The Importance of Speed in Cross-Border Payments

The move is part of SWIFT's plans of enabling instant settlement capabilities through its Global Payments Innovation in the wake of imminent competition from the likes of Ripple.

The burden of bankingRipple CEO Brad Garlinghouse has consistently highlighted a particular aspect of the legacy financial system that creates inefficiencies in international payments - the need for correspondent banking relationships.

Commercial banks around the world tend to hold accounts with correspondent banks overseas to implement cross-border wire transfers, usually over the SWIFT network.

For wire transfers via a system like SWIFT, the participating banks need to have correspondent relationships abroad. A correspondent bank makes or receives payments on behalf of another financial institution in a different country.

If Bank A in Country 1 needs to send a wire transfer to Bank B in Country 2, Bank A will contact its correspondent bank in Country 2 to facilitate the payment.

Usually, Bank A would maintain an account with this correspondent bank.

To the correspondent bank in this instance, the account is called a Nostro account, while for Bank A - the counterparty - that same account is referred to as a Vostro account.

According to the Bank of International Settlements, global correspondent banking relationships are declining by the year.

The emergence of new international payment methods is one of the reasons identified by BIS that is responsible for the decline of the correspondent banking network.

"The continuing decline in the number of correspondent banking relationships in many countries around the world remains a source of concern. In affected jurisdictions, there may be an impact on the ability to send and receive international payments, which could push people into using unregulated and potentially unsafe 'shadow payments' with further consequences for growth, financial inclusion, and international trade."