Global Payment Systems and Geopolitics

International trade and finance are both hugely important forces in our increasingly interconnected world, both driven by cross-border payments. Cross-border payments — that is, transactions that take place between two or more countries — form the backbone of today’s global economy, facilitating the exchange of goods, services, and capital internationally.

Of course, these transactions would not be possible without global payment systems. These platforms provide the infrastructure needed for secure, efficient transfers. By enabling cross-border transactions, global payment systems facilitate global trade and promote economic growth.

With that all being said, these systems do not exist in a vacuum. Like anything else, they are affected by external factors, including geopolitics. Such trends influence both the development and the functioning of cross-border payment systems by shaping the regulations surrounding them and, in turn, their accessibility.

This article will take a closer look at the connection between global payment systems and geopolitics, analysing the current trends and potential risks associated with cross-border payment transactions.

Evolution of Global Payment Systems

Electronic fund transfers have been around in some form or another since the mid-1800s when the advent of the telegraph made it possible for merchants to transfer money through Western Union. Nowadays, transferring money looks very different. But how did we get from there to here? In this section, we chart the evolution of global payments.

The History of Global Payment Systems

By the early 20th century, wire transfers had caught on as a prominent means of transferring money, still through the use of telegraph. However, another couple of decades after that, sometime in the mid-1900s, the world of cross-border payment systems was changed forever by the introduction of telex technology. Telex marked a significant improvement from the telegram, as it allowed real-time person-to-person communication that you could trust.

Historically, payments associations played a crucial role in standardising methods and ensuring compliance across borders, particularly as digital payment platforms emerged and evolved. Nonetheless, there was still room for improvement. So, in 1973, the world said hello to SWIFT. By introducing a standardised platform for transfers and messages, SWIFT outdid telex technology. With faster, more reliable transfers, made possible by removing the human error component, the platform replaced its predecessor in 1977.

Modern Payment Systems

These days, SWIFT isn’t the only major player in the world of global payment systems. The Single Euro Payments Area (SEPA), Fedwire, and the Cross-Border Interbank Payment System (CIPS) are a few other examples you might recognise.

These days, we also have access to online payment systems, which make it easy to send money directly from one account to another using the internet. PayPal is often cited as one of the first successful digital payment systems, as we would recognise them today, having been established back in 1998. In the years since, these systems have only increased in popularity, driven by a surge in mobile payments and e-commerce, as well as non-economic factors like the COVID-19 pandemic.

The Role of Global Payment Systems in the World Economy

Today, global payment systems ensure stability and speed in cross-border payments. They do this by using standardised messaging formats to streamline communications between banking institutions and payments associations to improve overall accuracy and clarity, providing reliable services you can trust. Furthermore, unlike the payment systems of yesteryear, modern cross-border solutions are near instantaneous, making transferring money abroad far easier and more convenient.

One cannot overstate the impact of this on global trade and investments. As well as increasing transaction speeds, these methods lower processing costs and allow better market access, the result of which is the dynamic world marketplace we’re able to enjoy today.

Risks and Challenges for International Payment Systems

There are a number of risks and challenges for cross-border payment systems to contend with. Some of these are risks to individual users — cyberattacks and fraud, for example. Other challenges impact payment systems and the overall economy far more broadly. In this section, we’ll examine a few of them.

Cybersecurity Risks

As is the case with any online platform, payment systems must contend with any number of cybersecurity risks, including fraud, cyberattacks, and other types of criminal activity. Banking institutions and payments associations are vulnerable to these dangers, as well.

Without putting the necessary precautions in place, companies and banks run the risk of facing a data breach. The effects of this are potentially devastating: on the one hand, consumers can end up losing their money and even their identity; on the other, platforms can lose their good reputation, as well as customer trust. Incorporating encryption and appropriate authentication features is an important part of fighting against these threats.

Financial Protectionism

Financial protectionism refers to governmental efforts to restrict financial competition from other countries. This might include imposing tariffs, applying quotas and embargoes, or even direct manipulation of currency — i.e., a country purposefully devaluing its currency to gain an edge in exporting. Creating independent payment systems is another method. We can find a particular example of this in China, which created CIPS to reduce its reliance on Western economic systems.

One final method to consider is the restriction of access certain countries have to international payment systems. Countries may choose to respond to this by developing their own system or by seeking the assistance of others.

Influence of Regulators and Economic Institutions

Another challenge to be aware of the influence of regulators, payments associations, and other economic institutions, such as the World Bank or the International Monetary Fund. For service operators, compliance with these funds is a necessity. However, the number of policies this involves means that compliance is something of a legal minefield.

Furthermore, cross-border payments are very heavily regulated, and exchange rates fluctuate all the time. These can lead to delays and extra administrative costs that can be quite detrimental to global payment systems as a whole.

Geopolitical Factors and Their Impact on Payment Systems

Global payment systems are impacted by geopolitical trends as much as any other part of our society. In this section, we’ll begin to examine the role such factors play, considering the impact of sanctions and economic restrictions, political instability, trade wars, and currency conflicts on payment systems.

Sanctions and Economic Restrictions

Since 2008, the EU has placed a number of restrictions on Iran’s banking sector, in large part because of the Iranian nuclear programme, among other reasons. In 2012, the EU passed a regulation prohibiting financial messaging systems, including SWIFT, from offering products and services to any Iranian banks already sanctioned by the Union.

More recently, numerous sanctions have been placed on Russian banks in response to the country’s annexation of Crimea in 2014, as well as the Russo-Ukrainian War. Like Iran, Russia was removed from SWIFT, as well as other service providers. In response to this, Russia turned to CIPS as an alternative, though it seems to have had limited effectiveness.

