Why is BRICS exploring cross-border payments?

Why in the News

The 18th BRICS summit in New Delhi, with India as Chair, is expected to push for mechanisms to settle payments between members, including links between national digital payment systems and central bank digital currencies (CBDCs), which are digital versions of a national currency issued by its central bank. Finance ministry and central bank representatives from member countries met at Jaipur on August 12-13 to discuss financial cooperation, payments and the wider use of national currencies in settling trade between members. The push follows a 2024 BRICS report under Russia’s chairmanship, which argued that this part of the financial system is monopolised by a single institution and that the monopoly raises transaction costs. India has framed its own proposal as a way of cutting costs and speeding settlement rather than as a move away from the dollar. The tension is that every workable alternative needs a critical mass of banks and regulators to join before it saves anyone money, and the members most eager to build one are the members others are most wary of joining.

How does a cross-border payment move today?

1. The chain of correspondents: Money does not travel directly between the buyer’s bank and the seller’s bank. It moves through a series of correspondent banks that hold accounts with each other. Eg. An importer in Cape Town paying an exporter in Chennai is routed through a larger international bank typically headquartered in London or New York.
2. The dollar as a vehicle: Very few banks hold both rupees and rand, so the payment is converted from rand to dollars and then from dollars to rupees, with no American party to the trade.
3. Messaging is separate from settlement: The instructions travel over SWIFT, the Society for Worldwide Interbank Financial Telecommunication, a Belgium-based cooperative overseen by the National Bank of Belgium along with the G-10 central banks including the U.S. Federal Reserve. It carries payment instructions; the money is settled separately.
4. Why the network is hard to displace: SWIFT is used directly by more than 11,000 institutions in over 200 countries, and smaller banks reach it indirectly through larger member banks.

What does the chain cost?

1. Foreign exchange margins are paid twice: Every intermediary charges a fee, and the two currency conversions mean the exchange margin is taken on both legs.
2. The measured margins: A 2019 BRICS survey of cross-border payment systems conducted by Brazil found Brazilian respondents reporting foreign exchange margins of 2.5 per cent, rising to 8.5 per cent for payments into Africa and in some cases as high as 20 per cent.
3. The network has thinned: The Bank for International Settlements (BIS) found active correspondent banking relationships fell by 20 per cent between 2011 and 2018, with regional declines ranging from 12 per cent to 30 per cent and Latin America worst affected. The reasons were largely commercial, since payment volumes kept growing through the same period.
4. Speed is no longer the binding problem: SWIFT states that its Global Payments Innovation service has cut transaction times substantially, and the remaining delays are structural rather than a function of chain length.

Why does BRICS want to change this system?

1. Exposure to other countries’ monetary policy: Settling in a handful of dominant currencies, the U.S. dollar, the euro and the Japanese yen, exposes developing economies to policy decisions taken by the issuing countries.
2. The stated cost argument: The 2024 BRICS report held that concentration of the messaging layer in one institution raises what every participant pays to transact.
3. Sanctions are the sharpest driver and the sharpest deterrent: Several Russian banks were cut off from SWIFT in 2022 following Russia’s invasion of Ukraine. Sanctions-hit Russia has pushed hardest for an alternative, and that is also the reason other members are wary of joining one.
4. The adoption problem: An alternative rail is useful only once a large number of banks and regulators have joined it, and a bank that uses one to deal with sanctioned entities risks sanctions itself.

What alternatives are on the table?

