The future of financial services depends on global connectivity
The past year has no doubt seen its share of challenges. The aftermath of the pandemic, ongoing geopolitical tensions, and a rapidly globalising world have meant that all businesses and industries have had to adapt, financial services included.
Establishing interoperability in global payments is a formidable task
At the same time, the headwinds of change have also served as a catalyst for new forms of money to come to the fore – the number of cryptocurrencies tracked by CoinMarketCap reached the 22,000 mark in early December. The World Economic Forum also estimates that the tokenised assets market could potentially be worth as much as $24 trillion by 2027.
The frameworks for how global payments are executed are also being informed by the evolution of money and consumers’ shifting expectations. The G20 roadmap for enhancing cross-border payments prioritises collective action to make international payments faster, more transparent, and more accessible, at a lower cost.
While the financial services industry has proven to be remarkably resilient during these challenging times, there is further work to do in ensuring these innovations can integrate seamlessly with today’s financial ecosystem.
Laying the foundations
Payments is a good example here. Key to ensuring that the wave of digitisation across the global payments industry will achieve scale is a focus on interoperability. This means allowing participants to transact payments across systems without needing to actually be connected to multiple systems. This places an emphasis on collaboration, both at market infrastructure and individual firm level.
Innovating with a global mindset naturally introduces the importance of interconnectivity and inclusivity. On a practical level, interoperability points to the importance of standards and arranged governance, applied and adhered to on a cross-jurisdictional level, so that payments can flow seamlessly across borders. Global collaboration is important for all aspects of financial services, but for payments, it’s crucial. Payments are, after all, the lifeblood of a connected world. However, often times, innovation tends to occur in discrete, localised pockets. Many jurisdictions or regions are digitising with a domestic mindset.
The rise of real-time payments systems serves as a good example of this fragmented globalisation. Different regional cross-border and multi-currency payment systems are emerging. Examples include the Buna initiative for the Middle East and Africa region; the IXB project, whereby EBA Clearing and TCH want to interconnect the euro-denominated instant payment system, EURO1, and the dollar-denominated system, RTP, to execute instant, cross-border payments; and the Nexus project from the BIS Innovation Hub, designing a multi-lateral instant payment interlinking model.
But to embrace the future of money, which is increasingly becoming digital, we must focus on ensuring that the systems being used can connect seamlessly with other systems, so that the innovation taking place can empower countries to transact with one another easily.
Interoperability and innovation go hand in hand
Beyond real-time payments, the need for global interoperability will also be crucial in ensuring the successful implementation of many innovation projects that are taking shape across payments. We are seeing this first hand, as the global payments ecosystem embraces digitisation alongside the need for security and global connectivity.
This points to the promising work being done in central bank digital currencies (CBDCs) and new digital assets. There are currently a number of ongoing experiments exploring how this new form of money can be integrated into the global payments landscape. At present, the CBDC ecosystem is highly fragmented, with numerous central banks developing their own digital currencies – each based on different technologies, standards, and protocols.
In fact, nine out of ten central banks are exploring the potential of a domestic CBDC. So the next step is to look at how these different digital currencies can be used across global lines. Whether the future of CBDC-backed global payments entails integration with existing payment systems or linkages between domestic digital currencies, this interconnectivity, underpinned by a universal set of standards, will be the linchpin to ensure success.
A global effort
Establishing interoperability in global payments is a formidable task. A careful balance must be struck between collaboration and competition, fostering new market entrants and simultaneously maintaining a universally recognised set of standards. Central banks are a driving force in galvanising a truly connected future, but they cannot act alone. Industry-wide effort and cooperation will be crucial in seeing many innovation projects scale up and achieve longevity. This is why initiatives such as the G20 roadmap for the future of cross-border payments are so important.
With 2023 promising to see the materialisation and development of many significant projects in payments – in CDBCs and beyond – we must keep the objectives behind their development front of mind. With this purpose-led, collaborative approach, we can go one step closer to creating an inclusive and seamlessly connected global financial ecosystem.
