How can you compare domestic and cross-border payment systems?

1 Domestic payment systems

Domestic payment systems are those that operate within a single country or currency area. They usually involve a central bank, a clearing house, and a network of commercial banks and other financial institutions. Domestic payment systems can be classified into two categories: retail and wholesale. Retail payment systems handle low-value, high-volume transactions, such as card payments, mobile payments, or online transfers. Wholesale payment systems handle high-value, low-volume transactions, such as interbank transfers, securities settlements, or large corporate payments. Domestic payment systems are typically fast, secure, and efficient, as they rely on standardized rules, regulations, and infrastructures.

2 Cross-border payment systems

Cross-border payment systems are those that enable the transfer of funds between parties located in different countries or currency areas. They usually involve multiple domestic payment systems, as well as intermediary banks, correspondent banks, or payment service providers. Cross-border payment systems can also be classified into two categories: traditional and alternative. Traditional cross-border payment systems use the SWIFT network, which is a global messaging system that facilitates the exchange of information and instructions between banks. Alternative cross-border payment systems use new technologies, such as blockchain, cryptocurrencies, or fintech platforms, to offer faster, cheaper, or more convenient solutions.

3 Performance factors

When comparing domestic and cross-border payment systems, there are several factors that affect their performance, such as speed, cost, convenience, security, and transparency. Speed refers to how long it takes for a payment to be processed and settled. Cost refers to how much it costs to send or receive a payment, including fees, commissions, and exchange rates. Convenience refers to how easy it is to access and use a payment system, such as the availability of channels, devices, and services. Security refers to how well a payment system protects the privacy and integrity of the data and funds involved. Transparency refers to how clear and consistent the information and rules of a payment system are.

4 Benefits and challenges of domestic payment systems

Domestic payment systems offer several advantages, such as faster and cheaper transactions due to the lack of intermediaries or currency conversions, greater convenience and security through familiar channels and devices, and higher interoperability and integration with common standards. However, these systems also face some challenges, such as limited reach and coverage, lower innovation and competition due to regulatory barriers or inertia, and greater vulnerability to domestic shocks or disruptions.

5 Benefits and challenges of cross-border payment systems

Cross-border payment systems offer several advantages, such as wider reach and coverage, higher innovation and competition, and reduced vulnerability and risk. However, these systems also come with some drawbacks, including slower and more expensive transactions, lower convenience and security, and lower interoperability and integration. These systems serve customers and markets across different countries and currency areas, using new technologies and solutions to challenge incumbents. They also diversify the sources and destinations of funds to reduce dependence on a single system or country. Transactions involve multiple intermediaries and currency conversions, while unfamiliar and untrusted channels and devices are used with different laws and regulations. Furthermore, different standards and platforms with limited connections to other systems lead to reduced interoperability and integration.

6 How to compare domestic and cross-border payment systems

When attempting to compare domestic and cross-border payment systems, there is no single answer that fits all needs and preferences. However, some general steps can be taken to make an informed decision. First, identify your payment purpose, such as personal, business, or humanitarian. Then, determine your payment criteria, such as speed, cost, convenience, security, and transparency. Next, research the available payment options like domestic or cross-border, retail or wholesale, traditional or alternative. After that, evaluate the pros and cons of each option based on your payment criteria and purpose. Lastly, choose the best option for your payment or use a combination of options if needed.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?