Transforming Cross-Border Payments: The Rise of Regional Payment Connectivity

In today’s hyper-connected global economy, the volume of cross-border payments is expected to reach $250 trillion by 20271, highlighting the urgent need for more efficient international payment systems. Despite this growth, cross-border transactions still suffer from high fees, delays, and lack of transparency.

To address these challenges, Regional Payment Connectivity (RPC) initiatives are emerging as key drivers of economic integration. By aligning payment systems across multiple countries, these initiatives aim to streamline payment processes, reduce transaction costs, and enhance the efficiency of financial services across participating countries. Collaborating banks, financial institutions, and regulatory bodies are at the forefront of these efforts, creating an ecosystem that fosters faster, more transparent, and cost-effective payments across borders.

In this article, we discuss some of these regional initiatives and highlight key areas that banks should prioritize in their technology modernization journey in order to actively participate in and capitalize on the opportunities.

Regional Payment Connectivity: A Growing Trend

A notable example of regional payment connectivity is the Single Euro Payments Area (SEPA) in Europe. Established in 2008, SEPA harmonizes payment systems and standards across 36 European countries, allowing for efficient, cost-effective payments across borders. Another notable regional arrangement is the Gulf Payment that connects all the payments systems in GCC countries namely Bahrain, Kuwait, Oman, Qatar, Saudi Arabia.2

The success of these arrangements has inspired other regions, such as ASEAN, to explore a similar arrangement. ASEAN, one of the largest and fastest-growing economic blocs, is working to establish a multilateral payment connectivity system.

The ASEAN Journey Toward Regional Payment Connectivity

Several ASEAN countries already have bilateral payment linkages, such as between Singapore’s Paynow and Thailand’s Prompt pay. However, multiple bilateral connections can become complex, leading to inefficiencies, exchange rate fluctuations, and regulatory challenges. In response, ASEAN countries have agreed for a multilateral arrangement which can ease the payment commute within the region.3

During the G20 Leaders’ Summit in November 2022, Project Nexus was highlighted as a key initiative for regional payment connectivity. Project Nexus is designed to connect different domestic payment schemes to cross border network, ensuring real-time and seamless cross borders payments within the region. A proof of concept (POC) has demonstrated the technical feasibility of connecting payment systems across borders, and India has now joined the initiative as a founding member.

Benefits of Regional Payment Arrangements

These initiatives bring several advantages to different stakeholders:

For Corporates:

• Ability to use a single bank account for payments and collections across countries

• Better transparency and liquidity management by maintaining a single bank account

For Banks:

• Opportunity to expand business by offering services to customers across the region
• Reduction in charges associated with cross border payments

For Economy:

• Increased trade and investment opportunities while fostering closer economic ties among member states.

Role of Technology in RPC Journey

Technology providers play a critical role in enabling the success of Regional Payment Connectivity. Banks and financial institutions will look for technology partners who can deliver solutions that meet the evolving needs of the payment’s ecosystem.

Banks should evaluate the solutions based on the below technology characteristics:

• Innovation in Service Quality: Delivering new and improved payment services with a focus on user experience.
• Micro-services-based construct: Enabling selective scaling of capabilities to deliver population-scale performance.
• API Integration: Supporting seamless integration across various payment systems.
• Interoperability: Ensuring systems can communicate and function across borders.
• Scalability: Solutions must be able to grow alongside the evolving demands of the market.
• Data Security: Providing advanced security measures to safeguard transactions and data integrity.
• Component Reusability: Once developed and tested, individual components should be able to be re-used across different parts of the platform or in creation of new products.

Banks and regulators should look to partner with IT service/technology providers that are abreast and adapt with the latest technologies constructs such as microservices enabled or composable architecture, parameterizable, etc. Such banks will be more adaptive and responsive to the changing needs, benefiting from this RPC initiative.

Concluding Thoughts

Regional payment connectivity has the potential to revolutionize cross-border payments by making them faster, cheaper, and more transparent. It offers tremendous opportunities for banks to expand their services across borders and for technology partners to innovate in a growing market. Strengthening regional payment connectivity not only supports economic stability but also paves the way for a more inclusive and dynamic global economy.

For banks to fully leverage the opportunities presented by Regional Payment Connectivity (RPC), they must prioritize technological modernization and strategic collaboration. This includes investing in scalable and interoperable systems, embracing API-driven architectures, and ensuring robust data security measures. Additionally, banks should seek partnerships with innovative technology providers who can help them stay agile and responsive to evolving market demands. By doing so, banks will not only enhance their cross-border payment capabilities but also position themselves as key players in a more interconnected and efficient global financial ecosystem.

References:

1. Cross-border payments | Bank of England

2. https://www.gulf-payments.com/en/

3. https://www.bnm.gov.my/documents/20124/10150308/ar2022_en_wb4.pdf

With inputs from
Harshad Laxmikant Kirloskar, AVP-Senior Industry Principal
Rajesha H G, Principal Consultant
Monindro Saha, Principal Consultant