1. Bilateral linkage of national systems: Two countries can connect their domestic payment systems directly, avoiding correspondent banks and dollar conversion. Eg. India and Singapore have linked the Unified Payments Interface with PayNow for remittances. Building such links pair by pair does not scale.
2. A shared hub: Project Nexus, designed by the BIS and handed to a company set up by six central banks including the Reserve Bank of India, lets each country join one connection rather than many. It goes live only in 2027 and is not a BRICS initiative.
3. CBDC settlement on a common platform: Central banks issue digital versions of their currencies for use between banks, a settlement asset distinct from the retail digital rupee held by individuals, and exchange them on one platform. Both legs of a currency swap occur at the same instant or not at all, which removes the risk of paying out before the other side pays and cuts the capital banks must set aside.
4. The one platform running today: mBridge, built by the BIS with the central banks of China, Thailand, Hong Kong and the UAE, was handed to its participants when the BIS left in October 2024. Over 95 per cent of its settlement volume is in China’s digital yuan, according to People’s Bank of China figures.
5. The BRICS-specific proposal: The Kazan declaration of 2024 agreed to discuss and study the feasibility of an independent settlement system called BRICS Clear. The Rio declaration the following year did not mention it.

What is India’s position?

1. The proposal: India has proposed that members link their CBDCs for trade and tourism payments, extending the linkage idea from retail systems to central bank money.
2. The framing is deliberate: Indian officials have consistently presented the payment systems as a means of cutting transaction costs and speeding settlement, not as an initiative to displace the dollar.
3. Other members have gone further: Russian proposals, and those of some Brazilian economists, have moved towards alternative financial systems explicitly aimed at reducing dependence on the dollar.
4. The reason for the caution: In November 2024 the U.S. President threatened 100 per cent tariffs on BRICS countries that moved away from the dollar, and a further 10 per cent on countries aligning with vaguely defined anti-American BRICS policies. The threats were not carried out.

Challenges to a linked BRICS payment system

1. Domestic rails are not built alike: Member systems differ in message formats, operating hours and rules on when a payment becomes final, so linking them forces each participant to change domestic infrastructure. Eg. The Unified Payments Interface settles instantly and around the clock. Several member country systems settle in batches on business days only.
   The Fix: Require every participant to migrate to the ISO 20022 messaging standard and extend operating windows so linked systems overlap for a common settlement period.
2. Most member currency pairs have no liquid market: Settling directly in national currencies needs someone willing to hold and convert the receiving currency, which does not exist for most BRICS pairs. Eg. Indian exporters accumulated rupee balances in special vostro accounts under the rupee trade settlement mechanism that counterparties could not readily deploy.
   The Fix: Establish central bank swap lines and designated market makers for the main pairs, so balances can be converted rather than parked.
3. One platform needs one rulebook: Customer verification, anti money laundering standards and dispute resolution differ across members, and a shared platform cannot function on several standards at once. Eg. Financial Action Task Force grey listing constrains banks anywhere from dealing with counterparties in a flagged jurisdiction.
   The Fix: Agree a common rulebook and a named dispute resolution seat before the platform carries live value rather than after.
4. CBDC readiness is uneven across members: A linkage of central bank digital currencies cannot include a member whose currency has not reached production. Eg. India’s wholesale and retail digital rupee pilots began in 2022 and remain pilots.
   The Fix: Sequence the linkage in waves, beginning with members whose wholesale CBDC is already in live operation.

Conclusion

The grouping has no shortage of proposals and a shortage of commitment. Every model on the table asks members to surrender something domestically, either control over settlement or their own infrastructure standards, before any of them saves a rupee. The declarations so far have moved in the opposite direction, agreeing to study a settlement system in one year and passing over it the next. The New Delhi summit is where the members either name one model and a date for it or repeat the study language a third time.

Back2Basics: Bank for International Settlements

1. Established in 1930 and headquartered at Basel, Switzerland, it is the oldest international financial institution.
2. It is owned by 63 member central banks, including the Reserve Bank of India, and functions as a bank for central banks rather than for governments or individuals.
3. It hosts the committees that set global financial standards, including the Basel Committee on Banking Supervision.
4. Its Innovation Hub builds payment and settlement prototypes and hands them over to participating central banks, which is how both mBridge and Project Nexus were created.

Matching Previous Year Question

“With reference to the Central Bank digital currencies, consider the following statements: 1. It is possible to make payments in a digital currency without using US dollar or SWIFT system. 2. A digital currency can be distributed with a condition programmed into it such as time-frame for spending it. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2”