Project Nexus: Are we on the verge of an “instant global payments” revolution?

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    This international RTP solution could be a game-changer for cross-border payments.

    Nexus, and international RTP solution, could be a game-changer for cross-border payments.

    Cesar Boralli

    Associate Managing Director – Fintech and Banking Lead

    Contact the author

    Real-time payment (RTP) solutions, such as Brazil’s PIX and India’s UPI, seem to have accelerated the future, creating seamless, cost-effective, and user-friendly money transfer systems in many countries. In contrast, the market for cross-border payments is still dominated by traditional financial institutions, involving complex, costly, and time-consuming processes. Sending money abroad can take days, as funds must flow through multiple financial institutions before reaching their destination, and fees in some cases exceed 10% of the transfer amount.

    When customers are dissatisfied, an industry becomes ripe for disruption – and the cross-border payments sector is no exception. It remains unclear which system will emerge as the solution to this sector’s pain points, but the ‘Nexus Project’ is undoubtedly the frontrunner. Spearheaded by the Bank for International Settlements Innovation Hub (BISIH), Nexus aims to create an international instant payment solution by establishing a pathway to connect the domestic real-time payment networks.

    It is too early to tell whether Nexus will truly become a game-changer for cross-border payments, given the technical, regulatory, and commercial challenges that it still needs to overcome. However, this is definitively an initiative that companies in the payment industry should closely monitor. Ultimately, if the Nexus project succeeds, they need to be prepared for a new world of instant, seamless, and cost-effective cross-border transfers.

    This article aims to explain the basic facts surrounding the Nexus Project, including its challenges and potential impacts. It will also offer companies three recommendations to help them prepare for what could be a seismic shift not only in global payment dynamics but also in the international economy as a whole.

    Present-day global money transfers

    Today, the transfer of funds from one country to another involves several steps. First, senders need to provide the receivers’ details to their banks, including identifier codes for international transfers. The senders’ banks may then conduct compliance checks to conform to anti-money laundering and other specific legislation which might include asking for additional documentation. After that, they send the payment instructions either to intermediary banks that will facilitate the currency exchange or directly to the recipients’ banks if the two banks have a direct relationship. Throughout this process, financial institutions communicate with each other and exchange payment instructions through the so-called SWIFT, a well-known closed-loop secure messaging system. Even the most agile Fintechs have relied on this framework to operate in the cross-border payment space, although it has several pain points both for individuals and businesses. According to the World Bank, the average cost of sending $200 abroad was 6.3% in 2022, a stark contrast to domestic instant transfers, which often cost cents. The system is also hampered by reconciliation issues and a lack of transparency, leaving users unsure of the status and timing of transfers. Being slow and expensive, it restricts global trade, limits the cross-border flow of resources, and creates friction for businesses and individuals. For instance, a 2023 survey by 72Point and Revolut Business1 reported that 58% of businesses took over 12 hours to process their cross-border payments.

    The ‘Nexus’ solution

    As mentioned above, Nexus aims to facilitate real-time cross-border transfers by connecting existing domestic instant payment systems (IPSs) through a standardized gateway, eliminating intermediaries. Its creators believe that this solution can enable near-instant (under 60 seconds) cross-border payments at a fraction of the current cost. In other words, Nexus could allow for faster, cheaper, and more transparent wire transfers, with the potential to unlock significant economic and social benefits.

    Demonstrating the feasibility of the idea, the BISIH Singapore Centre has successfully completed the first test phase of Project Nexus in 2022, building a prototype network connecting three established IPS: Malaysia’s Real-time Retail Payments Platform (RPP), Singapore’s Fast and Secure Transfers (FAST), and Europe’s Eurosystem’s TARGET Instant Payment Settlement (TIPS). The resulting structure allows payments to be sent across these three geographies using only mobile phones or company registration numbers.

    This first pilot initiative was developed with the collaboration of the Bank of Italy, the Central Bank of Malaysia (BNM), the Monetary Authority of Singapore (MAS), PayNet, and Banking Computer Services (BCS). Now, the next phase of Project Nexus involves creating a network to connect the domestic IPS of five countries: the Philippines, Indonesia, Thailand, and once more, Malaysia and Singapore.

    The project’s ultimate goal is to promote the implementation of a global instant payment system through the establishment of a Global Advisory Panel comprising central banks and payment system operators from various countries. Yet, these expansion plans will also encounter at least four challenges:

    Technical complexity: Connecting diverse IPSs is technically complex since national systems operate with different standards and structures. It is true that many national RTP solutions have adhered to some global standards, such as the ISO 20022 messaging standard, but there are also major differences, so true connectivity and interoperability may be difficult to achieve.2

    Regulatory hurdles and difficulties to ensure multinational cooperation: Different regulations across countries can also pose challenges for harmonization and cross-border interoperability. The project requires stakeholders in many countries to work towards harmonizing their systems and regulations, as well as to cooperate to ensure the advancement of the Nexus project. Yet, securing this stakeholder engagement for wider adoption is not an easy task. Negotiating governmental agreements on such a complex topic can also be time-consuming and made more difficult due to political differences.

    Commercial considerations: Successfully convincing Nexus partners to bear the project’s costs also requires careful planning and strong negotiation skills. The project leaders must ensure that the economic advantages of the Nexus system are clear for its users and providers. Competitive foreign exchange rates and sufficient liquidity will be key to prompt consumers to embrace this cross-border transfers solution instead of others available in the market (e.g., Wise). Merchants and IPSs incentives can also boost adoption and investments to improve and sustain the platforms integrated to Nexus systems.

