FX Ecosystem 05 | FX settlement: Instant, still distant? | ShapingFX series
Instant has become a firm fascination and, in some cases, an expectation in the world of payments. Faster payment systems (FPS) are now a common feature across many countries, making domestic payment rails more efficient. Many consider linking domestic instant payment solutions the key to improving cross-border payments, at least in the retail sector. But the answer is not so simple for the wholesale market. This paper explores the potential opportunities instant payments bring to the cross-border payment sphere, acknowledging that instant is not yet feasible on a large scale due to the unique nature of the foreign exchange (FX) market, nor is there a strong market desire for instant FX settlement.
A ‘need for speed’ has recently become a driver – or at least a key factor – for market participants selecting a payment mechanism. Those offering ‘instant settlement’ are becoming more desirable.1
Instant settlement solutions involve the transfer of funds in real-time or near real-time2 on a 24/7 basis.3 Though real-time payment capabilities and systems have been around for some time,4 the gradual digitization of economies and improvements in computer technology over recent decades has led consumers to expect their financial interactions to keep pace.5 Around 70 jurisdictions already have FPS in place offering real-time payment solutions,6 often praised for their speed, convenience and cost savings for end users.7
FPS implementations have significantly increased over the past decade, and it is expected that the overall number of FPS worldwide will continue to rise as the global real-time payment market grows at a compound annual growth rate of 35.5% from 2023 to 2030.8
“... the gradual digitization of economies and improvements in computer technology over recent decades has led consumers to expect their financial interactions to keep pace.”
1 See Real-Time Payments in a Digital World: What Lies Ahead: finextra.com2 Whilst FPS provide customers with the functionality to send and receive payments, the underlying settlement model does not always settle in real-time. Several FPS, such as UK Faster Payments Service, are settled through deferred net settlement, which involves multiple settlement cycles and the settling of payments in batches on a multilateral net basis, which provides liquidity saving benefits.3 See CPMI (2016) Fast payments – Enhancing the speed and availability of retail payments.4 See Future of Fast Payments_Final.pdf: worldbank.org5 See WEF Shaping_the_Future_of_Cross-Border_Fast_Payment_Systems_2023.pdf: weforum.org6 See Linking fast payment systems across borders: considerations for governance and oversight: bis.org7 See IMF (Jan 2024), Digital Money, Cross-Border Payments, International Reserves, and the Global Financial Safety Net – Preliminary Considerations.8 See World Bank Group, (Oct 2023) ‘The Future of Fast Payments’ (Future of Fast Payments_Final.pdf): worldbank.org
