Multilateral platforms are payment systems that are primarily used for cross-border transactions, although they can also be used for domestic payments. The key feature that distinguishes them from other payment systems is their multi-jurisdictional nature. They can operate alongside traditional correspondent banking relationships or domestic payment infrastructures, providing a faster and more efficient way for businesses across different jurisdictions to make cross-border payments to their customers, suppliers, or entities in other countries.
For example, in Europe, TARGET Instant Payment Settlement (TIPS) was launched as an extension of TARGET2, settling payments in central bank money. P27 is a Pan Nordic multilateral platform connecting banks in the Nordics. In Asia, there are two payment systems – UPI in India and Singapore Pay in Singapore – that have also connected, allowing for cross-border payments across multi-jurisdictional areas.
While Visa and Mastercard are well-known for their global four-party card schemes that process cross-border and domestic payments primarily for the retail sector, multilateral platforms allow businesses from multiple jurisdictions to participate and use the platform for cross-border payments. This provides a much faster and more efficient way to settle payments without having to participate in individual local jurisdictions.
There are several types of backend arrangements that businesses can use to process cross-border payments for their customers. The first is the correspondent banking network, which can be slow, laborious, and less transparent when using respondent banks for cross-border transactions. The second is the single loop or closed loop system, which is mostly used for domestic peer-to-peer transactions.
The third type is interlinking, which involves multilateral platforms that enhance cross-border payments. There are two main models for interlinking: the hub-and-spoke model, like Freemarket's, which is built primarily for cross-border transactions, and the common platform model, which is designed for both domestic and cross-border transactions. The hub-and-spoke model allows businesses to focus on the exchange of information, cash management, withdrawals, and FX within the hub, without having to consider technicalities across domestic systems. The common platform model is less technically complex but requires agreement from a significant number of stakeholders.
To achieve cross-border payments, agreement, and compromise is required to overcome five distinct risks and challenges. These include business risk, where scale must be reached quickly through organic growth to create a network effect and lower operating costs. Finance risks involve managing money laundering, terrorist financing, and sanction screening, complicated by a long chain of participants. Operational risk comes from relying on multiple players, creating single points of failure, and the potential for cyber-attacks. Legal risk is present when dealing with different statutory and regulatory frameworks, which change over time. FX and liquidity risk may occur with smaller exotic currencies, requiring sufficient funds to settle. Freemarket uses a pre-funded model to ensure liquidity during the day and safeguard customer funds at night.
There are two implementation approaches to consider in addressing the challenges facing payment platforms. One is the organic growth approach, which involves expanding existing multilateral platforms to new jurisdictions and participants based on identified needs and opportunities. This option may require public or private sector involvement for coordination. The other approach is the greenfield approach, which involves building a new global infrastructure for cross-border payments. This option requires complex governance discussions and cooperative oversight to balance the roles of different stakeholders in various regulatory markets and jurisdictions.
I believe that businesses will find a way to grow organically to meet their needs, and this would be the best approach to address these challenges.
Multilateral platforms can provide businesses and financial institutions with several benefits to enhance their payment processes and improve customer experiences. First, the platform's liquidity management feature offers transparency, allowing businesses to see the liquidity they have and where it needs to be moved. Second, compliance and data processing features such as AML/KYC checks throughout the process from originator to the beneficiary, ensure compliance with regulations. Third, the platform's safeguarding of funds or clearing feature provides security and ring-fencing of customers' funds. Fourth, with the right banking network, settlements are faster and more efficient, especially if an ecosystem is created. Fifth, the FX feature enables businesses to leverage the multilateral platform's aggregated layers of correspondent banks and NBFIs (non-bank financial institutes) to get the best rates for currency exchange. Finally, multilateral platforms provide resilience and stability by removing single points of failure in the system., multilateral platforms provide resilience and stability by removing single points of failure in the system.
Overall, multilateral platforms offer peace of mind and continuity of service by managing the rails for moving money across borders, eliminating the need for individual clients to worry about it. By aggregating all these services, multilateral platforms provide a headache-free way for businesses and financial institutions to leverage the benefits of the platform while mitigating potential risks associated with individual banks' differing appetites for focus and risk.
When integrating new clients into existing payment ecosystems/platforms, it's crucial to communicate to them what information is required upfront. This could include multiple levels of documentation, particularly for risk and compliance purposes.
Understanding the specific documentation required for currency corridors is also essential in ensuring a clear understanding of the commercials involved. Transparency is key as a multilateral platform, both in terms of regulatory requirements and the needs of the client. It's important to be aware of the jurisdictional and regulatory requirements of both the banks that are the spokes in that hub and spoke model, as they will have their own rules and regulations. By being upfront and clear about the required data and information, the onboarding process can be made smoother and faster, reducing the pain points that many businesses experience when setting up individual correspondent bank networks.
Absolutely! At Freemarket, we're thrilled to be participating at Money 2020 and we're excited to share with attendees insights into our commitment to providing resilience, speed, security stability, and continuity of banking services. As mentioned earlier, we understand the importance of businesses like ours in creating peace of mind for our clients. With our aggregation of global banks and non-bank financial institutions, we've created a global multilateral platform network that ensures our clients' heavy lifting is managed by someone else, allowing them to focus on their core business.
In the wake of recent turbulence in the banking sector, it's more important than ever for businesses around the world to diversify and seek resilience in their cash management. At Freemarket, we specialise in providing just that. Our value proposition is centred around providing the stability and continuity of banking services that our clients need, and our sweet spot is in ensuring that their businesses can weather economic headwinds such as high-interest rates.
If you're interested in learning more about how we can help your business achieve resilience, stability, and diversity in your cash management, we encourage you to come and speak with us at Money 2020. You'll find us at stand C 64, and we're eager to share our expertise and knowledge with you. So don't hesitate to stop by and say hello!
About Ronnie d’Arienzo
Before joining Freemarket as Chief Commercial Officer in January 2021, Ronnie held senior strategic positions at large financial corporations such as American Express, PPRO, and Paysafe (previously Skrill). Ronnie’s experience and track record in fast-growth businesses, as well as his strategic understanding of how to mature businesses allow him to focus on implementing and industrialising rigour, processes and tools that help grow Freemarket. At Freemarket, he works to attract and recruit new clients into the business and manages, supports and delivers growth for existing partners and customers – which is key for Freemarket’s long-term growth plans.
About Freemarket
We enable businesses to unlock more currencies and markets through a single, API-enabled connection point and platform, while ensuring they can more efficiently move funds internationally and access an entire correspondent banking and payments network.
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