Study: Multilateral Platforms “Could” Ease Cross-Border Payment Friction

A new report finds that multilateral platforms – cross-border payment systems that are designed to operate in multiple jurisdictions, could reduce the need for intermediaries, thus speeding up the payment process. The report also notes, however, that “risks, barriers and challenges could limit their potential or even hinder their establishment in the first place”.

The study was conducted by the Bank for International Settlement’s (BIS) Committee for Payments and Market Infrastructure (CPMI), along with the BIS Innovation Hub, the IMF and World Bank – and explores two concepts, the growth and greenfield approaches. The writers stress it only offers high-level consideration, and does not seek to pre-empt considerations on individual business cases. It is based, BIS says, on a stocktake, conducted by CPMI of existing and potential platforms, as well as discussions with existing platform operators.

The report says depending on its design, a platform can offer extended operating hours to meet the requirements of participants in different time zones and ease compliance checks related to anti-money laundering and combating the financing of terrorism (AML/CFT). Built as new, it can also reduce dependencies on legacy systems by implementing the latest technology and payment message standards. “To the extent a multilateral platform is able to mitigate these underlying frictions, it could reduce the costs and increase the safety, speed and transparency of cross-border payments,” the report states.

While there is an argument for enhancing payments, however, it also says these platforms often involve more complicated legal and operational issues relative to domestic payment systems. “Any decision to increase the role of multilateral platforms should weigh all relevant trade-offs, risks and benefits relative to other cross-border arrangements such as correspondent banking, not merely the added risks relative to domestic systems,” the report states. “These considerations vary depending on the current state of cross-border payment arrangements in a specific geographical region or for a specific payment system function, as well as on the purpose and chosen approach for increasing the role of multilateral platforms.

“The actual improvements that a potential platform can bring to the cross-border payments ecosystem will, of course, depend on its concrete design,” it adds.

The growth approach explored in the report involves expanding existing multilateral platforms to additional jurisdictions, currencies and participants (including by extending access to foreign participants and interlinking with domestic systems and other platforms). “This option could be based on existing institutional arrangements but may nevertheless require additional public-private sector involvement and coordination,” the report states.

The greenfield approach, in contrast, involves building a new, potentially global infrastructure for cross- border payments. “This option could foster greater alignment of certain aspects of cross-border payments but may entail complex governance discussions and cooperative oversight arrangements as well as careful balancing of the roles of public and private sector stakeholders,” suggests the report.

A section of the report highlights FX and liquidity risks faced by a multilateral platform. It observes that platforms are exposed to the risk of unexpected volatility in FX rates, adding this may have implications for participants’ liquidity risk management if they are unable to obtain enough of a volatile currency for settlement. “A platform may choose to perform the currency conversion itself by offering FX rates that are fixed for a limited period,” the report suggests. “In this case, the platform would share the FX risk with participants and would thus need to manage the associated credit and liquidity risks.

“FX and liquidity risks can make it more challenging to operate multilateral platforms relative to domestic systems, particularly if the platform processes multiple currencies,” it continues. “To mitigate these risks, a multilateral platform may opt to settle in a few, very liquid currencies, however, this choice could limit the usability of the platform for regional business. A platform might also require participants to fully pre-fund their accounts to initiate payment transactions or choose to settle on a deferred net basis rather than in real time to reduce liquidity demands.”

The authors also suggest that the future design could reflect that which created CLS, namely a public-private partnership. A new platform would require establishing new cooperative oversight and supervisory arrangements, the report observes, however it notes that there are precedents for such a setup – again it uses CLS as an example.

Although the report rarely references central bank digital currencies (CBDCs) it does occasionally mention the various projects being conducted by BIS Innovation Hubs and central banks around the world. The over-riding sense from the report is, however, that CBDCs will play a significant role in the evolution of cross-border payments.

Indeed the report states, “In anticipation of future opportunities, authorities could conduct further analytical, experimental and policy work on new payment arrangements. This could improve their understanding of the potential technical improvements that such arrangements can bring, while considering the challenges they face and risks they pose to existing payment arrangements. This may help guide the efforts of payment system operators and authorities contemplating the establishment of multilateral platforms in specific scenarios. Scenarios could include, for example, expanding an existing multilateral platform to additional jurisdictions, currencies and participants, or building a new multilateral platform for cross-currency fast payments or CBDC payments in a specific region or globally.”

Commenting on the report, Jerome Kemp, president of Baton Systems, says, “The report highlights the many challenges facing cross-border payments today, of which FX settlement risk is a primary concern. The establishment of multi-lateral platforms does bring significant benefits for managing cross-border risks, but whether these platforms evolve through the expansion of existing platforms or via the creation of a new purpose-built platform designed to handle the flow of international payments, more efficient riskless settlement and greater transparency of payment status need to be central to a multi-lateral platform.

“DLT needs to be factored into the conversation as a technology that can unlock this conundrum,” he continues. “Technology firms – such as Baton – have proven that riskless FX settlement in a broad basket of currencies, for an extensive range of wholesale participants, and greater transparency into current and forecast funding requirements at the currency level is possible today.”