RTGS.global: Why Cross-Border Payments in Opportunity Markets are Ripe for Disruption

Posted on Mar 21, 2024 by Jarrad Hubble, CEO, RTGS.global

Headshot of RTGS.global CEO Jarrad Hubble

At RTGS.global we recently facilitated a series of frictionless cross-border payments and settlements between a group of progressive institutions in three rapidly growing markets: Uzbekistan, Tajikistan and Georgia. This saw five banks, across three separate jurisdictions, conduct multiple payment-versus-payment settlements and immediate cross-border payments in their respective domestic currencies. This serves as a powerful proof point for how instantaneous settlement has the potential to revolutionise the way money moves around the world, while driving financial inclusion particularly in developing markets where there is huge untapped potential.

But why is this important, and so relevant today?

Where currencies are exchanged by parties on a deliverable basis, payment-versus-payment settlement is tremendously important. Put simply, payment-versus-payment (or “PvP”) settlement ensures that the final settlement of a payment in one currency occurs if and only if simultaneous final settlement of a payment in the counter-currency takes place. PvP mechanisms aim to mitigate settlement risk, which is the risk of loss when a party in an FX transaction pays the currency it sold but does not receive the currency it bought. As noted by the CPMI,[1] such FX settlement failures can arise due to default events, operational issues, liquidity constraints, or other factors. This can lead to significant losses for market participants, most famously demonstrated in the failure of Bankhaus Herstatt in 1974. Given the vast notional amounts exchanged daily in the FX market to satisfy physically-settled FX transactions,[2] payment failures can have systemic consequences. As a result, FX settlement risk has for years been a priority for the policymaking agendas of central banks and regulators around the world.

Whilst incumbent PvP arrangements (such as CLS Bank) protect a significant proportion of daily FX settlements from settlement risk, it is well-recognised that such arrangements are not available to all segments of the FX market. Many emerging markets and developing economy markets, for example, do not have PvP solutions available to them, despite trading in their currencies having increased over the years. In addition to mitigating settlement risk, new FX settlement solution providers may also seek to enhance efficiency by offering their settlement rails to further mitigate other cross-border payment frictions, such as slow and expensive movement of funds due to long transaction chains, limited hours of functionality, expensive credit, credit risk, opacity as to the status of a payment, and trapped liquidity, most of which are a direct result of over-reliance on the traditional correspondent bank network.

As prompted by the G20 Roadmap to enhance cross-border payments,[3] the time is right for new initiatives to provide services to an expanded set of markets and industry stakeholders, especially where there are clear opportunities for and from more efficient cross-border payments but a lack of availability of PvP and streamlined global payment mechanisms.

A Need for Regional Solutions

Bringing PvP solutions to emerging markets opens avenues to regional integration and internationalisation of a wide range of currencies. Creating a framework for reliable and secure exchange of value then becomes the basis for closer integration of their financial institutions.

With central banks becoming more comfortable with entities storing their liabilities on an external computer system, including in the cloud, this potentially enables a technological and regulatory framework that supports faster, cheaper and more secure exchanges of value across borders. This in turn creates the right circumstances and incentives for the development of regional settlement services, supporting regional unification, including of financial markets, and/or extending the currency reach of such regional settlement schemes.

The result? Access to foreign currencies will no longer be the exclusive privilege of the larger banks, thereby directly contributing to efforts for increased financial inclusion and cross-border payment cost reduction.

Barriers to Adoption and How to Address Them

There are two main barriers for using an existing settlement arrangement: omission of the currency from that service, or the fact that at least one of the sides to the settlement is not using it.

This is why we at RTGS.global believe there is a need for a new fit-for-purpose common platform which:

  • creates a foundational regulatory framework, designed with accessibility and the potential for a truly global reach in mind,
  • is underpinned by an agile technical infrastructure that leverages the latest standards, payments, message standards, application programming interface (API) and technological advancements, and
  • is overlayed with a comprehensive notification and workflow where finality of settlement is achieved within its rulebook. Settlement will be instant, transparent, predictable and executed with certainty of outcome.

The availability of such a platform across multiple jurisdictions will allow for previously unavailable levels of interoperability whereby currencies can be freely exchanged with peace of mind that local host bank funds are segregated and held at the relevant central banks. This will result in the opening up of previously underserved currency corridors — as recently demonstrated with the successful transaction we facilitated with Credo, Humo, Arvand, Alif and Anorbank. The certainty of PvP settlement will allow market makers to reconsider offering FX rates between any currency pair supported across the network, removing the need for a currency conversion via a hard, typically USD, currency.

Regional initiatives like Buna and PAPSS are leading the way as great example of regional integration. We have observed a strong desire for regional integration of trade driving the need for closer integration of financial markets in a wide variety of locations. It is recognised by all stakeholders that the key to achieving this is an open platform, a common standard underpinned by a shared rulebook and support from the relevant regulatory authorities.

Real-World Impact

As demonstrated by our recent pilot in Central Asia, enormous progress can be demonstrated without the need for a big-bang introduction of a new global settlement service. In collaboration with the banking community and the wider financial ecosystem, a phased and controlled approach is preferred, with a focus on regional growth and/or proving out individual business use cases first.

