Technology disruption to the back-end of cross-border retail payments systems could present opportunities for growth

  • Demand for cross-border retail payments continues to grow.

  • Increased compliance costs lead to ‘de-risking’, especially in the South Pacific.

  • The use of new technology to create alternative back-end arrangements may improve efficiency and present further opportunities for revenue.


Source: The Bank for International Settlements 


Point of View


The Bank for International Settlements’ (BIS) 2018 Cross-border retail payments paper published in February, reported findings of a survey of many industry members and describes the cross-border market. The BIS observes that changes in demand are outpacing advancement in supply side arrangements. Demand has been growing strongly, fuelled by international trade, e-commerce and international remittances. In a report discussing ‘International Payments in a Digital World’, Accenture has forecast global values to increase by over 50 per cent between 2017 and 2022, from US$2.13 trillion to US$3.56 trillion annually. Simultaneously, all types of end-users have increased their expectations of payment transactions, partly due to domestic payment infrastructure improvements.


The supply side, however, has experienced less-consistent, shallower progress. Most of the innovation has been concentrated in front-end functions, mainly to improve customer convenience. The BIS found that user experience is not meeting expectations, especially in terms of transparency, speed and costs. 


Back-end correspondent banking models, which involve a chain of bank relationships historically focused on low-volume high-value payments, remains the main arrangement. However, the BIS found the number of correspondent relationships has been declining since 2011, citing higher costs and regulatory uncertainty of compliance obligations including KYC. Rather than risk non-compliance or bear the associated cost, correspondent banks are ‘de-risking’ by withdrawing services from regions with high risk profiles such as the South Pacific. 


Diminished access to correspondent banking services and its associated effect on economic development has prompted initiatives to revamp the model, including improved technical recommendations for KYC, and harmonising processes and standards. Nevertheless, many respondents to the BIS survey believe that correspondent banking is incapable of changes necessary to address developments around high-volume low-value payments, because it was designed for low-volume high-value payments. 


The paper highlights three alternative arrangements for consideration: Peer-to-peer (P2P) systems which are predominately distributed ledger technology (DLT); interlinking domestic payment infrastructures; and closed-loop systems. Each with their own developmental path and problems.


The potential of DLT to improve efficiency of certain back-end processes, for both correspondent banking and other arrangements, has drawn much interest despite being the least mature. Interlinking domestic systems, for example the Directo a Mexico initiative, that created links between the U.S. and Mexican domestic payment systems, has so far not lived up to expectations. Possibly due to low adoption of services by banks in relevant jurisdictions. The BIS reports closed-loop systems, where payer and payee share the same payment service provider, have been growing the fastest. Nevertheless, there are concerns of insufficient oversight, and that adequate risk management standards may not be implemented in closed-loop systems.




The BIS found that challenges facing correspondent banking are particularly pronounced in the South Pacific. This is important because remittances from migrants in Australia to their families in the South Pacific make up a large proportion of GNP in those countries. AUSTRAC found more than 700 bank accounts of remittance service providers were closed in Australia between early 2014 and mid-2015. However, this appears to be due to consolidation of arrangements, as many remittance service providers retain access to account services. BIS figures show that despite Australia’s correspondent banking sector experiencing a 0.2 per cent decrease in active correspondents between 2012 and 2015, the volume and value of correspondent payments increased by 7.4 per cent and 33.4 per cent, respectively.


Mckinsey’s ‘Rethinking correspondent banking report’ found new players are expanding their reach beyond the P2P segment, into business-driven cross-border payments, which currently make up 80 per cent of cross-border payment revenues. Accenture predicts up to 25 per cent of the banks’ traditional cross-border revenue streams could be at risk. Non-banks are also rapidly exploring closed-loop and DLT models. For example, China’s Ant Financial, through Alipay Hong Kong, launched a blockchain based cross-border remittance service. However, the robustness and appropriateness of these three back-end arrangement alternatives are yet to be demonstrated on a large scale. Furthermore, any efficiencies that could be unleashed are conditional on interoperability between these back-end arrangements.


Given the growing market, current customer expectation and improvements in domestic payment systems, the back-end of cross-border retail payments is ripe for disruption, and Australia has a solid foundation on which to build. Australia’s adoption of ISO 20022 messaging standards for the New Payments Platform is a significant advantage for interlinking domestic payment infrastructures with other nations, many of which are also moving towards ISO 20022. There is similar potential in DLT, with Australia taking the leadership in developing international standards for blockchain, and the ASX’s decision to replace CHESS with DLT.


The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members. This publication is also subject to the AusPayNet Terms of Use and Privacy Policy available on the AusPayNet website.



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The opinions and views expressed in this publication are those of the authors exclusively and do not purport to reflect the opinions, views or official policy position of AusPayNet or its members. This publication is also subject to the AusPayNet Terms of Use and Privacy Policy available on the AusPayNet website.


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