A new world wide web of payments may be the best way to move money quickly and cheaply across borders.
Unrealistic as it was technically, the idea of a pan-Asian currency always had some political support: Since 2005, the Japanese have published the exchange value of something called the Asian Monetary Unit, a precursor to what would one day become the region’s equivalent of the euro. The debt crisis in southern Europe — and the threat it posed to the single currency in the early part of the last decade — ended that pipe dream.
Now there’s a more modest goal: Keep money national, but allow it to jump borders effortlessly. This vision could start becoming a reality in three years and have a far-reaching impact on a continent expected to account for half of the world’s consumption growth in the current decade.
That’s a $10 trillion opportunity, according to McKinsey & Co. A big chunk of this additional consumption will be fulfilled by small and medium-sized businesses, and a lot of it will occur online. But credit cards and PayPal are expensive options for small merchants. And while Indonesian sellers can easily accept QR-code-based transfers from local digital banking or fintech apps, they can’t do the same for Singapore banks’ customers. National boundaries get in the way. As Ravi Menon, chief of the Monetary Authority of Singapore, said in a recent speech: “The current state of cross-border payments is not fit for the 21st century.”
Thankfully, an upgrade is at hand. From Singapore and Malaysia to Thailand, Indonesia and the Philippines, countries in Southeast Asia want a multilateral network of payments by 2025. Their customers already have access to mobile-phone apps for settling claims in real time, but these are restricted to the local market. The next step is to connect them via the so-called Nexus Scheme, which has been conceived by the Bank for International Settlements as a world wide web of payments, a set of rules that any economy can adopt to set up a gateway to the collective.
The rules will harmonize compliance standards and messaging formats — the instructions intermediaries send one another to move money domestically. Once the platform takes off, international banks will be available on it with competitive currency conversion services. The experience for the customer will be no different whether they’re paying someone next door or a thousand miles away.
Using a smartphone app, an individual or business can already collect money instantaneously and nearly free of cost from another participant of the same national banking system. In cross-border remittances, however, the average cost is still as high as 6%, according to the World Bank. The technology of correspondent banking, which involves a lender providing a local account to banks based overseas, has improved vastly from when the practice evolved in the late 1800s. But transfers via the SWIFT messaging system — a matter of minutes on the fastest routes — can still take more than two days on several of the slowest.
International transfers with Nexus won’t be totally free. For one thing, currencies will still have to be exchanged. But it may be possible to squeeze the average cost of paying a business in another country to 1% or less and eliminate any corridor where costs are higher than 3%, which is the Group of 20’s goal for end-2027.
Asia’s policymakers have two other reasons to smash the status quo: One, access to SWIFT is at the discretion of American and European politicians; it could get cut off, as it was for Russian institutions earlier this year as punishment for the war in Ukraine. Two, much of international commerce takes place in dollars, and the US currency is expensive right now. In regional trade, especially where small firms in one country are selling goods and services to retail customers in another, it’s possible to reduce dependence on a surging dollar with technology.
The banking industry’s annual payments revenue pool is dominated by the Asia-Pacific region, which churns out roughly $90 billion from cross-border commerce.(1)Financial institutions are resigned to the idea that their fees per transaction will fall. What they don’t want is for volumes to disappear, which can happen if blockchain-based private stablecoins or central bank digital currencies become the preferred technology for international transfers. From their standpoint, Nexus’s advantage is that it won’t seek to bypass banks.
A single currency would have transformed Asia’s payments scene — and reduced the dollar’s dominance. Some Chinese state researchers recently called for a single digital token, pegged to a basket of 13 regional currencies. But the euro zone’s troubles have shown that it’s impractical to think about such a monetary arrangement without a fiscal union. Since a sharing of taxpayers’ resources between rich Singapore and poor Myanmar is hard to swallow even as a fantasy, the next best option for reducing the friction caused by different mediums of exchange may be to harness the power of the smartphone. When a Singapore bank app can be used to pay someone in Jakarta in 60 seconds — at a cost of 1% or less — the question of a single currency becomes moot.