CBDCs Compete for Relevance in Cross-Border Payments

Link by link, the fashioning of a global network for central bank digital currencies (CBDCs) proceeds apace. 

As it continues to grow, it has the potential to simultaneously transform cross-border payments and spur the interoperability of faster payments schemes around the globe. 

As PYMNTS reported Wednesday (Sept. 13), the global messaging platform SWIFT said that three central banks are testing its solution for interlinking CBDCs — and the solution is being utilized by another 30 FIs to examine other use cases for CBDCs.

The three central banks and monetary authorities — among them the Hong Kong Monetary Authority (HKMA) and the National Bank of Kazakhstan — have agreed to integrate SWIFT’s connector solution into their infrastructures.

Cost Structures Improve

The far-flung (geographically speaking) nature of these banks and monetary authorities, we’d add, speaks volumes to the ways in which the digital currencies could be used along various trade corridors, and that an “on ramp” is critical for various domestic CBDCs to move beyond a given country’s borders.

And if cross-border transactions see settlement times shrink from, say, several days to a few seconds, it’s conceivable that the FX-related costs of those transactions would be drastically reduced. 

Banks and enterprises may also wind up keeping less capital “locked up” on their books, or may reduce the practice of holding foreign currencies, since they no longer have to mitigate those costs. Greater transparency and speed of those cross-border payments also has the positive knock-on effect of improving supply chains, as buyers, banks and suppliers all are integral components of those chains.

Cross-Border Pain Points 

According to recent PYMNTS Intelligence, 27% of SMBs see the complexity of cross-border payments as a hindrance to their ability to grow.

Less than a quarter of small businesses found their current cross-border payment solutions to be “very or extremely” satisfactory. The opportunity, and the need, to smooth the channels across which cross-border funds flow is illustrated by the fact that 38% of SMBs saw an increase in cross-border payments sent or received in 2021, and 81% of merchants who used online cross-border payment methods say these transactions have helped their businesses grow, per PYMNTS Intelligence. 

The rise of digital payments — and faster payments in particular — demands interoperability as businesses and consumers want to be able to mix and match payment types, depending on the use cases, the transaction value and the urgency of a particular transaction’s settlement times. Against that backdrop, the linking up of CBDC initiatives also will likely help take down silos between faster payments schemes. 

Here in the states, interoperability remains an eventual pursuit.

The FedNow® Service has just debuted, and The Clearing House’s RTP network has been operating for six years. Linking those rails together will give some runway to linking faster U.S. payments into an international setting.

In the meantime, India’s real-time payments system Unified Payments Interface (UPI) has already connected with Singapore’s PayNow and expanded UPI access to the U.K., Australia, Canada and the U.S.