Executive Summary
Cross-border payments remain one of the most persistent inefficiencies in the global financial system. Despite rapid domestic payment innovation — India's UPI processes 12 billion transactions monthly, Brazil's Pix handles 4.5 billion, and the UK's Faster Payments processes 4 billion annually — international payments remain slow (2–5 days), expensive (averaging 6.2% for remittances according to the World Bank), and opaque. The Financial Stability Board's 2020 Cross-Border Payments Roadmap set ambitious targets — reducing costs to below 3%, achieving one-hour processing, and ensuring universal access by 2027 — but progress has been uneven.
This policy brief analyses cross-border payment interoperability through the lens of network economics and coordination game theory. We examine three leading initiatives — BIS's Project Nexus, the mBridge multi-CBDC platform, and SWIFT's Transaction Manager — as competing approaches to the interoperability challenge. Each embodies a different network architecture with distinct implications for efficiency, sovereignty, and systemic risk. We argue that the choice of interoperability architecture is fundamentally a coordination game with multiple equilibria, and that the equilibrium selected will shape the structure of international finance for decades.
The Cost of Fragmentation: A Network Economics Perspective
The inefficiency of cross-border payments is a direct consequence of network fragmentation. Domestic payment systems are closed networks — UPI does not interoperate with Pix, nor does Faster Payments connect to SEPA Instant. International payments therefore require intermediation: correspondent banking chains that bridge disconnected domestic networks through sequential bilateral relationships.
Network economics explains why this intermediation is costly. In a fragmented network with N national payment systems, full bilateral interoperability requires N(N-1)/2 connections — approximately 14,000 bilateral links for the 170 countries with domestic payment systems. Each link requires legal agreements, technical integration, compliance frameworks, and liquidity management. The fixed costs of establishing and maintaining these links create natural barriers to entry, resulting in the concentrated correspondent banking network that currently dominates cross-border payments.
The BIS Committee on Payments and Market Infrastructures (CPMI) documents the consequences of this concentration. The number of active correspondent banking relationships declined by 25% between 2011 and 2024, as global banks exited less profitable corridors — a phenomenon known as "de-risking." This de-risking disproportionately affects developing economies: the World Bank reports that remittance costs to sub-Saharan Africa average 7.9%, nearly double the global average, directly reducing the development impact of the $650 billion in annual remittance flows to low- and middle-income countries.
Three Architectures for Interoperability
Project Nexus: The Hub-and-Spoke Model. The BIS Innovation Hub's Project Nexus proposes a multilateral "hub" that connects national instant payment systems through standardised protocols. Rather than requiring N(N-1)/2 bilateral connections, each country connects once to the Nexus hub, reducing the integration burden to N connections. The hub handles message translation, compliance screening, and FX conversion. Pilot implementations connecting the payment systems of India, Malaysia, the Philippines, Singapore, and Thailand demonstrate proof of concept, with transaction settlement times of under 60 seconds.
The hub-and-spoke architecture captures network economies of scale: each additional country that joins increases the value of membership for all existing participants (Metcalfe's Law). However, it creates a governance challenge: the hub is a critical single point of control, and decisions about access, pricing, and technical standards are inherently political. The choice of hub operator — and the governance framework under which it operates — becomes a question of international monetary sovereignty.
mBridge: The Distributed Ledger Model. The mBridge platform, developed by the BIS Innovation Hub Hong Kong Centre with the central banks of China, Hong Kong, Thailand, Saudi Arabia, and the UAE, takes a fundamentally different architectural approach. mBridge uses a custom distributed ledger (the mBridge Ledger) to enable direct central bank-to-central bank settlement in wholesale CBDCs, bypassing correspondent banking entirely.
The economic implications of mBridge are profound. By enabling atomic (instantaneous, irrevocable) cross-currency settlement, mBridge eliminates the credit and liquidity risks inherent in correspondent banking, potentially reducing settlement costs by 50–80%. However, mBridge also enables payments outside the US dollar-denominated correspondent banking system, raising questions about dollar hegemony and sanctions effectiveness that have made it geopolitically contentious. The participation of China and Saudi Arabia — two countries with strategic interest in reducing dollar dependence — has intensified Western scrutiny.
SWIFT Transaction Manager: The Overlay Model. SWIFT's approach preserves the existing correspondent banking infrastructure while layering improved functionality on top. The Transaction Manager pre-validates payment details, locks in FX rates, and confirms compliance before initiating the payment, reducing uncertainty and delays. This evolutionary approach minimises disruption but does not address the fundamental structural inefficiencies of multi-hop correspondent banking.
The Coordination Game: Choosing an Interoperability Standard
The coexistence of competing interoperability architectures creates a coordination game with multiple equilibria. Each architecture benefits from adoption: the more countries that join Nexus, the more valuable Nexus becomes; the more central banks that participate in mBridge, the greater mBridge's utility. This positive feedback loop means that the "winning" architecture will be determined less by technical superiority than by early adoption dynamics and geopolitical alignment.