Sanctions can have quite a significant impact on banks. For one thing, such prohibitions mean they lose access to a lot of global markets. They also often suffer an increase in operational costs and may notice a negative impact on both trade financing and foreign relations.

Political Instabilities and Conflicts

Political instabilities and conflicts can have a noticeable impact on access to cross-borderpayment systems, as well. In addition to potential sanctions, countries affected by such changes suffer because of an erosion of trust in the national banking institutions. For that reason, banks from other countries may be hesitant to do business with them, thereby reducing access to global networks.

Syria provides us with a good example of this. Because of the country’s ongoing civil war, strict sanctions have been placed upon both the Syrian government and many of the nation’s banks. Like Iran and Russia, it has been blocked from SWIFT.

Another example can be found in Venezuela, a country that faces various sanctions because of the prolonged political and socioeconomic crisis. The nation’s economic institutions have had heavy restrictions set against them, effectively cutting the country off from access to many international economic services.

Trade Wars and Currency Conflicts

Trade wars — that is, when a country retaliates against another by hiking up its import tariffs — can also have a significant impact on international settlements and currency exchange. Such conflicts often result in currency volatility, which can, in turn, create new vulnerabilities. They can also increase costs associated with cross-border payments.

The ongoing trade war between the U.S. and China is a good example of this. These tense relations began in 2018, when former President Trump imposed a number of tariffs on goods from the EU, Canada, China, and Mexico. By May of the following year, these tariffs had affected nearly $200 billion of Chinese imports. China retaliated with its own tariffs not long after.

In the end, this led to growing fears of a currency war, as China’s yuan dropped very steeply in value for the first time in roughly a decade.

Examples of Geopolitical Influence on Payment Systems

We’ve already looked at some examples of the impact geopolitical risks can have on payment systems. In this question, we will focus on the long-term impact of this. For example, we will consider a couple of ways in which a country might respond to being locked out of an international payment system.

Development of Alternative Payment Systems

One response a country might have to being cut out of SWIFT or other similar systems is to create an alternative payment system of their own. We have already discussed China and their system, CIPS. Another example of a country launching its own economic countermeasure is Russia, which established the System for Transfer of Financial Messages (SPFS).

Russia first began the development of SPFS back in 2014 as a response to the U.S. threatening to remove it from SWIFT, but the first transaction wasn’t made through the system until 2017. Despite facing some initial troubles and some operational challenges, it is now fairly popular, with a total of 20 foreign countries having joined up.

Evidently, then, the launch of SPFS has allowed Russia to diversify its trade partners while at the same time providing a means to support local banks.

The Battle for Digital Currency

According to a recent report, over 134 countries and current unions are currently investigating the possibility of installing a central bank digital currency (CBDC). CBDCs are a type of decentralised, digital fiat currency and are also largely driven by geopolitical motivations.

Some countries might pursue having a CBDC in order to decrease their dependency on foreign economies and increase their own freedoms. Using this type of currency will allow countries to bypass traditional banking systems entirely, thereby facilitating cross-border payments severely curtailing the economic power of sanctioning.

CBDCs have many other benefits. The digital yuan has a great deal of potential; for example, it is poised to raise awareness of the yuan around the world and increase its size in international trade. According to the former governor of the People’s Bank of China, the total number of transactions made using this currency had reached around 950 million by June 2023, with a total value of 1.8 trillion yuan. This represents a significant increase from the cumulative value of 100 billion reached less than a year earlier.

The Future of Global Payment Systems in an Era of Geopolitical Instability

In a time of such instability, it can be difficult to determine what the future holds. One thing is for sure, however: the future of global payment systems is sure to be interesting. In this section, we take a closer look at that future, considering some key trends.

Emergence of New Players and Technologies

FinTech companies have already disrupted the traditional banking system by introducing revolutionary new technologies that change the way we think about economics. Blockchain technology, mobile payments, peer-to-peer transfers — these and many other innovations can help facilitate faster, more reliable, and more secure global money transfers.

At the same time, the introduction of such technology helps to drive competition and creation, meaning we will soon soar to even higher heights.

Rethinking International Economic Relations

The introduction of CBDCs and alternative payment systems will enable nations to reinvent themselves on the economic stage. We can already see that China and the digital yuan are having a significant impact on the world economy, shifting our focus towards a multipolar system and reducing dependence on the USD and SWIFT.

China’s progress gives us a sense of the dramatic international trends we can expect to see in the future.

Possible Development Scenarios

At this time CBDCs are something of a threat to sanctioning powers. In the future, it is likely we will see regulations around sanctions revised and tightened in response. If this does happen, however, it’s probable we will see even stronger trends towards alternative payment systems, further reducing dependence on SWIFT and allowing individual countries more economic autonomy.

An increase in regional payment systems may produce mutual trust in new alliances. This might result in consolidated payment systems that will provide international trade a significant boost while also enabling independence from established Western international payment systems.

Conclusion

Global payment systems are a key part of international trade and cross-border payments — but they are by no means static. These systems respond to external situations, including the types of geopolitical conflicts and instabilities we see in our world today. Currency conflicts, wars, and sanctions, among countless other issues, help shape the landscape of international economics and cross-border payment solutions.

But for all these factors challenge the future of international finance, they also present opportunities for evolution, growth, and cooperation. To make the most of them, we need to tackle these challenges head-on, finding ways to adapt and develop new payment systems to best service us.