IAS Gyan

Daily News Analysis

Project Nexus

2nd July, 2024 Economy

Project Nexus

Disclaimer: Copyright infringement not intended.

Context:

  • The Reserve Bank of India (RBI) has recently joined Project Nexus, a multinational initiative aimed at facilitating instant cross-border retail payments.
  • The project focuses on interlinking domestic Fast Payments Systems (FPSs) across participating countries.

Key Participants:

  • India: Unified Payments Interface (UPI)
  • Other Countries: Malaysia, the Philippines, Singapore, and Thailand

Project Nexus

Concept and Origin:

  • Project Nexus is an initiative spearheaded by the Innovation Hub of the Bank for International Settlements (BIS).
  • Its primary goal is to enhance cross-border payments by linking multiple domestic instant payment systems (IPS) globally.

Bank for International Settlements (BIS)

The Bank for International Settlements (BIS), established in 1929, serves as an international financial institution owned by member central banks. Its core mission is to promote international monetary and financial cooperation while acting as a bank for central banks. Initially tasked with overseeing the settlement of World War I reparations, the BIS now facilitates global financial stability through meetings, programs, and the Basel Process. It provides specialized banking services exclusively to central banks and international organizations. Headquartered in Basel, Switzerland, the BIS maintains representative offices in Hong Kong and Mexico City to support its global operations.

READ ALL ABOUT UPI: https://www.iasgyan.in/daily-current-affairs/upi#:~:text=Unified%20Payments%20Interface%20(UPI)%20is,%2Dmerchant%20(P2M)%20transactions.

Implementation and Significance:

  • Notably, Project Nexus represents the first BIS Innovation Hub project in the payments domain to transition from conceptualization to live implementation.
  • The initiative underscores a concerted effort to streamline and accelerate cross-border retail payments.

RBI's Involvement and Collaborations:

  • The Reserve Bank of India (RBI) has actively engaged in bilateral collaborations with various countries.
  • These efforts aim to connect India's Fast Payments System (FPS) — specifically the Unified Payments Interface (UPI) — with partner countries' FPSs.
  • This bilateral connectivity facilitates cross-border Person to Person (P2P) and Person to Merchant (P2M) payments.

FPS

The FPS is instituted in order to reduce payment times between accounts held by different customers. Historically, these types of payments would take 3+ days, but the Faster Payments Service has reduced transaction times down to a few seconds, in most cases.

A number of different services—including banks, fintechs, and payment service providers—are able to connect securely and directly to the Faster Payment Service system infrastructure. These connections are what facilitate payments across the FPS.

In general, provided that both the sending and the receiving bank are direct participants of FPS, funds are available immediately upon transfer. In some cases, transfers can take as long as two hours—though this is more likely to occur outside of normal business hours or if one party is not a direct FPS participant.

Because payments sent use the Faster Payments Service happen in real-time, they cannot be canceled or recalled once they are sent. 

Advantages of Multilateral Approach:

  • While bilateral connections have been beneficial, a multilateral approach through Project Nexus will amplify the reach and impact of Indian payment systems globally.
  • It will enable seamless cross-border transactions, enhancing convenience and reducing transaction times and costs.

Global Impact and Potential:

  • Over 70 countries currently benefit from domestic Instant Payment Systems (IPS) that ensure rapid transaction processing at minimal costs.
  • Connecting these IPS globally through Project Nexus can potentially enable cross-border payments to reach recipients within approximately 60 seconds in most cases, according to BIS projections.

Benefits of Project Nexus:

Standardization of IPS Connectivity:

  • Project Nexus aims to standardize the connectivity between domestic Instant Payment Systems (IPS) globally.
  • Instead of individual payment system operators building custom connections for each new country, operators can establish a single connection to the Nexus platform.

Efficiency and Scalability:

  • By leveraging Nexus, a fast payments system operator can seamlessly reach all other participating countries on the network through a unified connection.
  • This standardized approach enhances operational efficiency and scalability, reducing the time and resources required for establishing and maintaining cross-border payment connections.

Accelerated Growth of Cross-Border Payments:

  • Nexus has the potential to significantly expedite the expansion of instant cross-border payments.
  • It simplifies the process for payment operators to onboard new countries, thereby fostering a more interconnected global payments ecosystem.

Enhanced Accessibility and Cost Efficiency:

  • Standardized IPS connectivity through Nexus enhances accessibility to cross-border payment capabilities for a broader range of users, including individuals and businesses.
  • This accessibility is coupled with cost efficiencies, as streamlined connections reduce transaction costs and improve financial inclusion.

Promotion of Financial Integration:

  • By promoting standardization and interoperability among IPS globally, Project Nexus contributes to greater financial integration across borders.
  • It supports economic activities by facilitating smoother and faster cross-border transactions, benefiting global trade and commerce.

Countries Participating in Project Nexus:

Founding Members

  • Malaysia: Bank Negara Malaysia (BNM)
  • Philippines: Bangko Sentral ng Pilipinas (BSP)
  • Singapore: Monetary Authority of Singapore (MAS)
  • Thailand: Bank of Thailand (BOT)
  • India: Reserve Bank of India (RBI)

Future Member:

  • Indonesia is slated to join the platform in the future, expanding the network of participating countries.

Agreement Details:

  • An agreement was signed on June 30, 2024, in Basel, Switzerland, between the Bank for International Settlements (BIS) and the central banks of the founding countries.
  • This agreement solidifies their commitment to integrate their respective Fast Payments Systems (FPSs) into the Nexus platform, facilitating seamless cross-border retail payments.

Strategic Focus:

  • The inclusion of ASEAN countries (Malaysia, Philippines, Singapore, Thailand) along with India underscores the strategic focus on enhancing financial connectivity within the region and beyond.
  • Indonesia's future participation is expected to further bolster the platform's reach and impact across Southeast Asia.
  • Project Nexus, with its multinational collaboration and standardized IPS connectivity, aims to foster greater financial integration, efficiency, and accessibility in cross-border payments among its member countries and potentially beyond.

READ ABOUT UPI: https://www.iasgyan.in/daily-current-affairs/upi#:~:text=Unified%20Payments%20Interface%20(UPI)%20is,%2Dmerchant%20(P2M)%20transactions

PRACTICE QUESTION

Q. Discuss the significance of Project Nexus in enhancing cross-border retail payments. How does this initiative contribute to global financial integration and economic cooperation?

SOURCE: INDIAN EXPRESS