The future of cross-border payments

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LEANA FERGUSON: There's one quote from the article, though, that really resonates with me, and it cuts to the heart of the matter. Ultimately, where we want to get to is the ability to instantly settle any payments in any currency, anywhere, anytime.

VIJAY LULLA: I'm very excited with what blockchain can do and is already doing and the potential that it holds.

LEANA FERGUSON: With cross-border payments on the rise, new technology is rapidly evolving to meet the demands of treasurers, business owners, and customers. What barriers to cross-border payments still need to be broken? And how are technological advances like blockchain technology leading the charge?

Welcome to Making Sense. I'm Leana Ferguson, a payments, sales, and relationship manager for financial institutions at J.P. Morgan. Today, I'm sitting down with my colleague Vijay Lulla, EMEA head of cross-currency payments at J.P. Morgan. In today's podcast, we'll be expanding on our Payments Unbound series, which is available on jpmorgan.com as we discuss the future of cross-border payments.

VIJAY LULLA: Hey, Leana, so nice to meet you, and I'm excited to be here.

LEANA FERGUSON: Great to see you. I'm incredibly excited as well. So, if you're ready, Vijay, I think we can get cracking. So cross-currency payments, cross-border payments, I think we can both agree this is an exciting time in payments. We have an awesome opportunity to offer our clients increasingly innovative technology that can make their lives and the life of their customers easier. We recently published an article in our latest edition of Payments Unbound, which is a collaboration between J.P. Morgan Payments and wired consulting, titled The Race to Rewire Cross-Border Payments. This article raises some interesting points about the increasingly efficient future of cross-border payments. But before we start looking ahead, I would love to hear your take on the current landscape, Vijay. How would you describe the present state of cross-border payments? What are some of the challenges our clients are facing?

VIJAY LULLA: So one of the biggest challenges and opportunities at the same time is instant payments, or real-time payments, as we call them. They're becoming the norm domestically, but is much more difficult to transfer money instantly across borders. To set the tone, there are 195 countries globally and more than 85 real-time payment schemes. As the article says, each and every one of it has its own systems, its own regulations, and levels of technology maturity. Now, by increasing market efficiencies, we know that RTPs are expected to generate $170 billion plus of economic value to these economies. Now, just imagine, if you were able to connect this globally and provide this across borders, so the connecting it to the cross-border space, that would just double or even triple the benefits. But the challenge, as I see it, that it will require closer collaboration between the different players in the payment space, whether it is regulators, banks, technology providers, in fact, everyone and anyone who is part of this. Technical processes and data formats will also need to be aligned. While we all know that ISO 20022 is a step in the right direction, but it will take some time for it to really work out. A single regulatory and compliance regime would need to be agreed for all the participants to make this really work. That's very challenging. So, yes, do we see this as a possibility? Yes, I would say again. In the immediate future, maybe it will take a bit more time.

LEANA FERGUSON: Regulatory harmonization sounds great, right? But as you said, I think we're probably a way off of that. And what I'm really hearing from what you said is we need a lot more teamwork in the industry to really propel this forward.

VIJAY LULLA: Absolutely.

LEANA FERGUSON: Right, so going back to your comments around current challenges, it's interesting because we have made headway, right? For example, we learned in the article that globally, 84% of payments are now either direct payments or have just one intermediary. Communication technology between banks has improved to the point where cross-border payments are moving much more quickly than ever before.

VIJAY LULLA: Yes, absolutely. So while Swift has enabled the movement of cross-border on a near real-time basis, if I would say. But the actual connectivity into the real-time network is going to take its own sweet time. While there are global initiatives underway, but like I mentioned earlier, it's complicated, involving technical and legal integration, among other things. We have seen regional setups and some countries coming together to make this work. And I can share some examples. PayNow in Singapore is integrating with faster payment networks across some of the markets in Asia, like India, Thailand, and Malaysia. Although this is for very small remittances, we've seen UPI in India go across into different markets to enable something similar. And there's another bigger project called Project Nexus, which BIS is running with more than six countries to really set up the blueprint for connecting multiple national real-time payment systems to enable seamless, cross-border payments. Maybe that is the next step and that's what needs to be done, that a global body needs to come in and lay out the guidelines and the initiative to get the different multi countries together.