    Fraud & Disputes: An international real-time payment (RTP) scheme must establish a robust framework to effectively prevent fraud and handle dispute resolution. Card companies and banks have demonstrated significant business acumen in creating structures and clear rules to address these issues. Domestically, real-time payment schemes still encounter challenges in these areas, and they are expected to become even more complex with the launch of an international instant payment solution. On the flip side, this might be an opportunity for providers and governments to promote their digital identity initiatives.

    Forecasting Project Nexus’s chances of success is a complex task. Although the outcomes of the pilot project were promising, navigating the obstacles ahead will not be easy. Success demands strategic planning, effective resource allocation, and resilience.

    Possible impacts

    On the other hand, these efforts could pay off: the positive outcomes of global adoption of a system like Nexus would be significant for various stakeholder groups. The World Bank estimates that faster and cheaper cross-border payments could increase the world’s GDP by 2%. Among those who would benefit are remote workers with employers or clients abroad and immigrants sending remittances to their families. A study by the McKinsey Global Institute found that reducing remittance costs by 5% could uplift 5 million people out of extreme poverty.

    Businesses that operate internationally or have partners overseas would become more efficient, reducing their costs related to international payments and cash flow management. Moreover, they could gain access to new markets where it is currently difficult to move money in and out. Governments could see an increase in tax revenues due to boosted economic activity and broader financial inclusion. Additionally, tax collection could become more efficient with the adoption of a transparent and less complex system.

    The impact on participants in the global payments industry is likely to be mixed. Although banks with a large deposit base could benefit from faster inflows of resources, the most significant effect on traditional banks would be the loosening of their tight grip on the cross-border segment, mirroring the effect of RTP’s adoption on national markets. The revenues they currently obtain from global payment fees would decline, and they would need to explore new monetization avenues.

    Global messaging networks such as Swift could also become obsolete if a global real time instant scheme were successfully implemented. To a certain extent, the overall lack of data standards, connectivity and speed has contributed to their success until now.

    Fintechs, on the other hand, could benefit from a system that enables instant international transfers, having the opportunity to develop innovative solutions leveraging the Nexus technology. In fact, some of them are already striving to enhance the convenience, efficiency, and speed of cross-border transfers. Revolut, for instance, has launched a new feature enabling users to make payments in 150 countries without the need for IBANs or additional beneficiary details. However, these improvements can only be marginal without the existence of an infrastructure that enables connectivity and interoperability between national IPSs.

    Finally, global payment networks such as Visa and Mastercard will also be impacted, given the importance of international transactions as a source of revenue for these companies. Ultimately, a global instant payment solution not only opens the doors for traditional competitors of cards but also sets the rails for further innovations that could reduce their market share in global payments in the medium and long run, such as global BNPL (buy now pay later) solutions.

    Recommendations:

    Given the lightning-speed adoption of national RTP solutions across the globe, it is reasonable to assume that, sooner or later, the cross-border payments industry is also set to undergo significant changes to better serve its customers. Clients who are accustomed to speed, convenience, and transparency in the payments sector at home will not settle for less when operating internationally. The changes in the global payments market may take time, as they involve technical and regulatory challenges. Yet, the question seems to no longer be if an instant solution will become a reality, but when and how this will happen.

    Project Nexus may be successful – or it may not. Given the technical challenges mentioned above, there are even experts who dispute that the best strategy to create a real-time cross-border payments structure is through connecting domestic systems. But the race to offer faster cross-border payments has begun, and there is no turning back. Below, PCMI lists three recommendations for companies to be at the forefront of this potentially transformative movement.

    Stay Informed: It is essential to closely monitor the Nexus project’s development, as well as other initiatives of this type to assess their potential impact on the cross-border payments landscape.

    Evaluate Opportunities: Assess how Nexus or other similar initiatives could benefit downstream partners and clients, considering the system’s potential to promote faster payments, reduce costs, and facilitate access to new markets. The idea is to use this assessment to work on new business opportunities and services that better serve their clients.

    Advocate for Adoption: Once the company concludes that the impact on its operations would be positive, it should engage with relevant stakeholders to support Nexus’ development and implementation. Its public and government affairs departments should stay informed and incorporate the issue into their agendas. Specifically, they could advocate for harmonized national regulations to facilitate the adoption of Nexus or another instant global system, as well as government support for pilot projects and other initiatives favoring Nexus’ implementation. In countries where national RTPs are currently under development, it is crucial to ensure that those leading these initiatives take into account that, in the future, these networks will need to be integrated into global structures. Thus, they can choose the appropriate technologies and adhere to global standards.

    Next Steps

    Let’s connect. At PCMI, we specialize in conducting comprehensive market research in the payments and commerce sectors, empowering companies to make strategic decisions that greatly influence the adoption of their products and services. Explore our services.


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    Sources

    BIS Innovation Hub: Project Nexus

    Project Nexus Overview Report

    Digital Frontiers Institute: Project Nexus

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    Cesar Boralli
    cesar@paymentscmi.com

    Cesar is a renowned thought leader in the banking and fintech space in Latin America, having worked for some of the region´s most exciting companies including global banks such as Citi, J.P. Morgan, Bank of America and fintechs like Flywire, Rapyd, EBANX and XP Inc. He is a Portuguese native speaker as well as fluent in English and Spanish.

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