A system that allows payments between countries and different currencies in up to 60 seconds is the essence of Nexus, a project being studied by the innovation center of the “central bank of central banks” since 2021. But until the “Global Pix” becomes a reality, there is a long road and a series of challenges to overcome.
Putting the brakes on is Andrew McCormack, head of the BIS (Bank for International Settlements) innovation center in Singapore, who is “cautiously optimistic” that the Nexus may have “the potential to make an impact in the real world”.
“We don’t expect this to happen overnight, but we think it’s possible, given the time and investment,” McCormack said in an interview with Sheet.
“It wouldn’t just be starting up and the next day having 20 countries connected. It would probably take us a while to introduce the service in two countries and then add a third, a fourth. Who knows, after five years there would be enough of countries to make this network significantly attractive,” he added.
The design of the Nexus is based on the premise of connecting instant payment systems that are already in operation around the world on a single transnational platform. Today, there are about 60 countries, including Brazil with Pix.
Currently, the project is in the proof-of-concept phase to improve the model – a stage that should last until the end of December.
In the process, the BIS innovation center works together with the ECB (European Central Bank), the central banks of Italy and Malaysia, the Malaysian payment system operator PayNet, the Monetary Authority of Singapore and the of the Asian city-state BCS Nets payment system.
At this stage, a prototype connecting the Singapore, Malaysian and Eurozone payment systems is being developed in a test environment to uncover technical complexities that have not yet been detected in theory.
“We are connecting not only fast payment systems but also proxy services [pontes entre os usuários e a internet] that allow cell phones to be used as recipients,” McCormack said.
According to the director, technological barriers make up the package of issues to be studied. He points out that most domestic systems are built around a single currency and use different message formats, blocking communication in the case of transactions involving more than one country.
“The challenge that Nexus has taken on is trying to find common ground, how can we overcome these technical hurdles to find a way that imposes as few changes as possible on the payment system operator, on the banks and on the participants,” he said.
The model has two structural pillars: the Nexus Gateway (Portal Nexus) and the Nexus Scheme (Schema Nexus).
The first corresponds to the software component that coordinates processes such as currency conversion, message translation and payment sequencing among participants around the world based on a common set of technical standards and operational guidelines. It is these basic rules, established by the second pillar, that allow communication between systems.
McCormack also cites economic, political and legal issues among the challenges. As an example, he says that there are differences in how jurisdictions handle data privacy cases and also in the mechanisms around foreign exchange transactions.
For David Chance, vice president of Strategy and Innovation at Fiserv – a provider of technology solutions for financial services and payments – the availability of payment networks needs to be a fundamental requirement. “These systems must always be available, with no downtime,” he said.
The expert also sees risk management as one of the biggest challenges associated with real-time cross-country transactions.
“Domestic instant payment usually relies on a pre-stocked cash establishment to reduce risk exposure. This is not a practice applied in cross-border payments due to the requirements of foreign currencies and their exchanges”, he said.
According to Chance, instant international payments without robust settlement capabilities can increase risk in the global financial system.
The limit on the amount of transfers made through Nexus will be established by the payment system operator in each country. According to McCormack, the amount could be lower at the beginning of operations, while operators, banks and users still gain experience and confidence in the system.
“We hope that over time these limits may also increase, so the system could potentially be attractive to small business customers,” he said.
The “Global Pix” will not necessarily be free for users, the decision to pass (or not) the cost to customers will be up to each bank participating in the transnational system.
The head of the BIS innovation center considers that many institutions include their profit margins in foreign exchange transactions and that they have costs that need to be recovered in some way. So he opted to make the Nexus “as flexible as possible”.
“We hope that having a more competitive foreign exchange market over time will be something that can further reduce the costs of cross-border payments,” he said.
According to McCormack, the development team tries to bring the Nexus as close as possible to the domestic payment experience, without losing sight of the complexity involved in international financial operations.
If the proof of concept is successful, the next step will be a pilot project, which could start in 2023. Despite “hope and expectation”, the leader of the hub in Singapore is cautious. “We are still coming out of the second year of the proof-of-concept phase, certainly a pilot is an aspiration, but not guaranteed at this point”, he pondered.
Behind the scenes, Nexus developers look at questions about structure and rules, government payments, business architecture, and the business model.
“If the model is technically feasible and desirable from a public policy perspective, the last piece will be around the commercial and business model, which is a bit outside the scope of proof of concept,” McCormack said.
Fiserv’s Chance says the Nexus, as a model, is a good framework, but the big question is its commercial viability. “Interoperability between domestic instant payment networks will occur because of the benefits and potential for cost savings, but only on commercially viable axes,” he said.
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