By Chavi Jafa, Head of Visa Business Solutions, Asia Pacific
Why it is time for financial institutions to embed optionality, flexibility and global reach into their future-focused payments infrastructure today.
With new business models emerging and the global economy continuously evolving, cross-border trading relationships are becoming increasingly complex and dynamic. These relationships are having to adapt as supply chains react to new free trade agreements, political shifts, and the proliferation of e-marketplaces…not to mention the pandemic.
Confidence in how value is exchanged impacts how readily businesses take advantage of commercial opportunities. It is therefore key that financial institutions can provide buyers and sellers the ability to exchange value in not only a simple and trusted way but also consistently across the global supply chain. The adaptability of payments infrastructure to support the changing needs of businesses is becoming ever-more important.
To be future-ready, financial institutions need to evolve their payment infrastructure to address security, identity verification and predictable value exchange.
Harmonizing diverse requirements
To start, cross-border payments encounter inherent complexities as the payment moves through multiple jurisdictions where parties must comply with local regulations. For example, when a payment is sent to Thailand, a Tax ID must be included in the payment instruction, whilst, for India, a purpose of payment detail is required. Not meeting these requirements leads to delays and frustration for businesses. Governments are key in promoting the simplification and interoperability of diverse payment systems to reduce barriers to cross-border payment delivery. In Europe, the Single Euro Payments Area (“SEPA”) is a successful example of the harmonization of a regional payment system within a single regulatory framework and currency. While there is no equivalent multilateral institution governing Asia, there has been recent progress with the establishment of regional trade agreements like the Regional Comprehensive Economic Partnership (RCEP) which aims to drive supply chain localization across the region; and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Collaboration at this scale is ambitious – the RCEP covers approximately 30% of global GDP and one-third of the world’s population and is larger than trade agreements in the EU, US-Mexico-Canada and the CPTPP, which excludes China1.
This multilateral government attention is well-deserved given the sustained growth of intra-Asia trade where supply chains continue to shift. A great example is in the electronics industry where the supply chain is integrated across China and many ASEAN economies, including Malaysia, Singapore, Philippines, Thailand and Vietnam, as goods are imported, assembled and exported to meet changing demand. While government-led regional collaboration promotes standardization, businesses exchange value across the globe and the private sector plays an important role in further driving interoperability globally.
Using standards to fortify payment security
Amidst the diverse requirements, there is broad agreement that security comes first. Applying new technology within a network of known participants to support the standardization of diverse requirements can provide financial institutions the flexibility they need while ensuring rigorous governance and controls. Apart from harmonizing domestic payment system requirements and country-specific message formats in a simplified way, data protection frameworks can devalue and protect account information while using data analysis to identify and combat fraud. Value-added capabilities also add a layer of security and reliability to transactions across the globe.
With a proliferation of ways to move money, standards and interoperability will again grow in importance in enabling participation, security, and efficiency of money movement across all types of flows. Global network standards provide an interoperable experience governed by a set of operating rules so money or other forms of value can be moved across networks end-to-end2.
Global network standards provide an interoperable experience governed by a set of operating rules so money or other forms of value can be moved across networks end-to-end.
Establishing security with interoperable digital identity
Local regulations require the identification of the transacting parties involved in a payment and additional details like the purpose of payment. These KYC standards vary globally but are united in their stipulation that anonymous payments are not an option for regulated entities.
While many leading economies are now reaping the economic benefits of linking payments to a domestic digital identity, the challenge for cross-border account to account payments is that there is no globally recognized business identity. A globally interoperable credential is a critical element that drives digital experiences for customers and secure automation of processes for financial institutions. Digital identities enable automated pre-validation checks and empower financial institutions to have confidence in their transaction screening and regulatory reporting. It is the missing link for efficient and secure payment processing which in turn gives businesses the confidence they need to transact with the digital experience they are looking for.
Supporting new forms of value exchange
In addition to shifting supply chains, the world is also watching innovative developments, targeted at solving the challenges of cross-border payments using central bank digital currencies (CBDCs), such as pilots between Singapore and Canada as well as Hong Kong and Thailand3. The pace of change highlights that joining payment systems and establishing interoperability regionally or even globally is complex. As new technologies emerge, regulation will continue to accelerate innovation. Industry players must have the flexibility to evolve traditional models and go beyond transaction processing, clearing and settlement, into overlay services such as data, intelligence, security and risk management capabilities4. Global networks that have the ability to support settlement models for new forms of value will empower financial institutions to evolve their capabilities in line with what their business customers require.
Payment services depend on sound foundational principles to stand up to the scrutiny the industry will undoubtedly face as innovation accelerates.
Getting a global perspective
Payment services depend on sound foundational principles to stand up to the scrutiny the industry will undoubtedly face as innovation accelerates. As legacy norms are redefined, transparency, trust, and scale will continue to be important differentiators, with security and reliability a top feature valued by companies in improving the payment experience5. A global network with money movement capabilities like Visa B2B Connect and Visa Direct positions financial institutions to adapt quickly to the requirements of their customers and eliminate frictions from moving money amongst multiple parties in a supply chain. Predictable exchange of value is not only addressing cost and speed by transforming the payment path from the bank of origin to the recipient bank through a multilateral, global network, but by applying mature risk management processes that ensure the governance and controls to protect all parties remain in place.
As economies recover from the pandemic, new opportunities to grow will present themselves. Businesses are focused on building resiliency by adapting their supply chains and optimizing customer experience and operations through digitization. To enable them to thrive, financial institutions need to embed optionality, flexibility and global reach into their payments infrastructure today. Visa’s money movement capabilities are empowering financial institutions that are ready to embrace a paradigm shift in cross-border payments, breaking down traditional processes and silos to spur innovation.
1 15 Asia-Pacific Countries Sign World’s Largest FTA; A Closer Look at RCEP’s Key Outcomes and Implications, White & Case LLP, November 2020
2 Visa Asia Pacific: Network of Networks Summary Paper, January 2021
3 Singapore, Canadian central banks use blockchain for cross-border payments, Ledger Insights, May 2019
Inthanon-LionRock Leveraging Distributed Ledger Technology to Increase Efficiency in Cross-Border Payments, Bank of Thailand and Hong Kong Monetary Authority
4 Visa Digital Currency in Asia Pacific, April 2021
5 Visa AP B2B Connect Survey, September 2020, looking at cross-border payments across 5 countries in Asia Pacific and surveyed 1,300 decision makers of micro, small, medium and large corporates to identify cross-border practices, usage, needs and pain-points
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