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According to Waller, not all frictions that slow payments down are undesirable; certain frictions are purposely built into the global payment system for compliance | Representative Image
Interlinking fast payment systems will not necessarily deliver on making cross-border transactions more cost-effective for consumers and businesses, a member of the US Federal Reserve Board of Governors, Christopher J Waller, said on Wednesday.
Speaking at the Global Fintech Fest in Mumbai, he said frictionless cross-border payments will make it difficult to check money laundering and terror funding.
“Today’s consumers and businesses can generally send a payment anywhere in the world, but they all seem to want faster and cheaper global payments, just like we always want faster flights and cheaper airfares. However, I am not entirely convinced that interlinking arrangements will necessarily deliver on those goals,” he said.
Not all frictions that slow payments down are bad, he said, asserting that certain frictions are purposely built into the global payment system for compliance and risk-management reasons.
“Slowing down the speed at which payments are cleared and settled helps banks prevent money laundering and counter the financing of terrorism, detect fraud, and recover fraudulent or misdirected cross-border payments,” Waller said.
His remarks came days after Reserve Bank of India (RBI) Governor Shaktikanta Das advocated a faster interlinking of domestic payment systems to overcome the concerns of high costs and delays.
“With the emergence of Fast Payment Systems across countries and experimentation around central bank digital currency (CBDC), new possibilities are opening up to bring in greater efficiency to cross-border payments. Maximum efficiency gains in such initiatives would come from ensuring inter-operability as a key design element,” Das said in Bengaluru on Monday.
Waller, however, said that it may not be easier.
“There is no silver bullet that increases speed and efficiency without tradeoffs,” he said.
Waller highlighted that the practice of sending payments through a complex chain of correspondent banks contributes to slower payments that could benefit from efficiency enhancements.
Unless new solutions are found, interlinking fast payment systems might increase the risk-management burden for banks that participate in them, he added.
“That is, legal, compliance, and operational considerations are critical to the discussion of the promise and challenges of interlinking. Governance, oversight, and settlement arrangements also need to be thought through, along with considerations for data privacy,” he said.
Waller said from a technical perspective, the promise of interlinking, which is essentially interoperability between or among domestic fast payment systems, is that fast payment networks can just “connect’’ with each other and move payments globally.
“It sounds simple. In practice, however, achieving interoperability is not simple. Technology is probably the easiest part. The legal, compliance, settlement, and governance challenges are more substantial,” he said, adding that the new multilateral arrangements for interlinking could potentially address some of the challenges.
While some countries have established bilateral links between domestic fast payment systems primarily to support remittance payments, Waller stressed that establishing such connections across the globe simply will not scale.
“Multilateral arrangements might bring some efficiencies, yet they are no small undertaking,” he said.
First Published: Aug 28 2024 | 3:27 PM IST
