Note: This post was drafted in collaboration with Mojaloop Community members.

There is a global effort to reduce cross-border remittance costs to no more than 5% for any corridor and no more than 3% for most (SDG 10.c and G20 Roadmap targets).  We have a long way to go to get there – and we hope the final fees are actually lower.

These important goals focus on bringing down the cost for migrant workers to be able to send money home. These workers often come from low income, rural communities and go abroad looking for ways to better support their families. They already suffer significant penalties by being separated from their communities and upending their lives – they shouldn’t be required to pay the penalty of high costs to send some of their meagre earnings home. Unfortunately, for many, taking another 10% in remittance fees means the difference between being able to provide for their loved ones and falling short on funds.

And it’s not only the challenge of losing money, it’s also about time. Because remittances are expensive and inconvenient, migrants often try to limit transfers back home to avoid high fees and a hassle-filled process. But this delay often means that families back home struggle.

We believe that more inclusive and efficient cross-border payments will have some specific characteristics. It will require a significant amount of global coordination, standards building, and consensus building. It also involves making design decisions that will explicitly change revenue structures for some companies, which could elicit some defensive reactions. Companies that see the economic value in increased volume and participation will be the drivers of change.

We believe that the best system is multilateral interoperability scheme(s) between domestic Inclusive Instant Payment Systems (IIPS).  

Cross border schemes need to be multilateral utilities because all citizens need to have equal access, regardless of the size and resources of the country they are from. Countries like India and Singapore will always find willing counterparties and have the resources to develop and negotiate advantageous bilateral relationships. With projects like Nexus[1] gaining traction, we believe that there is already a degree of consensus that this general approach is the way forward, but we need to dig into nuances of design to ensure inclusivity. There can be both global and regional multi-lateral schemes.

By domestic “inclusive” IPS, we mean that an IPS should make all efforts to include all financial services providers, but especially those that serve the last mile. This means it is a utility, supporting tiered KYC, lowering integration barriers, setting efficient liquidity controls, and providing other mechanisms to ensure that non-banks--particularly small rural institutions--are able to participate. It also should find ways to reduce overall costs so that the price to consumers can be as near zero as possible. In this context, we still need to define how systems like these interoperate with each other.  A domestic system that includes all accounts. Small countries, just like small financial institutions, deserve a system that treats them as equals. 

To achieve this vision, there are a lot of details that need to be worked out.

Focus

We have identified five priority areas for investigation and discussion. 

1.     Defining success.

The FSB[2] and G20[3] have set targets for cost, but cost is not the only variable we’re concerned with. We want to measure inclusivity – access and usage – convenience and speed.  Whether the funds are going to an urban bank, a mobile wallet, or a small rural credit union, there should be no difference in experience or price for the sender.  We need to understand our success further, though. Such as, should these non-bank accounts need to be expanded to look like bank accounts or will they be allowed to participate “as is” at lower velocity levels? Should we develop mechanisms to assist in small FI participation, or will we leave it up to each scheme, or each financial institution?

2.     Addressing

Sending money across borders presents many challenges, but one important challenge is that of addressing; how do you send the money to someone’s preferred account? If it’s a mobile wallet, this is straightforward in many countries, the payment can simply be addressed to the mobile phone number. But this doesn’t work everywhere – for example, in many Asian countries, it’s commonplace to have multiple mobile wallets on a mobile phone, so which one should the money be deposited in? And if we want the money to go into a bank account or a microfinance account, how do we route that?

The answer lies in the use of an interoperable alias resolution service, such as the Proxy Addressing System Service (PASS) proposed by UNCDF. This service envisages taking a destination payee alias and seeking to resolve it across multiple national alias resolution services, in order to return the payment routing details for the payee.

3.     Messaging

All IPS switches must be able to route transactions and communicate in the same language. I support ISO 20022 for this, but there’s a need to address several challenges for inclusivity. First, ISO 20022 isn’t actually a payments standard, but “a common platform for the development of messages” and must be supplemented by sector-specific Message Definitions. Adoption of ISO 20022 messaging is piecemeal, and largely limited to the larger international banks. Most small or medium sized banks and non-banks have not adopted ISO 20022 messaging (and frankly never will). 

Several changes have been proposed to address risk management and the ability to integrate with the non-banks. In particular, we believe that reducing the number of failed transactions, a major cost for cross border payments, is best achieved through a two-phase transaction that performs all checks and signs a transaction prior to funds leaving the sender’s account. These checks are possible through extensions to the ISO 20022 Message Definitions and will support inclusive instant payments.

4.     Compliance.

Even more so than domestic transactions, international payments are subject to close monitoring and compliance requirements, according to domestic regulations developed in accordance with the international FATF[4] Recommendations. Sending institutions, switches and other intermediaries have a responsibility to transport metadata along with the transaction, so that receiving institutions can meet their own compliance obligations.

The extension of the PASS service could be used during account discovery before any transaction is initiated to create a compliance history and allow sanctions screening to take place before any transaction is proposed. This would further allow the overall cost of transactions to be reduced by dissociating screening from transactions. Organizations such as FATF, the Alliance for Financial Inclusion[5], and other international organizations will be crucial in formalizing these ideas.

5.     Settlement.

Settlement of transactions is always one of the most complex parts of an international payment. Traditionally this is done by correspondent banking relationships, with funds in “foreign” currencies being held in banks in nostro/vostro accounts, and being used in settlement of transactions often through an international reserve currency such as the US Dollar.

Many proposals, including most of those based on cryptocurrencies and blockchains, still fundamentally rely on correspondent banking, though this may not be apparent without close inspection.

Not all financial institutions can connect directly to a switch, particularly for international payments. In particular, non-banks, such as mobile wallets and credit unions, will find it difficult to obtain regulatory approval for such an integration. Domestically, this can be addressed by providing support for indirect settlement (small FIs settle through large banks), however, establishing standards for indirect settlement would drive the cost of these relationships lower.

The future of inclusive cross border payments is complex.  There are a lot of moving pieces and business interests. It’s critical that we focus on what would be the most efficient and cost-effective way to serve the most difficult to reach communities around the world; the smallest communities and the smallest countries. In our view, this means focusing on efforts to link domestic inclusive instant payment systems. Those linkages must be built with intentionality to capture the inclusive nature of the domestic systems and products.

If you want to join the discussion, leave a comment below or send me a note at shaley@mojaloop.io.

[1] https://www.bis.org/about/bisih/topics/fmis/nexus.htm

[2] https://www.fsb.org/

[3] https://www.fsb.org/2023/02/g20-roadmap-for-enhancing-cross-border-payments-priority-actions-for-achieving-the-g20-targets/

[4] https://www.fatf-gafi.org/