Image of two phones in different parts of the world sending each other money

Addressing Regulatory Frictions in Cross-Border Payments

Background 

Cross-border payments remain inefficient and costly despite advancements in domestic payment systems due to complexities involving multiple players, jurisdictions, and regulations. The G20 recognized the need for enhancing cross-border payments in 2020, prompting the Financial Stability Board (FSB) to identify key challenges and building blocks for reform. Diverse legal and regulatory practices across multiple jurisdictions has often been identified as one of the leading causes of frictions impacting cross-border payments. 

To address the inefficiencies in cross-border payments, countries are exploring new cross-border payment initiatives. This includes ongoing global initiatives to link fast payment systems (such as the Singapore’s PayNow and India’s UPI linkage), central bank digital currency projects focusing on cross border payments (such as  Project mBridge) and leveraging distributed ledger technology for cross border payments. Most efforts to address cross-border payment challenges has typically focused on technological advancements. However, it is important to address frictions that arise from divergent legal, regulatory and oversight frameworks across countries that can limit the potential of such newer cross-border payment initiatives. 

Objective of the Report 

To address these challenges and to complement the ongoing work by the international community in aligning regulatory, supervisory and oversight frameworks, this report identifies common regulatory frictions plaguing cross-border payments and recommending standards/ interventions that can inform cross-border payment arrangements while preserving sovereignty of jurisdictions. 

Key Regulatory Frictions in Cross-Border Payments 

The Report identifies the following regulatory frictions in cross border payments – inconsistent regulatory standards on anti-money laundering (AML) / countering the financing of terrorism (CFT) and know your customer (KYC) requirements, sanctions screening, privacy and data protection, access to payment systems by non-banks, capital control, settlement finality of payment transactions, governance structures of payment system infrastructure, etc. 

Recommendations 

The report suggests the following recommendations which can inform legal arrangements governing cross-border payments. 

Ensuring Financial Integrity of Transactions: Establish clear roles for AML/CFT compliance, use risk-based approaches to lower compliance for low-risk transactions, facilitate information sharing for sanctions screening, and harmonize purpose codes across jurisdictions

Security and Privacy: Create clear terms for cross-border data sharing, ensure transparency and user consent, use regulatory sandboxes for innovation, implement privacy-by-design frameworks, explore measures such as regulatory assessment toolkits, privacy certifications, etc. to asses adequacy of privacy standards adopted by a cross-border payment projects and agreeing on minimum privacy standards through bilateral or multilateral agreements.

Capital Control Regulation: Achieve full current account convertibility, simplify remittance restrictions, delink payment processing from enforcement of prohibited activities, and rationalise approval processes under Indian law with compliance linked to transaction amounts.

Access to Cross-Border Payments: Expand non-bank access to payment systems with a risk based approach, liberalize authorization for Payment Aggregator – Cross Border in India and implement a risk-based and graduated customer due diligence compliance for non-bank participants.

Consumer Protection: Ensure transparency on terms, conditions, and fees for cross-border payment services and implement a robust centralized dispute resolution system for user grievances and participant conflicts. 

Robust Governance Framework: Develop a robust governance framework for cross-border payments based on sound and transparent legal arrangements.  Such arrangements should define the operator’s ownership and responsibilities, include diverse stakeholder representation, and establish clear oversight and decision-making processes. This should be supported by common scheme rules governing participant roles, access, liability, and enforcement, ensuring consistency and accountability across jurisdictions. 

Way Forward | Implementing the Recommendations 

To address regulatory frictions in cross-border payments and achieve global consensus to implement the aforesaid recommendations, two key interventions are proposed.

Design high-level Core Principles for Cross-Border Payments Supervision, similar to those used in banking and payment systems. These can serve as baseline standards on issues like AML/CFT, KYC, data frameworks, and consumer protection, for countries to supervise and regulate cross-border payments. 

Create an inter-governmental body to effectively implement the Core Principles for Cross-Border Payments and monitor the adoption and implementation of such principles across jurisdictions. This may be achieved by  either forming a new entity or leveraging the expertise of an existing institution like the Committee on Payments and Markets Infrastructure, ensuring consistent international adherence and oversight.