Why is BRICS exploring cross-border payments? |Explained
How do cross-border payments work? What are the instructions between banks and costs involved in each step? How have transaction times reduced? Why does BRICS want to change the system? What alternatives are being explored? What does India propose?
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Context
The upcoming summit in New Delhi is set to explore mechanisms for facilitating cross-border payments among member nations. The focus is on linking digital payment systems like India's (UPI) and Central Bank Digital Currencies (CBDCs) to bypass the traditional, costly, and dollar-dominated system. This initiative aims to reduce transaction costs and mitigate vulnerabilities to Western financial sanctions, though India maintains the focus is economic efficiency rather than explicitly "de-dollarization."
UPSC Perspectives
Economic
The current international payment architecture heavily relies on correspondent banking and the messaging network, which uses the U.S. dollar as a vehicle currency. This system is inefficient for developing nations because it necessitates double currency conversion (e.g., Rand to Dollar, then Dollar to Rupee), resulting in high foreign exchange margins and transaction fees (ranging from 2.5% to over 20% in some regions). is exploring alternatives like linking national fast-payment systems (similar to the -PayNow linkage between India and Singapore) and utilizing wholesale Central Bank Digital Currencies (CBDCs) on shared platforms. Platforms like (developed by the ) allow instantaneous, peer-to-peer settlement using digital national currencies, eliminating the need for correspondent banks, reducing capital lock-up, and significantly lowering transaction costs. The is actively involved in similar initiatives like Project Nexus.
International Relations
The push for an alternative payment system reflects deeper geopolitical realignment and concerns over the weaponization of finance. The system, while headquartered in Belgium, is heavily influenced by the G-10 central banks, particularly the U.S. Federal Reserve. The exclusion of Russian banks from following the Ukraine invasion highlighted the vulnerability of nations reliant on the dollar-dominated system to unilateral Western economic sanctions. For Russia and, to a lesser extent, China, developing a -based financial architecture is a strategic imperative to achieve financial sovereignty and bypass U.S. monetary hegemony. This aligns with broader discussions on de-dollarization in international trade.
Geopolitical
India's approach to the cross-border payment initiative requires delicate strategic balancing. While India benefits economically from reduced transaction costs and faster settlements for its growing international trade, it is cautious about being perceived as part of an explicitly "anti-Western" or anti-dollar bloc, especially given potential backlash (such as tariff threats). India officially frames its proposals—like linking for trade and tourism—as technical improvements for economic efficiency rather than geopolitical tools. This reflects India's broader foreign policy of multi-alignment, where it participates in non-Western groupings like and the (SCO) while simultaneously deepening strategic and economic ties with the West through frameworks like the . India seeks to reform global financial governance without completely rupturing existing structures.