According to the Bank of International Systems (BIS), digitalizing trade economics can contribute to building resilience in the global financial ecosystem. While open finance systems operate seamlessly within national boundaries, collaboration with other jurisdictions remains a challenge. The BIS emphasizes that digital data portability is the key to building a unified global financial ecosystem with smooth money movement across jurisdictions. It suggests leveraging data to reduce the cost and friction in cross-border transactions. This is where open-banking-based APIs fill the gap to enable cross-border payments.
The global cross-border payments industry is poised to present an opportunity worth $311.5 billion to banks and FIs by 2032.
Brett King foresees a future that he calls Banking 4.0. He describes it as one with “banking everywhere but not at a bank.”
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Cross-Border Payments: The Vision
Consumers and payment enablers envision a cross-border ecosystem with:
Seamless Transfers
Intermediary-free money movement for B2C, B2B, C2C, and C2B transactions.
Rich Offerings
An innovative fintech ecosystem that swiftly responds to customer needs, at scale.
Operational Efficiency
Streamlined compliance and standardization, leveraging automation and data-powered insights.
Key Principles of Open Banking
Several bilateral and multilateral arrangements effectively reduce friction and smoothen money movement across financial systems of different countries. However, the BIS has raised concerns that this could lead to fragmentation, which, in turn, would translate into elevated scalability issues. Interoperability among these fragments could become more complex and geopolitical incongruencies may restrict user experiences. Therefore, careful planning, collaboration, and adherence to international standards are critical to achieving interoperability at a global level.
The BIS launched Project Aperta to reduce costs and friction in cross-border transactions. The bank leverages open banking’s data portability to connect domestic systems with distinct jurisdictions. The project outlines the necessary open banking data policies to foster a frictionless cross-border payment ecosystem.
ISO 20022 is a critical milestone for achieving open-banking and cross-border payment goals. The standard defines a global language for exchanging transaction data.
Learn how FIs can unleash the potential of data in our blog:
Most Power to Data After ISO 20022 Transformation
How Open Banking Elevates Cross-Border Payments
Open banking enables FIs to leverage APIs for real-time payment processing and pre-validation of transaction data. It paves the way for banks and payment enablers to expand their global footprint while improving operational efficiency and use-case implementation in cross-border payments.
Eliminates Intermediaries
As open banking enables money movement directly between bank accounts, the number of intermediaries in a cross-border transaction significantly declines. Every reduced layer translates into lower error induction, friction, and costs. Plus, real-time access to customer data and faster payment rails accelerate settlements.
Facilitates Traceability and Security
Open banking APIs effortlessly integrate cutting-edge security mechanisms, such as OAuth 2.0 and Strong Customer Authentication (SCA). This enhances security while reducing the operational burden at each stage of the transaction. Additionally, open banking’s low-intermediary operation mechanism facilitates real-time transaction monitoring, improving traceability through the money movement pipeline.
Fosters Competition
With greater accessibility and open ecosystems, customers have more choices. The dynamic marketplace creates an environment for FinTechs to launch state-of-the-art offerings. This fosters competition among financial services providers, encouraging them to innovate to push lower costs and remove speed barriers.
Read More: How to Leverage Open Banking in Simplifying Cross-Border Payments