End of Days: Calling Time on Swift’s Outdated Cross-border Payments Model

The evolution of the payments industry over the past 20 years has been significant, both in terms of the number of available settlement methods and how transactions can now be made. At a global industry level, there has been a greater focus on payments since G20 leaders endorsed the Roadmap for Enhancing Cross-border Payments¹ in 2020. The G20 made this activity a priority – specifically making cross-border payments, including remittances, faster, cheaper, more transparent, and inclusive. The current SWIFT migration to ISO 20022 XML for cross-border payments is possibly the most significant disruption to traditional global cross-border payments since SWIFT first introduced electronic financial messaging back in 1977. This transformation will deliver on one of the key building blocks identified by the Committee on Payments and Market Infrastructures (CPMI) back in July 2020²: Data and Market Practices. It is recognized that better-quality data will improve the overall efficiency, speed, and compliance of payments. But while this industry initiative will deliver material benefits, this change addresses only legacy file format limitations. It does not remove many long-standing difficulties with cross-border correspondent banking.

Friction within the correspondent banking model

The correspondent banking model is an essential part of cross-border payment flows. Its foundation is a series of bilateral agency agreements, whereby a bank maintains a physical bank account (and deposits) with another (correspondent) bank. This relationship enables the contracting bank to access an agreed range of financial services typically in different countries. The banks use the Latin terms nostro and vostro to describe the same bank account but from different points of view. Nostro refers to "our" account held in a foreign bank, while vostro refers to the foreign bank’s point of view, whereby they hold "your" account in their bank.

The established correspondent banking approach was developed hundreds of years ago. It includes a number of material challenges that will still exist post the SWIFT MT-MX migration in November 2025:

• High costs: The cost of a cross-border wire payment extends beyond the charges of the originating bank. Under the correspondent banking model, each bank involved in the cross-border payment processing chain can apply a fee. This also extends to the beneficiary bank that can also apply a fee. These additional correspondent banking and beneficiary banking fees can be greater than the initial charge made by the originating bank.
• Slow processing: While SWIFT GPI is a significant enhancement that provides tracking of the cross-border payment status, this merely highlights that in some cases, a cross-border payment can still take 24 hours to reach the beneficiary bank account. This means one correspondent bank in the cross-border payment chain has effectively taken one day’s float in addition to its processing fees – this is significant given interest rates remain relatively high.
• Principal amount: While the SWIFT message design allows for the originating customer to specify if the beneficiary should receive the full principal (payment) amount through using the "our/debt" charge bearer code, a significant number of corporates still encounter challenges where at least one bank in the chain ignores this charge bearer code and deducts its fees from the principal payment amount. This means the beneficiary receives less money, creating reconciliation challenges and customer dissatisfaction.
• Settlement risk: Banks worldwide need to hold significant balances in reserve to cover the risk of correspondent bank default because many cross-border payments take a day or more – sometimes weeks – to complete. Continuous Linked Settlement (CLS), which was launched in 2002 to mitigate this risk, covers only a small number of the world’s currencies, leaving large sections of the global economy badly exposed to correspondent banking’s overnight risk problem.

These are not the only concerns around the legacy correspondent banking model. In 2016, the Governors of the Bank for International Settlements (BIS) Economic Consultative Committee (ECC) mandated the Committee on Payments and Market Infrastructures (CPMI) to produce a report³ on any threats to its safe and efficient functioning. Analysis using SWIFT data highlighted a trend towards concentration in correspondent banking activities. The report identified that some banks providing these services were reducing the number of relationships they maintain and were establishing fewer new ones – highlighting a risk that some banks might be cut off from the international payment networks. This situation implies a threat that cross-border payment networks might fragment and that the range of available options for these transactions could narrow. The CPMI recommendations tried to address some of the costs and concerns connected with correspondent banking activities. However, it acknowledged that the issues surrounding the withdrawal from correspondent banking are complex.

