- Addressing challenges to cross border payments is critical to preserving the future growth of the digital economy.
- Modernized trade agreements as well as interoperability and coordinated oversight are some of the measures that can ensure strong growth in the digital economy.
We’re witnessing an unprecedented shift in the global economy. The current COVID-19 crisis is rapidly accelerating growth in digital commerce, and as trade in traditional goods and services decreases, trade in digital goods and services—or digital trade, as it’s commonly referred to—will only become more important. This shift is fuelled in part by the rapid expansion of access to digital payments, which enable consumers and merchants to easily buy and sell products worldwide. However, ensuring that cross-border payments are accessible, interoperable and secure is a difficult task, and several challenges threaten to make it significantly harder. Addressing these challenges is critical to supporting a key source of growth in the struggling global economy.
Prior to the crisis, cross-border e-commerce was already rapidly expanding (Figure 1), but since the crisis, growth has become exponential. For instance, in the United States and Canada, overall e-commerce orders have increased by 129% compared with last year. Similarly, the digital payments market is now expected to grow this year by 11% worldwide and as high 15.9% in places like China.
Growth in digital services and digital trade will be critical to global economic recovery, but several challenges threaten impede cross-border payments. A growing number of protectionist measures, such as requirements to use domestic infrastructure, localize data, and licensing and equity minimums for foreign firms, prevent international payment service providers from bringing services to market to some markets. Additionally, while new payment technologies have increased competition in the market, diverging technical and regulatory standards have made it more difficult to make connect different payment systems and markets.
Cross-border payments are also disproportionately targeted by fraud and cybersecurity threats, and small businesses are particularly vulnerable. Unfortunately, many policies aimed at improving cybersecurity and trust are either ineffective or counterproductive.
Finally, while adequate supervision and oversight of payment systems is integral to financial system stability, regulatory oversight for firms operating in multiple markets is often disjointed and uncoordinated, leading to inefficiencies and barriers to increased competition.
What is the World Economic Forum doing about digital trade?
What is the World Economic Forum doing about digital trade?
The Fourth Industrial Revolution – driven by rapid technological change and digitalization – has already had a profound impact on global trade, economic growth and social progress. Cross-border e-commerce has generated trillions of dollars in economic activity continues to accelerate and the ability of data to move across borders underpins new business models, boosting global GDP by 10% in the last decade alone.
The application of emerging technologies in trade looks to increase efficiency and inclusivity in global trade by enabling more small and medium enterprises (SMEs) to repeat its benefits and by closing the economic gap between developed and developing countries.
However, digital trade barriers including outdated regulations and fragmented governance of emerging technologies could potentially hamper these gains. We are leading the charge to apply 4IR technologies to make international trade more inclusive and efficient, ranging from enabling e-commerce and digital payments to designing norms and trade policies around emerging technologies (‘TradeTech’).
Fortunately, a newly released World Economic Forum whitepaper outlines steps countries can take to reduce cross-border payment friction and ensure digital trade growth remains strong:
Modernize trade agreements to remove market barriers for payment services
Governments can take several steps to promote digital trade by bolstering existing and new trade commitments on digital payments. A first critical step is ensuring non-discrimination of foreign firms—or “national treatment” as it’s known in international trade parlance—to ensure consumers have access to cross-border payment services in their respective markets. Similarly, supporting commitments to protect the free flow of data, while ensuring necessary privacy protections and regulatory access to this data, will also ensure local consumers are able to access new products and services. The recently negotiated United States—Mexico—Canada (USMCA) trade agreement provides the best example of how to support cross-border digital commerce, as it provides national treatment and protects data flows for financial services.
Promote interoperability through internationally accepted standards
By promoting internationally accepted standards for digital payments, governments ensure their respective markets can seamlessly connect with the broader global economy. New trade commitments also have a role to play here, by explicitly committing to adopt and promote international standards. Governments also can also encourage greater connectivity and interoperability by working with the private sector to develop open banking guidelines. Open banking encourages greater competition and interconnectivity by allowing consumers to share their banking data with third-party applications, enabling access to new and innovative financial services (especially those targeted at the underbanked). Governments can also adopt international standards (such as for payment messaging standards) for banking infrastructure, as well as standards to combat money-laundering and terrorist financing (such as Financial Action Task Force standards).
Ensure security and trust in the payment system
Trust and security are paramount to the global payment system, and policymakers can take several steps to protect consumers and businesses. A critical first step is deepening public-private partnerships on cybersecurity issues in order to coordinate cybersecurity standards and mitigate threats over the long-term. Public-private cooperation to establish consumer protections against fraud is also needed. Additionally, cross-border cooperation between law enforcement agencies is also critical to mitigating threats and protecting consumers. A good way to deepen cooperation between agencies is to modernize mutual legal assistance treaties, making it easier to share information between jurisdictions for data held off shore. Governments also have a role to play in establishing programmes to improve cyber hygiene and fraud awareness.
Enable innovation in cross-border payments through coordinated oversight
Finally, financial supervisors can encourage greater competition and maintain adequate oversight by coordinating oversight of FinTechs offering cross-border services. This will greatly reduce the burden of redundant oversight requirements, which currently make it difficult for new entrants to expand abroad and offer cross-border services. An interesting model for this is the Global Financial Innovation Network (GFiN), which is a network of 43 financial system supervisors seeking to provide FinTechs with a more efficient way to work with regulators through cross-border coordination. Moving one step beyond cross-border coordination, countries could do more than just share regulatory information and adopt “regulatory passports” for FinTechs (similar to the European Union), which enables FinTechs from markets with vetted regulators to seamlessly offer cross-border services in partner markets.
Facilitating cross-border retail payments today is complicated, requiring connections between a complex set of banks, applications, domestic and international payment service providers and, of course, consumers and merchants. But, these payments are also more important than ever given the urgent need for inclusive growth and competition in the global economy. Ever-changing technological innovation means that the role of payments will only grow and change with shifting needs and priorities. As a result, policy-makers must redouble efforts to address or avoid this complexity and any resulting barriers by working both in public-private partnerships and with trading partners on new rules, norms, and mechanisms.