Decoded: What is Nexus and how it will help India stit­ch bilateral deals

At a time when India is looking to popula­rise its payment products such as homegrown card network RuPay and Unified Pay­ments Interface (UPI) globally by stit­ching bilateral deals with other countries, one view is that, perhaps, India could join “Nexus”, the Bank for International Settlements’s blueprint for 24/7 real-time cross-border payments. Let’s find out what this open network is and how it works.

What is Nexus?
 

Conceptualised by the Bank for International Settlements (BIS), Nexus is a model for con­necting instant payment systems (IPS) of various countries through a platform to en­able faster cross-border payments that will also be ch­e­a­p­er, easier to access, and more transparent. Nexus, ess­entially, aims to achieve interoperability bet­ween existing instant payment infrastructu­res of various cou­ntries. While around 60 countries have IPSs that enable acc­o­unt-to-account transfer, with recipients receiving the paym­ent in real time and round the clock, cross-border payments are still a slow, cumbersome and expensive process. According to BIS, the Nexus platform will provide a scalable cross-border payments network that would connect IPSs in multiple countries, ena­b­ling payments to reach their destination within 60 seconds. The BIS innovation hub is working with the Monetary Authority of Singapore (MAS), the Bank of Italy and the Central Bank of Malaysia, as well as with BCS in Singapore and PayNet in Malaysia, to connect the payment systems of Singa­p­ore, Malaysia and the euro zone in an experimental proof-of-concept.

Why can’t existing IPSs of countri­e­s be linked for faster cross-border payments?
 

IPSs of various countries use different processes and functionalities. They might have different data formats, standards and mandatory fields, processes and sequences of steps in a payment process, and other things. Seve­ral countries have linked their IPSs bilaterally. For instance, in April 2021, Singa­p­ore’s PayNow service and Thai­land’s Prompt­Pay were linked, allowing users in the two countr­ies to send money to one another using just the telephone number of the recipient. In Sep­t­e­m­ber 2021, the Reserve Bank of India (RBI) and MAS, too, said they would link their respective fast payments systems — UPI and PayNow — to enable users to make low-cost fund transfers between the two countries. How­ever, the comple­x­ities would increase when more countries join the network. Acc­o­rding to the BIS blueprint, three countries require just three country-to-country links, but a network of 20 countries would require 190 such links. Each IPS operator would need to maintain custom-built links with 19 other IPSs, each with their own standards and processes. This is difficult from a software development and IT operations perspective.

How will Nexus work?
 

Nexus will enable interoperability among ISPs by providing a mechanism through which ISPs of various countries can interact with each other. BIS’s blueprint says, Nexus will include two elements: Nexus Scheme and Nexus Gateway. The Nexus Scheme will have the defined rules and obligations for the ISPs, banks, and payment service providers to make cross-border payments through the network, with minimum changes. The gateway, on the other hand, is the software that will synchronise compliance, forex conversion, message translation and the sequencing of payments between countries. The various IPSs and their members just have to make their systems adaptable to Nexus.

Besides being quick and cost-efficient, Nexus will make the process a lot more transparent as consumers will be made aware of the fees and forex rates before making the transaction. Also, accessibility will get a huge boost as consumers who use ISPs for making domestic payments will now be able to make cross-border payments in the same manner.

Who are the important players in the Nexus network?
 

The Nexus network comprises the sender and the recipient, who can either be individ­uals or small businesses using ISPs to make retail payments. Then there is the source bank (sender’s bank) and the desti­nation bank (recipient’s bank). The source and the destination bank should be connected to the IPS, which, in turn, must in­stall and op­erate the Nexus Gateway. Then there is the forex provider, which will be a regulated financial entity that will accept the source currency and pay out the destination curre­ncy. They will have to give Ne­xus the quote, the rate at which they will swap the currencies. The infrastructure is built in such a way that the forex providers will have to compete with one another to offer the best rates. If the forex provider is a bank or a payment service provider, which is already a member of the source or destin­ation ISP, then it can directly receive the so­u­rce curr­ency and payout the destination currency. However, if that is not the case, the forex provider can use accounts that it holds with liquidity providers in the source or destination country.

How will the transaction go through?
 

A sender can initiate the transaction by logging into his /her existing bank app as there is no separate Nexus ID or app. The next step is selecting the destination country, after which the source bank asks Nexus for service level description, which is basically the functionality available in the destination IPS, such as the account number format, alias format(s), the maximum value that can be sent and whether confirmation of payee is available. Nexus then gets quotes from forex providers for payment; the sender is shown the current forex rate. Thereafter, the sender is required to key in the amount they wish to send, enter the account number or any other details, after which the source bank will validate the details. Once the details are ascertained, the banks involved in Nexus do a screening on the sender and recipient according to the regulatory requirements. Once the checks are done, the sender can complete the payment.