Cross-Border Payment Alternatives to SWIFT

GS-II – International Relations

Why in News?

• BRICS New Delhi Declaration: Member states pledged to boost intra-BRICS trade and settlements in national currencies.
• CBDC Proposal: According to multiple reports, the idea of cross-border payments facilitating trade between BRICS members through Central Bank Digital Currencies (CBDCs) was floated but left out of the final Declaration.
• Background: Financial sanctions and concerns related to over-reliance on the US dollar-sheltered payment framework have inspired nations to create alternative payment systems.

Major Alternatives to SWIFT

• Project mBridge: A multi-CBDC platform involving the Bank of Thailand, UAE Central Bank, Digital Currency Institute of the PBoC, Hong Kong Monetary Authority and Saudi Central Bank.
  • Allows potential direct P2P settlement using CBDCs.
  • Employs the mBridge Ledger, a blockchain platform developed for it.
  • Reached the minimum viable product stage in 2024.
  • BIS had backed the project since its inception but withdrew its support on October 31, 2024.
• CIPS – Cross-Border Interbank Payment System:
  • Founded in 2015 by China to enable the internationalisation of the renminbi (yuan).
  • Permits banks to settle cross-border yuan transactions directly through China.
  • Has expanded to participants from 120+ countries.
  • Still operates on a much smaller scale than legacy global payment systems.
• SPFS – System for Transfer of Financial Messages:
  • A financial messaging system developed by Russia in 2014.
  • Gained renewed prominence after Russia’s exclusion from SWIFT in 2022.
  • As of 2023, it reportedly had 440 participants, including more than 100 non-residents.
• SEPAM – Iran:
  • Iran’s national interbank payment/messaging system.
  • Connects Iranian banks and certain foreign banks with institutions using SPFS.
  • Designed to enable transactions beyond Western-controlled financial systems.

India–Russia Payment Mechanism

• To facilitate bilateral trade, India and Russia have created a rupee–ruble settlement mechanism.
• The Russian banking official said rupees and rubles made up 96% of bilateral trade.
• Reportedly, 22 Russian banks and 17 Indian banks were providing banking services for bilateral trade.
• This highlights how national-currency settlement can mitigate reliance on dollar correspondent banking channels.

Why Alternatives Are Emerging?

• Financial Sanctions: Financial sanctions aim to restrict access to conventional international payment infrastructure.
• Dollar Dependency: Countries heavily dependent on the dollar are particularly vulnerable to U.S. financial restrictions.
• Increased Autonomy: Countries want more control over their own cross-border payment architecture, along with greater agency and self-reliance.
• De-dollarisation: The rise of trade in national currencies.
• Technological Change: CBDCs and blockchain-based systems might allow faster direct settlement without traditional correspondent banks.

Key Limitation

• However, these systems still do not provide a full-scale alternative to SWIFT.
• Major challenges include:
  • Limited global adoption.
  • Different technical standards.
  • Currency convertibility issues.
  • Liquidity constraints.
  • Regulatory differences.
  • Reliance upon cross-national systems and interoperability.
  • Dominance of existing dollar-based financial infrastructure.

UPSC Mains Question

Q. The rise of alternative cross-border payment systems echoes increasing scepticism about using the current global financial plumbing. India has been promoting alternative payment mechanisms. Where do you see the opportunities and challenges in this space?