Towards borderless payments: Best practice recommendations from a P20 report

“The inefficiency of cross border payments is well known and lags behind the improvements seen in domestic payments. This stifles global trade and particularly hurts SMEs who are the engine room of economic growth”, says Duncan Sandys, CEO of P20. A recent report published by his firm, contains specific best practice actions to move towards borderless payments and says that this can only be achieved through collaboration between governments, regulators and industry. Some of the recommendations which we have summarised below, can be implemented individually, says Sandys, but their collective impact would be significant. Others require greater collaboration but a potential roadmap is to focus on regional harmonization first and then look to expand that to a continental level before exploring linking continents.

Key recommendations

Overall

• Collaboration between the private and public sectors is crucial to delivering real improvements to the cost, speed, transparency and accessibility of cross border payments.
• Improving regulation and standards
• Adopt ISO 20022 as the global messaging standard and implement changes to business applications to take advantage of the ISO standard.
• Improve collaboration between legislators and between regulators to move towards more co-ordination and harmonization of payments law and regulation.
• Harmonize approaches to data protection and privacy and adopt common data sharing standards.
• Standardize approaches to KYC / AML / CFT / sanctions to achieve similar high standards.
• Develop digital currency standards that ensure robust regulatory compliance, sacrosanct token integrity and consumer protection. Both New York’s Part 200 and the UK FCA guidelines are models worthy of consideration for wider adoption.
• Build a Coalition of the ‘Willing’ on implementing agreed minimum standards.

Combating Financial Crime

• Educate, communicate and reinforce messaging to consumers about the creativity and persistency of fraudsters and highlight current threats.
• Educate consumers on the culture of Stop, Challenge and Protect ie. taking a moment to stop and think about what they are being asked to do. Challenge it. Could it be fake? Remind consumers that it is okay to reject the request and say NO.
• Deliver standard key messages to consumers:
• No financial institution will request personal information, your password or ask for money.
• Public wifi networks risk your personal information being stolen.
• Be alert to suspicious emails and calls and do not click on links or attachments.
• Consider checking the authenticity of the request by another route, eg. calling the company to verify an invoice or speaking directly to your bank or payment provider.
• When sending money to someone new, ask yourself the question: Have I thought about this enough?
• Identify, root out and prevent bad actors from using payment platforms and share that information across the industry. Accelerate the use of artificial intelligence to monitor for suspicious activity.
• Create an approved list of individuals who attain a certain KYC / AML level and explore how that information could be shared via a consensus / decentralized network.
• Examine the principles of New York’s Part 500 cyber security regulation to determine how they might be applied more broadly to improve coordination between the authorities and financial institutions.

Improving efficiency of cross border payments

• Explore ways to reduce frictions by examining screening frequency, value thresholds, intermediary dependency, interlinking payment systems and reciprocal liquidity arrangements.
• Extend payments systems operating hours to create a golden 2-3 hours where the majority of systems in the world are open.
• Enable real time access to funds and immediate confirmation but without facilitating an increase in financial crime.
• Ascertain and implement best practice on standards and achieving interoperability on a regional level before finding the best way to create continental harmonization with the ultimate aim of linking continents

African viewpoint

As our regional e-FX perspective feature in this edition of e-Forex is focused on Africa we have included part of interview with Dr Robert Ochola, CEO of AfricaNenda that was included in the P20 report.

Is harmonization of global standards achievable and what should be the priority areas?

Technically, harmonization of global standards is achievable. There is an ongoing project to achieve technical harmonization through a single switch whose standards must be adhered to before transacting. Once authorized, access to everyone on the switch is given. From a regulatory perspective, that’s where the heavy lifting is. The challenge is achieving collaboration to ensure that regulations and standards within payment systems achieve minimum standards.

Where should efforts be focused to reduce the estimated $40 billion per week that is laundered?

A top priority should be creating Know Your Customer (KYC) / Anti Money Laundering (AML) databases of people who have achieved a certain KYC/AML level, and then sharing those databases.

The fraud experts are trying to move in this direction. So the critical pieces are sharing of clean information, creating an approved list, and ensuring you share lists of those who don’t meet certain standards from a KYC/AML perspective. There’s still much work to be done because conversations are not happening collectively.

What key messages should consumers learn to better avoid scams?

The challenge is fraudsters are keeping one step ahead. But, do the simple things: (1) Keep your password safe and make sure it’s complicated enough; (2) Avoid phishing emails and things like that which allow people to steal your data; (3) Avoid using open wifi when you’re doing financial transactions. But I’d go step further: Ensure that whenever you’re sending money outside your usual payees, that you double, triple check what you’re doing. The best advice is to keep things as tight as you can as a consumer.

What are the critical elements of identity and how can they be verified across jurisdictions?

I can only speak to the issues of identity from an Africa perspective. And unfortunately, in Africa, you have varying degrees of achievement and maturity. Rwanda, for example, achieves a good level as the government has a digital ID number for all citizens. Of course, that’s kept in a very robust database and before you can do anything, you have to use that ID number. So, that’s probably as advanced as I’ve seen.

Other countries are still using physical ID. There’s a lot we can learn from others without going on the journey alone. The sharing of best practice from fraud monitoring is valuable but, in Africa, we’re still not there because you have systems which give out ID numbers that are still located on a paper system and therefore the ID numbers do not link. And then you find someone with the same ID number but a different name. These issues must be resolved before we have robust digital identity in Africa.

How can the payments industry realize the cost of $1 per cross border transaction?

We must drive interoperability by developing instant and inclusive payment systems that are scalable and talk to each other. Second, relates to cross border trade. Today, on the continent of Africa, the cost of a transfer varies. In East Africa, to send $100 costs about 12%. If you go down to southern Africa, it jumps to 22%. Why? Right now, there are multiple parties and correspondent arrangements.

Trying to harmonize that and bringing those transactions within regional or continental economic communities could be a solution. Why can’t corresponding banks come together to reduce the cost of transactions by considering a multilateral net settlement arrangement? And finally, countries should collaborate on building systems together to harmonize data sovereignty and data passporting under cloud arrangements. Building siloed systems then looking to make them talk to each other is costly. Tackling these issues is critical to driving down to that $1.

How can accessible and affordable low value cross border payments be achieved?

That’s what keeps me up at night. We must harmonize regulations, develop governance models that are inclusive, drive innovation, break monopolies so platforms are open and interoperable. This then allows fintechs to fulfil the demands of consumers. This has been achieved in certain jurisdictions but only for domestic payments. Open platforms create competition but regulators need to move in this direction because we want to drive inclusivity at a low cost. Once they send this signal, business will innovate.

Is a single global payments area achievable?

Technology can achieve that today but that’s not the problem. There are many other issues like sovereignty and control. So, the question is, how countries ensure that whatever technology they’re looking to use still gives them the control that they would need to run monetary policies. But secondly, you need to ensure countries who are slightly behind today are fast tracked through a technology cycle so their systems can then plug into whatever arrangement exists.

Work is underway to achieve this so I think that’s really in play. The question is how do they pivot and move everybody in that direction? It’s not a technology question, it’s regulation, a willingness and a sovereign discussion to say, let’s move. But do we need to go at it big bang? I don’t think so. I think we need to look at it at a regional and a continental level, and then get continents to talk to each other.