LEANA FERGUSON: There's one quote from the article, though, that really resonates with me, and it's probably thematic to everything that you've been saying just now. But where we want to get to ultimately is the ability to instantly settle any payment in any currency, anywhere, anytime.

VIJAY LULLA: Says it all, doesn't it? It's a dream for all of us.

LEANA FERGUSON: And that's from Jason Clinton, my boss, our head of financial institution group sales Europe at J.P. Morgan. He believes one of the probable solutions, amongst many others, but something that he sees as a standout item in the industry right now is blockchain technology.

VIJAY LULLA: I'm very excited about what I think blockchain can do and is already doing. There is some way to go, of course, but it's one of those technologies which has great potential.

LEANA FERGUSON: Why do you think blockchain technology is so well suited to the needs of cross-currency payments?

VIJAY LULLA: To put it simply, blockchain technology is great for cross-border payments because it's fast, secure, cost-effective. It cuts out the middleman, which means transactions can happen faster and cheaper. Blockchain works 24 by 7 and can help people in areas without traditional banking access. So theoretically, it has all the positives to make it work. Now, getting a bit more technical, one approach to improving cross-border payments using this technology is through the adoption of tokenized commercial bank deposits. This enables the preprogramming of financial controls, greatly lowering the cost for providing cross-border payment services. When brought together on a unified ledger, it can help to streamline clearing and settlement, which is one of the biggest challenges that we face when it comes to real-time cross-border payments. And then the work that is happening across central banks working on various wholesale CBDC initiatives. Now, if you combine this with the tokenized deposit, maybe that's the way to go forward. But again, I'm not a technical expert or a technology expert if I were to put it on blockchain. So I will leave it to the experts, but this is one way of really making a difference in the cross-border space.

LEANA FERGUSON: No, it's certainly very exciting. So what about when it comes to making instant or at least faster payments across borders?

VIJAY LULLA: Because the blockchain is a single source of truth secured by many institutions, transactions can be settled and verified securely within a mere matter of seconds or minutes.

LEANA FERGUSON: I know that a number of financial institutions are already using permissioned or private blockchains. They control who uses it and how data is shared, boosting security.

VIJAY LULLA: Absolutely, and to give an example, JPM launched the JPM Coin, facilitating cross-border movement of funds between JPM network of branches in a real-time 24 by 7 kind of a scenario. It serves both as a ledger, reflecting balances, and a payment rail to facilitate and record transactions. The beauty of this is that it leverages the DLT-based programmable 24 by 7 movement infrastructure for instant and conditional settlements. Now, it might sound a bit technical, but people who understand the blockchain space will know that these are the basics which are required to really move money on blockchain.

LEANA FERGUSON: Sounds like you're a technical expert to me. [CHUCKLES] I think you're being very humble. But no, it's certainly an exciting technology, and it's great to see alternatives. I don't think it's going to replace Swift, but it can certainly be a great partner or overlay to it. So, in the short term, as we've just said, we think that maybe it'll be an overlay, not here to replace Swift, but what do you think, Vijay?

VIJAY LULLA: I think, in the short term, it's going to take us time because different groups may be developing projects, but there is no guarantee they will work together. And that's one of the other challenges around cross-border payments. Given the complexity, it takes the entire village, if I were to put it that way, to really make things work. I think blockchain has great potential, but that potential cannot be realized unless one network becomes a global standard. And that's only possible if all countries and regulators work together. I think it's possible. I think we're moving in that direction, specifically with the work being done around various central banks coming together to expose the CBDC space that I mentioned earlier, plus some of the initiatives that a few of the larger banks have put together.

LEANA FERGUSON: No, that's excellent, Vijay. Thank you so much for sharing your opinion on that. So let's talk about other solutions outside of blockchain. I'd love to know, are there any others that we haven't mentioned in the article that you think could improve cross-border payments, making them more secure, transparent, or even faster?