Formally, this is a battle-of-the-sexes game with network externalities. All participants prefer coordination on a single standard over fragmentation, but they disagree on which standard to coordinate upon. Western-aligned economies prefer architectures that maintain compatibility with existing compliance and sanctions infrastructure (Nexus, SWIFT TM). China-aligned economies prefer architectures that reduce dependence on Western-controlled infrastructure (mBridge). Non-aligned economies — the majority of the developing world — prefer whichever architecture offers the lowest costs and broadest connectivity.
The risk is that geopolitical competition produces a fragmented equilibrium: parallel, non-interoperable payment networks serving different geopolitical blocs. This outcome would be globally suboptimal, increasing costs for countries that trade across blocs and creating compliance challenges for multinational firms. The BIS's 2025 Annual Economic Report warns that payment system fragmentation could reduce global trade by 3–5% and increase financial exclusion in developing economies.
Remittances and Financial Inclusion: The Stakes for Development
The interoperability debate has immediate human consequences. Remittances — transfers from migrant workers to families in their home countries — totalled $857 billion in 2024 according to the World Bank, exceeding foreign direct investment to developing economies. At the current average cost of 6.2%, remittance fees consume approximately $53 billion annually — more than total official development assistance from many donor countries.
Reducing remittance costs to the FSB's 3% target would save senders approximately $27 billion annually. For a Bangladeshi migrant worker in the UAE sending $300 per month, the difference between a 7% fee and a 1% fee represents $216 per year — a significant sum relative to the worker's household income and the recipient family's consumption in Bangladesh.
The interoperability architectures reviewed above offer different pathways to cost reduction. Nexus, by connecting domestic instant payment systems, could enable near-zero-cost remittances along connected corridors. mBridge's wholesale CBDC settlement could eliminate correspondent banking margins that contribute to high remittance costs. SWIFT's Transaction Manager improves efficiency within the existing system but does not fundamentally alter the cost structure.
Design Principles for Inclusive Interoperability
Regardless of which architecture(s) prevail, we propose five design principles for ensuring that cross-border payment interoperability serves financial inclusion objectives:
- Open access: Interoperability platforms should accept connections from all licensed payment service providers, not only banks, to enable fintech and mobile money operator participation.
- Proportional compliance: AML/CFT requirements should be calibrated to transaction risk, with simplified due diligence for low-value remittance flows, avoiding the "de-risking" dynamic that has cut developing economies off from correspondent banking.
- Competitive FX: Interoperability platforms should enable competitive FX conversion, breaking the market power of correspondent banks that currently extract monopoly margins on currency conversion.
- Interoperability of interoperability: Competing architectures should themselves be interoperable, preventing the fragmented equilibrium identified in our coordination game analysis.
- Governance proportionality: Governance structures should give voice to developing economies proportional to their stake in the system, not merely to the financial scale of participating institutions.
Implications for GDEF's Finance & Economy Working Group
Cross-border payment interoperability is a foundational infrastructure challenge with implications for trade, development, financial inclusion, and geopolitical balance. The coordination game dynamics identified in this analysis suggest that without proactive governance intervention, geopolitical competition will produce a fragmented outcome that serves no one's interests optimally. GDEF's Finance & Economy Working Group will advance interoperability governance proposals in its programme on International Financial Architecture Reform, with particular focus on inclusive governance mechanisms for multilateral payment platforms.
References & Sources
- BIS, Project Nexus: Connecting Fast Payment Systems Across Borders. BIS Innovation Hub. bis.org/bisih/nexus
- World Bank, Remittance Prices Worldwide Quarterly, Q4 2025. remittanceprices.worldbank.org
- FSB, G20 Roadmap for Enhancing Cross-Border Payments: 2025 Progress Report. fsb.org/cross-border-payments
- BIS, Annual Economic Report 2025. bis.org/annual-report-2025
- CPMI, Red Book Statistics on Payment, Clearing and Settlement Systems. bis.org/cpmi/redbook
- Katz, M.L. and Shapiro, C. (1985). "Network Externalities, Competition, and Compatibility." American Economic Review, 75(3), 424–440. jstor.org/stable/1814809
- Auer, R., Haene, P., and Holden, H. (2021). "Multi-CBDC Arrangements and the Future of Cross-Border Payments." BIS Papers, No. 115. bis.org/publ/bppdf/bispap115
- SWIFT, Transaction Manager: Transforming Cross-Border Payments. swift.com/transaction-manager
- World Bank, Migration and Development Brief 40, December 2024. worldbank.org/migration
- Farrell, J. and Saloner, G. (1985). "Standardization, Compatibility, and Innovation." RAND Journal of Economics, 16(1), 70–83. doi.org/10.2307/2555589