Why BRICS is Exploring Alternative Cross-Border Payment Systems
Subject: GS III — Economy
Context
Ahead of the 18th BRICS Summit hosted by India in New Delhi in September, member nations have intensified financial cooperation discussions—specifically focusing on mechanisms to streamline cross-border payments. Recent ministerial and central bank meetings in Jaipur highlighted the growing push to reduce transaction friction and encourage the use of national currencies in international trade.
The Mechanics and Friction of the Current Global Financial Architecture
Traditional cross-border payments rely heavily on legacy infrastructure, which introduces significant friction:
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Correspondent Banking and Vehicle Currencies: Instead of moving directly between an importer’s bank and an exporter’s bank, international payments frequently pass through a chain of correspondent banks. Because banks may not directly hold both local currencies, transactions often require a “vehicle currency” like the U.S. dollar (e.g., converting South African Rand $\rightarrow$ U.S. Dollar $\rightarrow$ Indian Rupee).
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The SWIFT Dependency: The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides secure messaging for payment instructions across 11,000+ institutions globally. However, SWIFT only transmits instructions; actual settlement occurs through financial intermediaries. Furthermore, this infrastructure is overseen by Western central banks (including the U.S. Federal Reserve and the National Bank of Belgium).
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High Costs and Structural Delays: The multi-layered banking chain incurs heavy intermediary fees, exchange-rate margins, and conversion costs. Historical BRICS surveys revealed foreign-exchange margins ranging from 2.5% to as high as 20% for certain developing-economy corridors.
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De-risking and Shrinking Networks: Data from the Bank for International Settlements (BIS) indicates that active correspondent banking relationships declined by roughly 20% between 2011 and 2018, concentrating payment flows through fewer major global institutions.
Why BRICS Wants Change: Strategic and Economic Drivers
Developing economies are increasingly motivated to reform or bypass traditional channels due to several key vulnerabilities:
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Exposure to Western Monetary Policies: Heavy reliance on dominant currencies (such as the U.S. dollar, euro, or yen) exposes emerging markets to the domestic monetary policy shocks of issuing nations.
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Sanctions Vulnerability: The weaponization of financial plumbing—demonstrated by the disconnection of several Russian banks from SWIFT in 2022—has underscored the risks of depending on Western-dominated infrastructure.
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Cost Inefficiencies: High FX margins and transaction fees disproportionately burden developing nations’ trade competitiveness.
Proposed Models for Cross-Border Integration
To overcome these structural hurdles, BRICS is exploring alternative architectures:
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Direct System Connectivity (Bilateral vs. Shared Hub):
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Bilateral Linkages: Similar to India’s UPI linking with Singapore’s PayNow for instant remittances, bilateral integration works well pairwise but becomes unscalable across a large multilateral group.
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Shared Hub Model: A centralized technological platform connecting participating domestic instant-payment systems. For instance, Project Nexus—designed by the BIS and slated to go live in 2027 under a company established by six central banks including the RBI—aims to link instant payment systems globally (though it is a broader international project rather than an exclusive BRICS initiative).
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Central Bank Digital Currencies (CBDCs) and Atomic Settlement:
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Wholesale CBDCs issued by central banks can serve as direct settlement assets on a shared platform.
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Atomic Settlement: Ensures that both legs of a multi-currency swap settle simultaneously or not at all, drastically lowering counterparty risk and freeing up capital that banks otherwise keep locked up against settlement delays.
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mBridge: A prominent BIS-backed CBDC cross-border experiment involving China, Thailand, Hong Kong, and the UAE, though heavily weighted toward the digital yuan.
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BRICS Clear: While initial exploration was flagged in the 2024 Kazan Declaration for an independent settlement system, discussions continue to evolve pragmatically.
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India’s Strategic Position
India has adopted a pragmatic approach within BRICS. Rather than framing alternative payment systems as an explicit campaign to “de-dollarize” or replace the global financial order, New Delhi emphasizes lower transaction costs, faster settlement times, and the use of national currencies for trade and tourism. By leveraging indigenous public digital public infrastructure (like UPI and CBDC linkages), India seeks greater financial sovereignty while maintaining broad global economic engagement.