The rise of instant payments

Instant (real-time) payments accounted for 266.2 billion transactions globally in 2023. This is a year-on-year growth of 42.2%, highlighting that just under one-fifth of all electronic payments globally were real-time, based on a report from ACI Worldwide⁴. With instant domestic payments now available in more than 70 countries, the report also estimates that at least 25% of domestic payments will be instant by 2028. And with domestic instant payments reaching their destinations in seconds at a near-zero cost to the sender, instant (real-time) payments are faster, cheaper, and generally more accessible. Through a corporate lens, they help to reduce costs when compared with traditional SWIFT cross-border payments. Importantly, they also improve liquidity because funds are received on a real-time/near real-time basis, which has an immediate positive impact on cash flow. Instant payment transaction limits continue to increase. The US FedNow service allows an optional transaction limit of up to $500,000; UK Faster Payments is now at £1 million for business transactions; and the 2025 SCT (SEPA) Instant rulebook removes the maximum transaction limit at a scheme level. All of these factors will help drive greater industry adoption.

Project Nexus: removing friction

Project Nexus is a BIS Innovation Hub (BISIH) project. It explores how to leverage the successful foundation of domestic instant payments as a means of addressing the limitations of correspondent banking and improving the speed, cost, transparency, and accessibility of cross-border payments. The concept is a simple one: by connecting domestic instant payment systems (IPS) to each other, a multinational IPS service can be created that enables cross-border payments from sender to recipient within 60 seconds (in most cases).

Is this just a pipe dream? Absolutely not. This project proves the vision of the G20 Roadmap for Enhancing Cross-border Payments can be achieved for speed, cost, transparency, and accessibility. The journey started in April 2021 (pre-Nexus) with a successful bilateral test connecting Singapore and Thailand using tokenization (sending payments across the border with just the recipient’s phone number). In 2022, Project Nexus completed a proof of concept (PoC) with the European Central Bank (ECB), Singapore, and Malaysia.

Project Nexus removes the challenges around a bilateral connection by introducing a standardized utility that would enable each domestic IPS to connect once only to this utility, based on ISO 20022 global financial standards. This vision moved a step closer to reality with the completion of a third phase in mid-2024, in which the BISIH Singapore center worked with the central banks and IPS operators of Indonesia, Malaysia, the Philippines, Singapore, and Thailand to evaluate the utility-based approach. It focused on the following core areas:

• Governance, scheme, and oversight arrangements
• Development of a viable business and revenue model for Project Nexus
• Finalization of Project Nexus’ technology architecture and operational model

The focus is now on preparing for production with India, Malaysia, the Philippines, Singapore, and Thailand. Both the ECB and Indonesia will be special observers to this initial production phase.

In addition to Project Nexus, private sector fintechs are also developing commercial services to interlink domestic payment systems to create a worldwide instant payment capability. One of the leading players in this field is UK-based RTGS.global. It uses a cloud-hosted ledger to enable banks and payment providers to settle in real time, at any time of day, with counterparties around the globe.

Instant settlement is the key to turning cross-border payments from the legacy message-based correspondent banking model into modern real-time value exchange.

As slick as domestic payments

While it is unrealistic to expect Project Nexus to completely replace the current correspondent banking model for cross border payments, alongside startups such as RTGS.global, it will introduce further choice around the payment process. And by using modern payments technology, adopting ISO 20022 payment messaging standards, and leveraging the existing domestic IPS network, there is a real opportunity to make the cross border payments experience almost as smooth and efficient as domestic payments. For corporates that initiate cross border payments within these initial payment corridors, this is now an area worth exploring with their banking partners to understand both the roadmap and the true potential of this initiative. For the rest of the corporate community, this initiative, along with other cross border payment solutions, should now be on the radar.

For more information on cross-border payments and Swift related challenges, please contact Eliane Eysackers or Mark Sutton.

*This blog was first published here: End of Days | Treasury Management International