cases related to cross-border activity, Jim Colassano, senior vice president of product development and strategy at The Clearing House, told American Banker. Operating instant payments 24/7 is extremely important for a multi-leg process, he said. "It's something we hear from the market, and we're trying to be as responsive as possible."
Other efforts to improve cross-border payments
To be sure, there have been improvements to enable more efficient cross-border transactions, buoyed by multiple competitors in the market, including Western Union, Wise and other fintechs. Also, real-time transfer services, such as
Swift GPI, an initiative to speed up cross-border payments while offering real-time tracking and fee transparency, has made cross-border transactions more efficient, Erika Baumann, managing director of banking and payments at Datos Insights, told American Banker. Around 4,400 financial institutions are in the Swift GPI network, nearly 40% of the institutions that are a part of the cooperative.
Moves toward increased interoperability
Moves by the domestic real-time payments networks come as payment systems across the globe are becoming more interoperable, Gareth Lodge, a principal analyst in the payments business at Celent, told American Banker.
He offers the examples of Buna, a cross-border payment system supported by Arab central banks and founded by the Arab Monetary Fund in 2018, and Nexus Global Payments, which links Indonesia, Malaysia, the Philippines, Singapore, and Thailand. "The U.S. really has to figure out a way to connect to these networks," he said.
Alacriti's Majeske, who helped design and launch RTP Network, is especially excited about the potential to scale Nexus beyond initial partner countries. Significant adoption would mean lower costs, faster transactions and more accessibility to funds on demand. "It will help make the world a smaller place, in a good way," he told American Banker.
Operational challenges for banks
The precise model for interconnectivity has yet to be determined. What seems to be happening differs from the single global network that many anticipated, according to Irene Skrynova, chief executive of global payments at Unlimit, a London-based global payments fintech. "Countries are building strong domestic real-time systems —
For banks, there are operational challenges to overcome. "In the old model, you had overnight to fund a payment. In a world of connected instant systems, you don't. Money has to be in the right place, in the right currency, around the clock. Treasury teams have to rebuild around that," she wrote.
While moves by RTP Network and FedNow are propelling things forward, there are still bumps in the road to overcome.
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"Speed on the U.S. side is the easy part. What actually determines whether an international payment feels instant is everything around it: currency conversion, compliance checks that hold funds for review after they've already arrived, payment data that gets stripped between different countries' systems, and failed or misdirected payments that still take days to unwind," Skrynova wrote.
"Until those move at the same speed as the rails, the end user won't feel the difference. Solve them, and cross-border catches up with domestic. Solve only the U.S. leg, and we've built a fast on-ramp to a road that still has traffic lights."
