The Bank for International Settlements (BIS) and its partners have revealed the comprehensive blueprint for phase three of Project Nexus, which seeks to address longstanding challenges in international money transfers by leveraging the power of domestic instant payment systems (IPS).
The ambitious initiative is targeting to transform cross-border payments in Southeast Asia (ASEAN) initially, before the broader Asia Pacific (APAC) region and, eventually, the world.
How Does Project Nexus Work?
Nexus is designed to standardise the way domestic payment systems connect with each other across borders. Instead of an instant payment system operator creating custom connections for every new country it connects to, the operator needs to make only one connection to Nexus. This single connection would then allow the instant payment system to reach all other countries in the network.
The potential impact of this initiative is substantial. According to the project report containing conclusions and key learnings recently released by the Bank for International Settlements Innovation Hub (BISIH) Singapore Centre, there is a sizeable flow of intra- and extra-ASEAN payments that could be processed through Nexus.
This aligns with the total value of digital payments in the six largest ASEAN economies alone amounting to US$806 billion in 2022, representing a 14% annual increase as per World Economic Forum data, and is expected to approach nearly US$1.2 trillion by 2025.
Connecting the ASEAN-5 and Beyond
Following a successful test of a Nexus prototype to connect the three instant payment systems of Europe (Eurosystem’s TARGET Instant Payment Settlement, or TIPS), Malaysia (it’s Real-time Retail Payments Platform, RPP), and Singapore (the Fast and Secure Transfers or FAST payment system), the heart of Project Nexus moving forward will be the collaboration between five ASEAN nations: Indonesia, Malaysia, the Philippines, Singapore, and Thailand.
These countries, collectively referred to as the ASEAN-5, have been at the forefront of developing robust domestic instant payment infrastructures. Project Nexus aims to interlink these systems, creating a seamless network for cross-border transactions.
While specific figures were not disclosed, the report suggests that connecting the ASEAN-5 countries alone would create a significant addressable market.
Moreover, as Nexus expands to include other countries in the Asia Pacific region, the network effects and economic benefits are expected to grow exponentially.
Enhancing Speed and Reducing Costs
One of the most significant benefits of Project Nexus as laid out in the report is the dramatic improvement in transaction speed.
The system aims to enable cross-border payments that reach their destination within 60 seconds or less in most cases — a marked improvement over traditional cross-border payment methods, which can take anywhere from several hours to several days.
In terms of cost reduction, Project Nexus aligns with the G20 Roadmap for Enhancing Cross-border Payments, which sets a target for the global average cost of cross-border payments to be no more than 1% by the end of 2027.
While specific fee structures are yet to be finalised, the project team has conducted extensive benchmarking to ensure that Nexus can feasibly provide cross-border payments where the total cost to the sender is within the G20’s 3% target, and potentially even lower.
Innovative FX Provision Model
Project Nexus introduces a flexible FX provision model that allows each Payment Service Provider (PSP) to take the approach that works best for them. Larger service providers may provide FX conversion for their own payments, while smaller service providers can use third-party FX Providers (FXPs).
This model allows payment service providers to send cross-border payments without having to hold multiple currencies in multiple countries, potentially reducing costs and complexity.
The Nexus model also separates out the different roles that a financial institution can play in a cross-border payment. This separation increases competition between roles and levels the playing field, allowing smaller FX dealers to compete with larger international financial institutions.
Overcoming Technical and Regulatory Hurdles
One of the key challenges in connecting multiple instant payment systems is the variation in technical standards and regulatory requirements across different countries.
Project Nexus addresses this through a standardised approach, utilising APIs and ISO 20022 messages to facilitate communication between different systems. This standardisation significantly reduces the complexity and cost of integration, making it feasible to connect a large number of countries.
The project team has developed a comprehensive governance framework and scheme rulebook to ensure compliance with diverse regulatory requirements.
This includes provisions for anti-money laundering (AML) and countering the financing of terrorism (CFT) measures, as well as accommodating different foreign exchange regulations across participating countries.
To facilitate live implementation, the partner central banks and instant payment system operators have agreed to establish a new entity, the Nexus Scheme Organisation (NSO), which will be responsible for managing this rulebook and ensuring its consistent application across the network.
The NSO will be wholly owned by the central banks and/or instant payment systems in the participating countries, depending on the specific domestic structures.
In developing the blueprint for phase three of Nexus, the BIS says it is supporting central banks in finding innovative solutions to deliver public goods, aligning with one of its key commitments as part of the G20 Roadmap.
Fostering Financial Inclusion and Economic Growth
The implementation of Project Nexus has the potential to significantly boost financial inclusion and economic growth in the Southeast Asia and Asia Pacific regions. By providing faster, cheaper, and more accessible cross-border payment options, Nexus could facilitate increased trade and remittance flows between linked countries.
For example, the project could greatly benefit the millions of migrant workers from Southeast Asian countries like the Philippines and Indonesia working internationally.
These workers often rely on expensive remittance services to send money back home. With Nexus, they could potentially send money instantly and at a fraction of the current cost, allowing more of their hard-earned income to reach their families.
Furthermore, small and medium-sized enterprises (SMEs) in the region stand to benefit from improved access to cross-border payment services. This could enable them to more easily participate in international trade, potentially driving economic growth and job creation across the region.
Real-World Implementation and Future Prospects
The BISIH Singapore Centre is now moving towards real-world implementation of Project Nexus. Having successfully concluded phase three, the next phase involves supporting a coalition of countries interested in implementing Nexus to connect their domestic instant payment system.
Phase four will involve the Central Bank of Malaysia, Bangko Sentral ng Pilipinas, the Monetary Authority of Singapore, the Bank of Thailand, and domestic payment system operators, who collaborated in phase three. They will be joined by the Reserve Bank of India, thus expanding the potential user base to include India’s Unified Payments Interface (UPI), the world’s largest instant payment system.
Bank Indonesia (BI) will continue its association with the project as a special observer. Having participated in phase three, BI will maintain this capacity to follow the project into its next stage of development.
While the initial focus has been on the ASEAN-5 countries, the BIS and its partner central banks share a desire for any real-world implementation of Nexus to be global rather than regional.
To this end, the project team is continuing to engage with central banks and payment system operators across the world. They are inviting interested parties to contact them for more information on connecting to Nexus or using the Nexus blueprint in their other projects.
The successful implementation of Project Nexus could serve as a model for other regions looking to improve their cross-border payment infrastructure. By demonstrating the feasibility of linking multiple instant payment systems across different countries, Nexus could pave the way for a truly global network of instant cross-border payments, revolutionising the way money moves around the world.
Regionally, it has the potential to significantly enhance financial integration in Southeast Asia and the broader Asia Pacific region, fostering economic growth and financial inclusion on an unprecedented scale.
Featured image credit: Edited from Freepik
