RESIDENTS here are closer to the day when they will be able to make instant and cheap cross-border money transfers to four other Asian countries via local apps such as PayNow.
The central banks and instant payment service providers in Singapore, India, Malaysia, Thailand and the Philippines have settled on a rules and an operations blueprint to establish a new entity called the Nexus Scheme Organisation (NSO).
The announcement was made on Jul 1 by the Switzerland-based Bank for International Settlements (BIS), an international body of central banks that develops global standards to strengthen the regulation, supervision and risk management of banks.
The BIS statement did not say when the new payment system will go live.
While Singapore already has bilateral real-time payment linkages with Thailand and India, they are separate systems and operated by distinct entities, such as PayNow-PromptPay for Thailand and PayNow-UPI for India.
Nexus, on the other hand, is designed to standardise the way domestic instant payment service providers connect to one another. Rather than an operator building custom connections for every new country to which it connects, the operator only needs to make one connection to the NSO.
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In fact, Nexus would be the world’s first multi-country fast payment system.
BIS Innovation Hub started the Nexus project in 2022 and worked with the partners from the five participating nations over the past year to fine-tune the scheme in areas like governance and the technology underpinning it.
Cecilia Skingsley, the global head of BIS Innovation Hub, said Nexus can be scaled up to additional countries and could make cross-border payments faster, cheaper and safer.
Nexus would be a significant improvement on how cross-border transactions are done today.
Most individuals and businesses use retail and commercial banks or online banking services to wire funds abroad. Overseas workers remit money to their families back home mainly via money changers, while parents wire tuition fees and living expenses to children studying abroad.
However, since banks must check these transfers against various regulatory requirements, including anti-money laundering and terror financing, the process is cumbersome and fees can be expensive.
That is especially true for people and businesses that must make small but regular overseas transfers. This, in turn, has made seamless and cheap cross-border payment services popular worldwide, although they remain a fraction of the global payments market.
Total cross-border payment flows – these include trade and services payments – made by traditional banking channels reached about US$150 trillion in 2022, according to McKinsey, while small global real-time payments transactions were about US$195 billion.
Skingsley told The Straits Times in a virtual interview from Basel, Switzerland, that the global payments system benefits big companies, asset managers and international borrowers, noting: “It is not really well-designed for catering for people’s needs.”
She added that not only individuals, but small companies also struggle: “It is quite a high cost to have access to financial services in the cross-border space.
“What we try to do here is allow or invite countries’ fast payment systems to connect to Nexus, and once they are on board and connected… their clients will be able to send money, cross-currency, cross-border, and the aim is that it will take less than a minute for the transaction to complete and land on the receiving-end account.”
The NSO will be wholly owned by the central banks or the instant payment service providers in participating countries, depending on the domestic structures. But they will all have to agree on a common set of rules – akin to entrance regulations – such as those requiring adherence to anti-money laundering and countering financing of terrorism.
Nexus is one of many exploratory projects embarked upon by the BIS Innovation Hub, which was set up to develop public goods in the technology space to support central banks and improve the functioning of the financial system.
The BIS annual economic report released on Jun 30, 2024, dedicated a special chapter on how artificial intelligence (AI) could impact central banks and the financial sector.
“The rapid and widespread adoption of AI implies that there is an urgent need for central banks to raise their game,” it noted.
“Central banks need to upgrade their capabilities both as informed observers of the effects of technological advancements as well as users of the technology itself.”
Skingsley said: “I do think that AI will be a real game changer when it comes to central banks being able to understand and follow what’s happening in the economy, sort of here and now.
“It will lead to better decision-making by central banks.”
However, the macro-economic impact of AI will depend on how individuals and businesses view it.
“Do they see it as an opportunity for them, and start spending more money as a result? Or are they getting concerned about it? Add in productivity effects from AI, and you see there is both supply and demand consequence,” she said.
The BIS report said AI’s likely effects on productivity, investment and consumption mean policymakers must find ways to study that and employ it for their own benefit.
BIS, which comprises more than 60 central banks as members, defines itself as a bank for central banks and is the world’s oldest international financial organisation. It aims to promote monetary and financial stability, and acts as a forum for cooperation among central banks and the financial community. THE STRAITS TIMES
