Why making cross-border payments in minor currency pairs can be difficult
The main issues with making cross-border payments in minor currency pairs include:
1) The number of intermediaries slows things down
Many banks in the seven countries and regions listed above don’t have direct relationships with each other, meaning they have to rely on intermediaries (called correspondent banks) to make cross-border payments. These intermediaries undertake tasks like verifying the identities of the two parties and checking that they meet the relevant jurisdictions’ laws.
For common currency pairs, like the dollar and the euro, this chain tends to be quite short. But for those that aren’t as common, such as the Swiss franc and the Japanese yen, or the New Zealand dollar and Japanese yen, there are more intermediaries, leading to more delays, as well as greater costs.
2) Unfavourable exchange rates add extra costs
Another major issue with cross-border payments featuring minor currency pairs is the high foreign exchange rates involved. These rates are determined by factors such as differentials in inflation levels and interest rates, and the two countries’ respective public debt levels and account deficits. With minor currency pairs featuring economies of hugely varying sizes, many cross-border transactions in these currencies can therefore have unfavourable foreign exchange rates, adding to the costs.
3) The lack of standardization leads to delays
More problems arise due to fragmented data formats and messaging standards. For instance, many countries’ formats only allow Latin characters, which can make dealing with nations using non-Latin scripts (such as Japan) difficult. Although numerous countries have now fully migrated to the ISO 20022, a uniform international payment messaging standard, most of the nations using major currencies haven’t.
4) Differing regulations can cause issues
Similarly, disparate regulatory regimes between jurisdictions can also lead to delays, as well as a lack of transparency. For example, banks might use different methods and sources for conducting checks, which can cause payments to be wrongly flagged, such as where organisations or individuals have similar names to those on sanctions or financial crime databases.