The World Economic Forum Just “Opened” The Digital Payment Borders
Digital cross-border payments are a headache for any and every company around the globe. The unique infrastructure of each market, country and government, coupled with the laws and policies attached to them, make it very challenging to navigate for merchants. The digital payment industry has been awaiting for a sign that would unite digital economies, easing cross border payments and it seems that the wait is finally over.
On June 2nd, the World Economic Forum published a report titled ‘Connecting Digital Economies: Policy Recommendations for Cross-Border Payments.’ The report discusses the role of the most recent pandemic in accelerating digital trade and cross-border e-commerce, and how this is an perfect opportunity “for policy-makers and regulators worldwide to reduce friction and improve connections between digital economies globally.”
Even though there is a long road between proposal and change, this report is a significant step in trying to globalize the digital payment space, and make trade and commerce as seamless and frictionless as possible. Today, we’ll dissect the recommendations put forward by the report and evaluate their feasibility.
The National Treatment Principle & Assisting The Free Flow of Data
The ‘national treatment principle’ is an international law concept that stipulates the fair treatment of imported and locally sourced goods in terms of taxation and other relevant regulation. The principle is set in place to prohibit preferential treatment towards and discrimination to cross-border trade. One of the strongest recommendations of the report is centered around the national treatment idea, to ensure consumers have fair access to cross-border payment services in their respective markets. Whilst this an existing principle, the report makes a strong point reinforcing the idea and finding better ways to implement it.
Then, there’s the data localization issue. Here’s an extract from a 2016 WEF Policy Brief titled ‘Analysis of Data Localization Measures Under WTO Services Trade Rules and Commitments.’:
“Some governments condition approval of the cross-border transfer of data on local data storage or processing. In many circumstances, such requirements can restrict or, de facto, prohibit cross-border trade in services, and must be analyzed in the context of applicable WTO/GATS rules and commitments.”
The report calls for a revision of these requirements, freeing up the flow and regulatory access to this data. This proposition is not as idealistic as it sounds. The United States–Mexico–Canada (USMCA) trade agreement provides a clear framework allowing the free flow of data, while ensuring parties have regulatory access to data. The first step has been made and there’s nothing to stop this idea from spreading.
International Standards, Open Banking & Interoperability
As you read through the report, you quickly realize that the recommendations are derived from existing scenarios and policies, making their feasibility a matter of when not a matter of if. Take the case of international standards, for example. The relationship between most consumer banks (issuers) and merchant banks (acquirers) is defined by payment card networks leveraging a common messaging standard – the International Organization for Standardization (ISO) 8583.
Similarly, cross-border payments between banking customers also use international standards and standardized messages with instructions for payment transfers use a standard such as the ISO 20022. What is there to stop governments from adopting the same approach for cross-border payments standards? The answer is, nothing. Which brings us to the issue of interoperability.
According to the report, interoperability is broadly defined as “enabling all participants of the
payment system (e.g. consumers, merchants and governments) to easily send funds between different payment networks and instruments.” The current situation does anything but that. Why? The existence of new local technologies and regulatory fragmentation do not allow interoperability to flourish. The introduction of international standards is something that will go a long way in ironing out these obstacles and create a smoother playing-field for cross-border payments.
Last but not least, comes the relationship of local government and the private sector. The idea of open banking and why it’s considered to be the future of fintech, has been around for quite some time. In this scenario, whilst open banking seems to be a perfectly applicable concept, there is still no international in enforcing or implementing it. What the report very wisely discusses, is the need for a coordinated effort by governing bodies around the world to set up an initiative outlining open banking policies and regulations. The initiative should clear the air regarding the sharing of consumer banking data with third-party applications and firms for the betterment and overall progress of financial services and cross-border payments.
If there’s ever going to be an “open border policy” for digital payments, the issue of cybersecurity is one of the first hurdles that needs to be addressed. The security conundrum is twofold: public-private partnerships on cybersecurity and cross-border cooperation between law enforcement agencies.
Regarding the public-private relationship we don’t need to look further than the contractual public-private partnership (cPPP) set up in 2016 by the European Cyber Security Organisation. The report outlines the “…need for a more coordinated approach to step up the supply of more secure solutions by European industry and to stimulate their take-up by enterprises, public authorities, and citizens.” Much like the previous recommendations, the call for a consolidated cybersecurity approach is an updated, newer and more developed take on what’s already set in place. The main idea is for the private and public sector to work in tandem and come up with the best possible solution.
A second problem that arises, is the authority of one country over another in the scenario of a cybercrime. Can the UK get hold of data and necessary information from a US company/account if needed? Where does the authorization start and where does it end? The report uses the “US Clarifying Lawful Overseas Use of Data Act (or CLOUD Act)” as the example to derive some inspiration from. In a nutshell, the Cloud Act enables and legitimizes data sharing amongst law enforcement agencies. Internationalizing the Act could not only help cross-border payments but signal the beginning of a broader cooperation culture between law enforcement agencies on issues like AML/CFT standards and other tax evasion practices.
Going through all of the recommendations would probably result in a blog post longer than the actual report and we don’t want to keep you reading any longer. Whilst this report has gone relatively unnoticed and flew under the radar, we believe it’s another big step in making cross-border digital payments possible.
These recommendations are the stepping stone in opening a discussion that involves a lot of stakeholders. Here at BigWPay, we don’t just stay on top of these news and developments, we make sure we incorporate them in our offering and let them shape the way we develop our products and tech. For any questions, feel free to reach out and a member of our team will be more than happy to assist you.