The status of immediate cross-border payments

Simon Wilson, Managing Director of Transaction Automation

Cross-border payments are growing rapidly, and by 2027 the market value is expected to reach $250 trillion. While cross-border payment transaction times have gradually reduced from several days to a few hours or minutes, we’re now operating in an ‘on-demand’ culture, where consumers and businesses expect instant payments. So, where are we with immediate cross-border payments, and what does the future look like for this game-changing initiative?

Now the expectations for real-time payments have been met in the retail space, the focus has shifted to how B2B payment methods can be optimized to match. The result has been major investment in domestic payment systems that enable funds to be transferred quickly, securely and at any time. But although domestic payments have seen a welcome advance in service standards, cross-border payments have lagged behind.

The aim of immediate cross-border payments (IXB) is to provide a 24/7 payment transfer system that will ensure a shorter time to market and execute instant cross-currency transactions. The scheme was developed by two renowned financial clearing infrastructures — The Clearing House (TCH) in the U.S., EBA Clearing in Europe, in liaison with SWIFT.

It combines the current real-time payment systems, RTP® in the US and RT1 in Europe, to facilitate these notoriously challenging multi-currency transactions.

Last October, the first participants exchanged cross-border instant payments as part of a live pilot with financial institutions in the United States and Europe. IXB was enough of a success in this pilot phase that some of the major banks – including JPMorgan Chase, Bank of America, Wells Fargo and Citigroup – were incentivized to test and adopt the IXB initiative. Working closely with IXB’s creators, these banks have since developed methods for seamlessly integrating the IXB tech into their existing systems.

One of the key features of IXB is that it won’t act as a single currency, bilateral link between just two payment systems. Instead, it’s based on a model that can be replicated across other currency corridors and payment systems – and its developers expect to add further currencies from an early stage to meet customer expectations for instant cross-border payments across the globe.

The plan is for a full commercial rollout this year.

What’s next for IXB

Although there’s still no specific timeline for the expansion of IXB, additional currency corridors will be added following its rollout, so clearly a more global service is the ultimate goal for the IXB service.

We think that IXB will address some of the frictions in cross-border payments that correspondent banking has not been able to solve. And although it’s different from traditional correspondent banking, there will be important roles for correspondent banks to play in the context of IXB, such as providing liquidity, offering FX services, and managing risks related to that.

At the same time, IXB will give them the opportunity to leverage the state-of-the-art rails of real-time payments to provide better and faster services.

In the meantime, as more banks begin to fully adopt IXB, I believe other payment platforms and banking applications will integrate the technology, including PayPal, Venmo, and Square, as well as other, smaller banks, credit unions and fintechs.

Once fully adopted, it will bring many benefits to businesses, particularly those operating in the US and Europe.

Aside from the ability to make transparent payments in real time, businesses will enjoy 24/7 availability to make cross-border payments at any time, day or night, which is particularly useful for those that operate and conduct business in cross-Atlantic time zones.

IXB also enables businesses to reach a wider audience and, unlike current payment processing alternatives such as blockchain technology and digital currencies, IXB complies with the regulatory bodies, so businesses can be confident in the security and reliability of the system.

Given all these clear benefits of IXB, it may even eclipse another much-hyped method of cross-border payment.

Will IXB put crypto in the shade?

IXB has the potential to overshadow crypto as a means of making fast, low-cost payments across borders. Compared to IXB, digital currencies are relatively slow and are, of course, unregulated.

And although digital currencies certainly allow for easy international cross-border currency conversion, they are still in the early stages of development. The IXB model, on the other hand, is designed to add additional currency corridors in the near future, which could include peer-to-peer transactions, as well as business-to-business ones. At the moment, crypto is simply not mature or mass enough to compete.

That said, if Distributed Ledger Technology (DLT), and the currencies it enables, prove successful, it has the potential to increase transparency, efficiency, and security. By leveraging a form of tokenized cash using DLT, payments could be made both instantly and securely: DLT ensures transparency by recording all payment transactions on the distributed ledger, which is accessible to all network participants. This shared record is secured and immutable, ensuring payments are genuine and protected against fraud.

Final thought

Interoperability is key to the future of payments. IXB offers many exciting benefits and is an attractive option for those keen to expand their global operations or improve their current relations with faster, transparent, and more secure payments. 

Of course, technology alone won’t deliver on the use cases for IXB. For successful innovations to help grow cross-border payments, payment providers need the solid backbone of standards and regulation that can be future-proofed for changes across multiple regions.

The internationally used ISO 20022 standard supports formats which are considerably more flexible than existing country – and bank – specific message formats, and so provides significant benefits in the field of process handling. For example, extended bank transaction information is provided and improvements for processing complaints are enabled.

At valantic FSA we are dedicated to supporting innovation in the banking industry, particularly when it comes to global payments. As such, we’re excited to see innovations like IXB implemented in a way that reduces friction and helps the cross-border industry to grow.

Please also read our white paper Payments without borders