As the G20 focuses on making cross-border payments more cost-effective and timely for consumers and businesses, Federal Reserve Board Governor Christopher J. Waller expressed concern on Wednesday that simply interlinking arrangements—interoperability between or among domestic fast payment systems - may not be sufficient to achieve these goals.
"Today's consumers and businesses can generally transmit payments anywhere in the world, but they all appear to want faster and cheaper global payments, just as we all want faster flights and lower airfares. However, I am not totally confident that interlinking agreements can deliver on those goals," he remarked while addressing at the Global Fintech Fest in Mumbai.
Earlier this week, Reserve Bank of India (RBI) Governor Shaktikanta Das stated that the emergence of fast payment systems across countries, as well as experimentation with central bank digital currency (CBDC), are opening up new opportunities to improve the efficiency of cross-border payments. He stated that the greatest efficiency advantages in such programs would result from establishing interoperability as a major design aspect. According to Waller, not all frictions that slow down payments are undesirable; certain frictions are intentionally designed into the global payment system for compliance and risk management purposes.
"Slowing down the speed at which payments are cleared and settled helps banks prevent money laundering and counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments," according to Waller.
Waller emphasized that the existing practice of routing payments through a complicated network of correspondent banks adds to delayed payments, which might benefit from efficiency improvements. He did, however, highlight that there is no silver bullet that can boost speed and efficiency without sacrificing other aspects.
"Unless new solutions are found, interlinking fast payment systems might increase the risk-management burden for banks that participate in them," he said. Waller emphasized that legal, compliance, and operational issues are crucial in discussing the potential and limitations of interlinking. Additionally, governance, oversight, and settlement procedures must be carefully explored, as well as data privacy considerations.
He also emphasized that, while the concept of interlinking, which essentially means interoperability between or among domestic quick payment systems, may appear simple, attaining interoperability in fact is challenging. Technology is arguably the easier part; the legal, compliance, settlement, and governance concerns are more significant, he said, adding that new global interlinking agreements might potentially alleviate some of these issues.
While some nations have developed bilateral links between domestic rapid payment systems solely to facilitate remittance payments, Waller emphasized that constructing bilateral links throughout the world will simply not scale. "Multilateral arrangements might bring some efficiencies, yet they are no small undertaking," he told reporters.