With this in mind, we are pleased to be able to share a unique perspective from Eraj Alisherov, Head of International Banking Relationships at Alif Bank, one of central Asia’s most progressive financial institutions, on the challenges faced by those banks operating in the Central Asia region and why efficient cross-border settlement has the potential to be a game-changer for the region.

"Undoubtedly, the quest for an efficient solution to cross-border settlements in Central Asia is a pressing issue that demands our immediate attention. Traditional methods, such as the utilisation of correspondent accounts, are becoming increasingly outdated. From our perspective, these systems are on the verge of obsolescence.

We stand on the precipice of a new era, one that calls for a groundbreaking approach that can transform our understanding of financial transactions. I recall countless articles I’ve read on current settlement mechanisms — they struck me as mundane, riddled with bureaucratic hurdles and unnecessary complexities. I found myself questioning the future of these systems. Will we ever witness the emergence of a more streamlined solution? This question resonated within me, fuelling my curiosity and determination to seek a better alternative. I firmly believe that the answer lies within our collective ability to challenge the existing norms and embrace innovative change.

This is why we are so excited by the solution presented by RTGS.global. They don’t just present a solution, but they have demonstrated its effectiveness, and its potential to revolutionise the way we operate. The concept of engaging with central banks is nothing short of groundbreaking. The need for correspondent accounts? Gone, if their vision of global adoption comes to fruition. As an expert in the International Banking Relationships Sector (IBRS), this is a game-changer.

When they conducted their first test involving Tajikistan and Georgia, it was clear this was no mere theory. This was a practical, working solution. That’s when I knew I had to act. My mission is to position Alif as the most advanced bank in the Republic of Tajikistan in terms of International Banking Relationships. Signing an agreement with RTGS.global aligns perfectly with this mission.

I’ve seen the instant settlements with my own eyes. It was a moment of revelation. I could only marvel at the efficiency and say, “It works. It truly works, guys.” This isn’t just a step forward, it’s a leap towards the future of banking. And I’m proud to be part of that journey.

Overlooking the potential of RTGS.global is a misstep no central bank can afford. This isn’t just a diamond in the rough; it’s a tool capable of shattering the glass ceiling of conventional settlements. Regardless of your country’s legislation, it’s imperative to find a solution, to carve a path that leads to this transformative journey.

We mustn’t stand idle, waiting for others to take the first step. The onus is on each bank worldwide to make this groundbreaking idea a reality, a change that could redefine everything we know about banking.

In Central Asia, this isn’t merely an option; it’s a necessity that all banks will undoubtedly consider. Our financial market is on an upward trajectory, and we have the vision to see opportunities that others might overlook. We’re not just part of the change; we’re at the forefront, leading the charge toward a brighter, more efficient future in banking."

- Eraj Alisherov, Head of International Banking Relationships, Alif Bank

A Common Requirement for Interoperability

Many banks hold few direct settlement memberships, and unless they have a global footprint are often only members of their domestic currency settlement system. While this approach can work efficiently for transactions within a limited range of currencies, it presents challenges when transacting in any of the world’s many other currencies. To carry out these transactions, banks typically resort to using multiple intermediaries whereby banks often have to temporarily relinquish control over their funds — a process that amplifies both transaction times and costs and increases the associated risks.

Interoperability has the power to overcome these limitations by encouraging disparate settlement systems, networks and applications to communicate seamlessly, enhancing the efficiency of cross-border transactions. The implications of this efficiency extend beyond mere cost and time savings; interoperability enables smoother and less risky international exchanges, and puts buyer and seller in direct control of their funds, which is integral to supporting the economic activities of our globally connected societies.

In the context of this article, interoperability serves a critical function in fostering financial inclusion, especially in the context of integrating opportunity/developing markets into the worldwide financial ecosystem. These markets, often underrepresented in global finance, can flourish when the barriers between diverse financial systems are reduced — and when greater certainty and standardisation are brought to cross-border settlement across different currency corridors. In these respects, interoperability can act as a facilitator to create a financial ecosystem that can carry a more inclusive and diverse global economy.

Creating a More Efficient, Secure and Inclusive Future

We at RTGS.global are passionate about enhancing interoperability in the world’s financial system, leading the way towards a more efficient, secure, and inclusive future. As demonstrated by the first-hand account from Alif Bank, a truly global settlement network backed by central bank funds has the power to open up new currency corridors in any developing and opportunity markets — whether that’s Central, Middle and Southeast Asia, the Near East, the Caribbean, or the Pacific Islands — to the rest of the world. 

Starting regionally, we are witnessing a monumental step forward towards universal interoperability between payment systems and other key infrastructures in the financial markets ecosystem. In time, this will be a major development in the move towards programmable money, moving from certainty of payment to certainty of getting paid, impacting how everyone transacts, does business and lives in a global world.

About RTGS.global

RTGS.global is a next generation settlement service that enables instantaneous movement of funds cross-border between banks. Its vision is to directly connect key market participants from individual countries into a global settlement network. To achieve this, it is creating seamless interoperability across borders and currencies, working towards a single global liquidity pool. RTGS.global — Instant Settlement with Certainty.

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