Inflation has caused the U.S. dollar's value to soar, providing an opportunity for international merchants selling to U.S. consumers, and for payment projects that seek to remove time and cost from transaction processing.
"The U.S. dollar continues to be the world's dominant currency and the most preferred currency for global trade," said Rusiro Gunasena, senior vice president of RTP product management and strategy at The Clearing House, which is testing a cross-border real-time payment gateway ahead of a full launch in 2023.
The Clearing House, SWIFT and EBA Clearing are piloting Immediate Cross-Border Payments, or IXB, which will begin processing live transactions in the euro and U.S. dollar currency corridor in the coming months. While the test progresses, there's a growing e-commerce market for Americans
The dollar has been gaining strength since the Federal Reserve began raising interest rates to counter inflation. The dollar is trading at a
Businesses, particularly those outside the U.S., are going to want to use the strong dollar as an opportunity to sell abroad, according to Ralph Dangelmaier, CEO of BlueSnap, a digital payments company.
That will put pressure on, or create opportunities for, projects that are trying to move money between countries faster, he said.
"The challenge is the current state of cross-border payments is far too slow and reliant on an archaic network of correspondent banks," Dangelmaier said. "That said, there are fintechs offering innovative solutions and forward-thinking businesses are already taking advantage of local card acquiring."
When
More than two dozen financial institutions from Europe and the U.S. developed IXB. They are testing messaging between the pilot institutions and payment systems; end-to-end processing between RTP, the IXB app and Europe's RT1 real-time network; and integration with users such as banks and businesses.
But there are challenges, namely the need to connect to other real-time payment networks beyond the U.S. and Europe, and to figure out a role for the correspondent banks that traditionally managed currency conversions for cross-border trade but have become time-consuming and cumbersome.
"There's quite a few things that need to come together to make real-time cross-border payments work," Gunasena said, adding the traditional model to move funds between countries is still dominated by correspondent banking, which creates latency. There's also a lack of transparency in traditional correspondent-led international payment processing. Collaboration between real-time rails can improve transparency by providing tracking and visibility into transactions, Gunasena said.
"There is a role for correspondent banks, but we want to make it more efficient and reduce the number of steps involved," Gunasena said.
There are other real-time payment networks and projects to connect networks between nations.
Some initiatives are underway to connect IXP with these other real-time payment systems, according to Gunasena.
Blockchain has also emerged as an option for cross-border payments. Firms such as
In the second quarter,
Blockchain has the opportunity to be a "game changer," according to Dangelmaier.
Blockchain is still maturing, but is not yet at a stage to manage a full international payment system, Gunasena said, adding IXP uses cloud-delivered technology to manage scale and speed.
While many issues inherent in domestic real-time payments have been solved, the same issues and points of friction still exist for cross-border payments, according to Erika Baumann, director of Aite-Novarica's Commercial Banking & Payments practice.
"The number of correspondent banks is shrinking due to de-risking as well as just the low return on the high investment in emerging markets," Baumann said, adding that while the correspondent banking model works much of the time, there is still an opportunity for the times when it does not.
That leaves challenges such as clearing and settlement taking up to two days, unpredictable expenses and the final settlement amount varying from the original transaction amount due to arcane fee structures during the correspondent banking process, Baumann said.
"The IXB pilot potentially helps to solve these issues where the correspondent banking model doesn't work as effectively, providing another option in the toolkit," Baumann said. "The RTP network was created with the ability to one day facilitate cross-border payments so seeing this [pilot] move forward is great."
