Cross-border payments in 2023: what’s driving change?

Cross-border payments in 2023: what’s driving change?

27 Feb 2023

27 Feb 2023

The cross-border payments industry is continuously developing and more changes are on the way for 2023. An ever-shrinking correspondent banking network, lagging cross-border infrastructure, and a rapidly evolving digital economy are all contributing factors.

The need for reform is widely recognised, with the G20 committed to improving cross-border payments as a priority. Government and industry across the globe are working together on innovative solutions. But as businesses grapple with limited resources and an uncertain economy, the pressure to modernise payment standards and legacy technology will accelerate change in the new year.

Challenging traditional cross-border providers

Cross-border payments, particularly those using SWIFT and correspondent banks, are often criticised for being costly and slow, with the pace of modernisation in the market failing to keep pace with that witnessed in domestic payments.

Generally, SWIFT and the correspondent banking networks function well for popular payment corridors and currency pairings such as the Eurozone to the US or Australia to New Zealand, with payments typically settled same-day. However, moving money between less established corridors with more exotic currency pairings can be problematic.

Differing regulations between jurisdictions and conflicting time zones, where counterparty opening hours may differ, makes is much harder to communicate efficiently. Incomplete Know Your Customer (KYC) or Know Your Transaction (KYT) information needed to show purpose, beneficiary and sender often also add further delays. The data has to be collected by every bank bank along the chain to satisfy internal compliance procedures, as well as regulatory requirements.

As a result, there is a growing pool of new payment providers launching cross-border services into the market. The digital-first approach that emerging providers often have means they can process payments without the clunky remittance and data collection roadblocks that many banks grapple with. This is a positive evolution in the space, as it brings greater choice for both end consumers and banks.

Regulators challenge de-risking

The correspondent banking network, which is currently the backbone of cross-border payments, has noticeably shrunk as more banks engage in heavy de-risking exercises. Perceived risk to reputation, exposure to money laundering, terrorist financing, and potential sanctions are some of the main reasons cited by banks. 

While this de-risking makes sense from a compliance and cost perspective for individual banks, unintended consequences have occurred. As the Centrale Bank van Curaçao en Sint Maarten (CBCS) shared in a recent SWIFT report, “de-risking has the potential to destabilise our economies, promote financial exclusion and increase poverty levels.”

The interest in this issue is significant, as government and industry realise the potential devastating affects that de-risking can have on both the local and global economies. As a result, regulators are urging banks to carefully consider their approach to de-risking.

AUSTRAC released a strong statement discouraging banks from removing legitimate and lawful financial services, as it “can increase the risks of money laundering and terrorism financing and negatively impacts Australia’s economy.” In December 2022, AUSTRAC published their draft guidance on debanking. The report was developed to provide insight on AUSTRAC’s expectations when financial institutions provide services to customers that they assess to be higher risk.

Migrating to ISO20022

The migration to the ISO 20022 messaging format for SWIFT cross-border payments and reporting (CBPR+) will transform send and receive data, and brings a number of benefits. The richer data will improve straight-through processing (STP) rates and provide a treasure trove of insight, which should aid reporting and compliance. 

However, to access these benefits banks will need to undertake significant ISO 20022 migration projects. This not only means updates to IT systems, workflows and processes, and data management capabilities, it also means financial institutions need to ensure that their underlying data sets and data collection capabilities meet local regulatory requirements. Finding these gaps is the first step in determining how to resolve them. Turning to automated compliance systems, which have this capability in-built, will avoid the need for labour-intensive and less precise manual processes.

And although the new payment standard is a big step in the right direction, the change is not a full resolution. Issues with sharing information between networks and challenges in remitting with legacy systems still remain for many financial institutions.

Rising digital economy invites financial crime

The new digital global economy was ushered in during the pandemic era, brought on by a boom in e-commerce trades, new technological innovations, and businesses engaging in deep digital transformation projects. This rapid shift to digital exposed new ways for bad actors to engage in financial and cybercrime. 

According to Deloitte, “financial services is an exciting, dynamic sector with significant opportunity for growth and innovation. But this very feature also makes it increasingly attractive to determined criminals who seek to take advantage of innovations such as digital banking and cryptocurrencies to launder dirty money.”

In response to the shifting trends, regulation and compliance has become a leading priority for financial institutions in Australia. Despite that, many regulated entities struggle to find the right people to drive much-needed compliance initiatives, citing the ongoing skilled labour shortages as a primary reason.
As a result, businesses are looking for ways to meet their obligations to regulators in the most efficient way possible.

Technology alleviates compliance burden

The right technology can alleviate the burden of meeting anti-money laundering (AML) standards, by helping regulated entities automate manual processes, get deeper insights on data, and improve transparency.

John Rayment, CEO of Identitii, said, “there is a whole host of cost-effective solutions that can (assist with delivering) compliance. Modern tech solutions also improve your ability to make better products. The better technology you have, you will likely comply better, but also win new business. Don’t just come from a compliance perspective. Consider the business angle and combine the two.”

Identitii offers a platform that provides financial institutions, fintechs and other reporting entities assurance that they are meeting their AUSTRAC reporting obligations. The platform allows regulated entities to gain visibility over their transaction data, improve auditability in their reports to regulators, minimise current manual processes through automation, and reduce the risk of non-compliance.

Learn more about how Identitii can help you improve your AUSTRAC reporting here.