VIJAY LULLA: Yeah, there are quite a few technologies, I would say. One of them, for example, is virtual accounts. It's very simple, and yet, not really something which has been adopted widely. For example, I know that many businesses have direct deposit accounts in multiple currencies where their beneficiaries are located. That means they have money in multiple currencies, which can easily cause real headache trying to maintain those balances, hedging their position in those currencies, et cetera. But with a virtual account, businesses can become easily able to manage cash flow across different currencies via a centralized structure. They might not even need to hold multiple local accounts in the same market. Virtual accounts can help simplify things under one umbrella, and that's one solution that we can really look at. Leana, what about you? Are you aware of any other solution you feel could make a difference in the future of cross-border payments?

LEANA FERGUSON: So I think, as you've just said, virtual accounts are certainly one. And I know at JP Morgan, we offer virtual reference numbers as well. And for our financial institution clients, the power of reconciliation with virtual solutions is incredible. So I definitely think that will resonate with our FI clients. But another one that I'm very excited about that is already very much in place, certainly at J.P. Morgan with our clients, is APIs, or application programming interfaces. So, one of the things I hear my clients say time and time again is that, although they're open to new technology, they don't want it to disrupt their current operations. But what's so brilliant about APIs is that they can integrate easily into existing treasury infrastructure and interfaces. They allow our treasurers to access real-time visibility into foreign exchange rates from the systems they already have, mitigate risk across their global accounts, and accelerate reconciliation. So I think they really facilitate that real-time data. So there's no lag. You ping it, you ask for it, it gets pinged back to you. And I think that's excellent.

VIJAY LULLA: Absolutely, and even we are seeing that on the cross-currency side when it comes to FX, for example, with the API connectivity, we are able to provide real-time rates to our clients that they can expose to their ultimate customers. So it's definitely a technology that's being adopted, has practical value. And we are seeing that grow more and more. So quickly. Leana, of the solutions that we discussed, which one are you the most excited about, and why?

LEANA FERGUSON: I don't want to sound like a broken record, guys, but it's APIs for me. I just think the simplicity, the ease of integration, and then the power of real-time data, that, for me, I just think is incredibly powerful for our clients. And yeah, I'd say that's what excites me the most. How about you?

VIJAY LULLA: So for me, APIs definitely because of their simplicity and ease of implementation. The other one, what we spoke about, blockchain, and that's largely because of the potential that it holds. At the end of the day, it all comes back to the client and the customer experience. And I do think, as technology like blockchains continue to evolve, cross-border payments will only become smoother and easier for everyone. So there's a bright future for all of us.

LEANA FERGUSON: And that's what we like to do, right, at J.P. Morgan, serve today but future proof for tomorrow as well.

VIJAY LULLA: Absolutely.

LEANA FERGUSON: And I'd say it's already happening. It's clear that cross-border payments are essential for any business. They enable international trade, support financial inclusion, and drive innovation, making global transactions faster and more cost effective. Ultimately, they foster economic growth and connectivity, which means an increasingly interconnected world. Vijay, thank you so much for joining the podcast today and sharing your insights.

VIJAY LULLA: Thank you for having me.

LEANA FERGUSON: And thank you to our listeners for tuning in to another episode of Making Sense. We hope you join us again next time.

VIJAY LULLA: It was a pleasure, Leana, to have this podcast. Thank you.

LEANA FERGUSON: Absolute pleasure. Thanks, Vijay.

Voiceover: Want to dive deeper into the future of payments? Check out the latest issue of Payments Unbound by visiting jpmorgan.com/payments/paymentsunbound. You can also find the link on our episode page or directly in the description on your favorite podcast platform. The views and opinions expressed herein are those of the author and do not necessarily reflect the views of J.P. Morgan, its affiliates, or its employees. The information set forth herein has been obtained or derived from sources believed to be reliable. Neither the author nor J.P. Morgan makes any representations or warranties as to the information's accuracy or completeness. The information contained herein has been provided solely for informational purposes and does not constitute an offer, solicitation, advice, or recommendation to make any investment decisions or purchase any financial instruments and may not be construed as such. Copyright 2024, JPMorgan Chase and Co. All rights reserved. Visit jpmorgan.com/paymentsdisclosure for further disclosures and disclaimers related to this content.

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