The U.S. has reservations about linking domestic fast payment systems like India’s UPI for global transactions, ToI reported on August 29. Federal Reserve Governor Christopher J. Waller voiced these concerns at the Global Fintech Fest in Mumbai.
Waller discussed the potential tradeoffs and increased risk management burdens that interlinking could impose on participating banks, according to ToI’s report by Mayur Shetty.
“Consumers and businesses want faster and cheaper global payments, similar to faster flights and cheaper airfares. However, I am not entirely convinced that interlinking arrangements will necessarily achieve those goals,” Waller stated.
India, the world’s largest recipient of foreign worker remittances, receives over $100 billion annually. World Bank estimates show that sending these remittances costs around 6% due to intermediary fees. The Indian government advocates linking fast payment networks to reduce these costs.
“There is no silver bullet that increases speed and efficiency without tradeoffs. Unless new solutions are found, interlinking fast payment systems might increase the risk-management burden for participating banks. Legal, compliance, and operational considerations are critical to discussing the promise and challenges of interlinking,” Waller added.
The Federal Reserve has launched its own fast payment network, the FedNow Service. However, Waller believes the global impact of interlinked payment systems remains uncertain due to varying levels of domestic adoption worldwide.
“We are at the beginning of a multiyear journey to establish a ubiquitous network covering most institutions in our country. The variation in domestic fast payment network adoption globally means the value of interlinked systems is not yet clear,” he said.
Waller noted that while technical feasibility and legal issues can be managed through bilateral arrangements, these are impractical on a global scale. Multilateral setups offer efficiencies but require significant resources.
“You have given us hope that the linkage between FedNow and UPI will happen, even if it takes some time,” said P. Vasudevan in response to Waller’s remarks. He expressed optimism that such a linkage would make remittances cheaper and faster.
Waller noted that while person-to-person transactions like remittances benefit from faster payments, this is not always true for commercial transactions.
“If we want to incentivize senders by lowering costs of faster payments, whose responsibility is it? Should private-sector competition drive down costs, as with other products? Or do payments require central banks or payment system operators to interlink their networks to reduce costs?” he questioned.
The private sector has shown how technology can drive innovation in cross-border instant payments. For example, a real-time payment system for wholesale clients facilitates global clearing and settlement within seconds, with compliance completed in under 24 hours. SWIFT’s Global Payments Innovation enhances speed and transparency and has been adopted by 150 banks worldwide.
“These examples show how market forces and competition can address demands for more efficient cross-border payments, though this is not an endorsement of specific services,” said Waller.