Cross-border banking faces several challenges that impact the efficiency and cost-effectiveness of international financial transactions. These challenges include:
1. Legacy Technology Platforms:
Legacy technology platforms contribute to the challenges of cross-border payments, potentially leading to inefficiencies and higher costs .
2. Correspondent Banking Relationships:
Correspondent banking arrangements enable banks to access financial services in other jurisdictions and provide cross-border payment services to their customers. However, these arrangements can involve a series of funds transfers in a chain of linked correspondent banks, leading to complexities and potential delays in cross-border transactions .
3. Multi-CBDC Platform Implementation:
Implementing a multi-CBDC (Central Bank Digital Currency) platform shared across central banks presents challenges, including the need for practical design solutions to address them. The challenges of implementing such a platform were identified in Project Dunbar, which developed prototypes for a shared platform to enable international settlements using digital currencies issued by multiple central banks .
4. Back-End Arrangements for Cross-Border Payments:
Various back-end arrangements, such as correspondent banking and single system or closed loop arrangements, are used for processing cross-border payments. These arrangements can introduce complexities and inefficiencies in cross-border transactions .
5. Regulatory and Financial Stability Issues:
Regulatory and financial stability issues, including challenges related to financial sector vulnerabilities and cross-border linkages, can impact the smooth functioning of cross-border banking .