Historically, different currencies have played decisive roles in making international trade possible. What’s more, cross-border payments have been undergoing substantial transformations throughout the years, driven by innovations and shifting market demands. Even today, major shifts are still ongoing in response to global events, revolutionary technology, and dynamics in the global economy.
In this article, we will take a closer look at the key ongoing developments in the sphere of cross-border payments. We will also explain how this domain is expected to balance optimizing efficiency and managing mounting global risks in the face of seismic changes. Without further ado, let’s dive in!
The modern cross-border payment scene is currently experiencing multiple major shifts that are sure to play a defining role in its future evolution trajectory. Here are the two main ongoing transitions you need to be aware of:
The T+1 Transition: What’s It All About?
Currently, the settlement process of a spot FX trade in the US usually takes about two days after the transaction is conducted. This process is linked to a concern known as Herstatt risk, aka settlement risk, when one side may fail to fulfill their payment obligation while the other has already done it and cannot reverse it.
Fortunately, the US Securities and Exchange Commission (SEC) is working on rules to shorten the standard settlement time from two days (T+2) to just one day (T+1). While this may seem like a small change, it is a major improvement that is set to bring about a lot of benefits, including:
This change is expected to go into full effect in May 2024 and will affect those dealing with US stocks, corporate debt, and unit investment trusts.
Yet, although T+1 is a big step toward faster cross-border payments, it is still not completely free from the FX settlement risk and other operational challenges.
Due to this, the SEC states that an eventual shift to end-of-day settlement (T+0) is inevitable. However, as the industry is currently in the midst of switching to T+1, it is way too early to plan this transition just yet.
This trend is especially prominent in the Asia-Pacific (APAC) region. For instance, in recent weeks, India executed its first crude oil payment to the UAE in Indian Rupees (INR).
What’s more, BRICS countries have expressed their intent to reduce reliance on the US dollar, with various banks in countries like Laos, Cambodia, and Myanmar increasing their holdings of Chinese yuan (CNY) over the past decade.
Yet another tendency supporting the de-dollarization trend is the fact that currency pairs not involving USD are now witnessing narrower spreads, which makes them more appealing for international trade. The growing number of market participants quoting prices in a broader range of currencies has played a significant role in this shift, particularly in emerging economies.
Nonetheless, full de-dollarization is likely a long-term process and is not a guaranteed scenario. After all, many financial markets stick to the “if it isn't broken, don't fix it” principle. The US dollar’s liquidity and efficiency in facilitating cross-border transactions have proven effective for decades.
Aside from T+1 and de-dollarization shifts, there are other noteworthy cross-border payment trends, such as:
Now, you have an idea about the major shifts and key trends ongoing in the realm of cross-border payments. While the future of these developments depends on a variety of factors and thus remains uncertain, the majority of stakeholders are pursuing common goals, including:
Thus, as of now, the trajectory of the cross-border payments’ evolution looks extremely promising. Regardless of the outcome of the T+1 and de-dollarization tendencies, industry experts predict reduced friction and improved transaction efficiency, which is an extremely positive tendency in the context of international commerce.
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