Navigating the intricate web of global payments can be a daunting task. As the operator of the UK’s high-value payment system (CHAPS), the Bank understands this challenge all too well. Leveraging the advantages of the ISO 20022 standard for messaging, we have developed a novel approach to pinpoint and categorize cross-border CHAPS payments with greater precision. This innovative method has unveiled that more than half of CHAPS activity involves international transactions and has provided fresh insights into the global payment corridors for CHAPS payments. With a deeper understanding of payment flows, policymakers can better focus their efforts on reducing global barriers in alignment with the G20 roadmap for enhancing cross-border payments.
###Understanding Cross-Border Payments
- When a payment travels internationally, it may need to take a detour through correspondent banks.
- Correspondent banks act as mediators between the sending bank and the foreign recipient, facilitating the transfer.
- By analyzing payments in CHAPS, we can track the movement of funds between correspondent banks domestically.
- Payments that arrive from abroad and have the UK as the final destination can also be identified in this process.
- While CHAPS is not directly involved in the international leg of the payment, detecting cross-border activity provides valuable insights into the payment ecosystem.
###Why Cross-Border Payments Matter
- Complex correspondent banking chains, inconsistent data standards, and mismatched settlement hours between jurisdictions contribute to inefficiencies.
- These inefficiencies lead to high costs, lengthy delays, restricted access, and limited transparency.
- Enhancing cross-border payments is a key priority for the G20, with a roadmap outlining targets and priority actions to tackle the challenges.
- Adopting ISO 20022 is crucial for improving global payment chains and aligning with the G20’s objectives.
###The Impact of ISO 20022
- The migration to the ISO 20022 messaging standard has revolutionized the way payment data is structured and enriched.
- ISO 20022 messages offer a more structured format compared to legacy MT messages, allowing for easier extraction of geographic information.
- This new standard has facilitated the development of automated code to extract crucial data elements, like BIC and IBAN, with greater accuracy.
- The classifier developed using ISO 20022 data has enabled the identification of cross-border payments based on country codes, providing valuable insights into CHAPS activity.
###Key Findings and Insights
- Our analysis revealed that over half of CHAPS payments involve cross-border activity.
- Cross-border payments constitute a significant portion of the value settled in CHAPS, highlighting the importance of international transactions.
- The average value of cross-border payments differs from domestic transactions, indicating distinct patterns in the payment landscape.
- Financial institution payments make up a higher proportion of cross-border transactions compared to overall CHAPS payments, showcasing the unique characteristics of international activity.
###Future Implications and Recommendations
- Understanding the intricate web of cross-border payments is crucial for policymakers and central banks.
- Extending RTGS settlement hours can address delays in international transactions, and insights from this analysis can aid in evaluating the impact of such policy changes.
- Embracing ISO 20022 and enriched data can unlock the secrets of cross-border payments, paving the way for a more efficient and transparent global payment ecosystem.
As we delve deeper into the realm of cross-border payments and explore the possibilities offered by ISO 20022, we invite further discussion and inquiry into this evolving landscape. James Duffy and James Sanders from the Bank’s Payments Strategy Division are committed to advancing our understanding of global payments, and we welcome your thoughts and feedback on this groundbreaking research. Let’s embrace a future of seamless and efficient cross-border transactions, powered by enhanced data and innovative solutions.
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