“There is no such thing as an international wire,” writes Erin McCune of Glenbrook Partners, a research and consultancy firm focused on payments.
Despite an increasingly globalized world, there’s essentially no international payment network for cross-border payments. The closest thing we have is SWIFT, but it’s only a messaging service. In such cases, international transfers can only happen if banks in both locations have a pre-existing agreement.
A good way to think about this is email before the advent of the SMTP protocol, which standardized electronic messaging. Imagine being on AOL and not being able to directly email someone using Yahoo. That’s pretty much the situation with international payments. Each region has its own closed-loop system. What’s lacking is a universal translator.
The problem with global #payments can be summed up in one chart. Tweet This
Left to their own devices, banks have come up with a system known as “correspondent banking,” where “cooperation is formalized through a series of bi-lateral correspondent banking relationships,” McCune explains. So if AOL has an agreement with Yahoo, I’ll be able to email my friend, which is great, but it’s likely that those emails will take longer or cost more. And if you’re a smaller player or a new upstart, you’ll to lean on the big boys, writes McCune. “Often smaller banks rely on larger banks in their country to conduct cross-border transactions.”
The end result is a system that can only be described as convoluted and inefficient, illustrated by this chart, a play-by-play of how a business in LA pays its supplier in Brazil:
Chart: Glenbrook Partners
And that doesn’t even include settlement:
All pretty straightforward—but one piece is still missing. Bank C in New York has the money and Mulitnational Bank D in Brazil has sent it out—how are these positions settled? In this example, as a part of their correspondent banking relationship, Bank C and Bank D have agreed to settle their transactions daily, on a net basis, by making funds available/withdrawing funds from a set of accounts both banks hold with one another. But there are no rules here: it is entirely up to the business arrangement that the correspondent “pair” has negotiated. That negotiation, by the way, covers fees, balances, and who-gets-to-do-the-FX as well.
As McCune sadly concludes:
At the end of the day, money doesn’t cross borders. There is no international wire, just a series of domestic transactions. One bank ends up with more money in its correspondent account: the other bank ends up with less money in its correspondent account.
Rather than an internationally accepted standard, we have a series of ad-hoc solutions, what amounts to endless variations of band-aids on a global system that’s anything but global. For the most part, it works, but it’s far from pretty. The system, or really the lack of one, creates additional barriers for emerging economies with less developed banking partnerships and poorly defined payment pathways. And if money can’t move freely and cheaply, businesses can’t trade, people can’t make a living, and countries can’t grow.
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