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Written by Cyndie Martini
on December 06, 2022

Traditional cross-border payments are complex, expensive, and can be time-consuming. To see why let's look at a common cross-border payment transaction workflow. These payments can be made by credit card or bank transfer. For this example, we'll use a bank transfer retail transaction. Retail is a person-to-person transaction vs. a wholesale transaction, which is done between institutions.

Jim is a Spanish citizen who needs to send 10,000 Brazilian reals to his brother (Miguel) in Sao Paulo. Jim checks his local bank's app to do the transfer. However, the option is unavailable, and Jim is informed that he must visit a branch. Jim visits a local branch and is told the transaction will cost 400 EUR. Jim might be able to get a slightly lower price at another branch, but Jim is in a hurry, so he proceeds. The local branch must contact its main office to perform AML and KYC checks.

Miguel's bank in Brazil must also perform AML and KYC checks. Once that clears, funds can move to a local branch where Miguel can withdraw them. As the information passes from bank to bank, it is wrapped in a digital envelope called SWIFT messaging. There's actually no transfer of funds across borders. It's all messaging (i.e., Nostro/Vostro accounts).

If the two banks in each country have no relationship, another bank(s) (correspondent bank) must get involved. This can delay the processing of the transaction. But a delay can occur at any point along the entire chain. The settlement will take at least 2-5 days in general.

One banking solution to the current cross-border payment inefficiencies is ISO 20022, a global standard. It will have the following advantages:

  • Standardized messaging between countries/banks
  • Lower transaction costs due to faster processing times
  • Interoperability between different payment systems

As you can see, ISO 20022 will bring many benefits to the existing cross-border payments space. The adoption of ISO 20022 will vary by country and bank. The U.S. Federal Reserve is expected to adopt ISO 20022 fairly early on.


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