The Interlinking of Fast Payment Systems and Geopolitical Dynamics
Fast Payment Systems are emerging as vital networks in global finance, shaped by geopolitical tensions and economic factors.
Payments are a fundamental component of the global economy, serving as an intricate network that often goes unnoticed until disruptions occur.
The evolution of global payment systems is significantly impacting the role of major currencies within the international monetary framework, affecting transaction settlements and costs in financial markets, while also creating strategic interdependencies between trade and finance.
Currently, most cross-border payments are processed through interbank systems known as correspondent banks—a network of intermediaries that facilitates transactions between banks across varied countries.
Research indicates that these transactions can often be slow and expensive due to the necessity for multiple intermediaries and currency conversions, leading to a significant demand for faster and more efficient solutions.
To address these challenges, the rise of Fast Payment Systems (FPS) has been notable, providing the capability to settle transactions in seconds.
FPS have been adopted across more than 100 jurisdictions, with several countries actively pursuing linkages between their domestic systems.
As of 2024, the landscape of FPS connections is primarily centered on large regional platforms, showing limited interconnectivity across distinct clusters.
Data indicates a total of 523 dyadic connections involving 117 FPS worldwide, with particularly dense networks in regions like Europe and Africa.
The Eurosystem's TARGET Instant Payment Settlement (TIPS) currently facilitates real-time payments in multiple currencies, with future expansions anticipated.
While advances in FPS offer potential for more efficient cross-border transactions, the interlinking of these systems is influenced by economic, technical, and geopolitical factors.
Enhanced interlinking can lead to reduced transaction costs by minimizing the number of intermediaries involved, yet establishing interoperability is complex and contingent upon sufficient cross-border transaction volumes.
Countries may pursue heightened technological independence due to concerns over reliance on foreign-controlled payment technologies.
Additionally, payment systems can offer geopolitical leverage, serving as tools for enforcing economic sanctions due to the monopolistic nature of payment networks and the latency of substitutes.
Analyses suggest that geopolitics plays a significant role in determining the interconnection of payment systems.
An assessment using a logit model indicates that geopolitical factors have a more pronounced impact on establishing payment links than geographical distances or trade volumes.
Specifically, one standard deviation increase in geopolitical distance—analogous to the geopolitical distance between the United States and China—diminishes the likelihood of payment links significantly.
The persistence of such geopolitical challenges over time could further inhibit the formation of new interconnections.
Disruptions in payment connections may lead to a weakened position for major currencies within the international monetary system, creating upward pressure on trade costs.
A proliferation of regional settlement systems could emerge if bilateral FPS gain traction.
Consequently, this fragmentation could increase operational costs for international trade, particularly if interoperability is not maintained.
Efforts to mitigate the effects of payment fragmentation were highlighted when the G20 established a roadmap in 2020 aimed at enhancing cross-border payment systems.
As part of this initiative, the European Central Bank has recently explored the possibilities of interlinking TIPS with FPS in key non-euro area economies.
In related developments, the demand for gold has been closely tied to geopolitical dynamics and central banking strategies.
In 2024, gold prices reached unparalleled heights, and central bank gold reserves neared levels not observed since the Bretton Woods system.
Central banks accounted for more than 20% of global gold purchases in 2024, a stark increase from previous years.
The demand for gold surged following economic instability instigated by geopolitical tensions, particularly after Russia’s invasion of Ukraine in 2022, sustaining high demand for the asset.
Surveys conducted among central banks reveal that gold holdings are primarily aimed at portfolio diversification, acting as a hedge against geopolitical uncertainty and inflation risks.
Central banks in emerging and developing economies expressed concerns about the implications of sanctions and changes in the international monetary framework, which have influenced their investment strategies, leading to significant purchases of gold.
Countries like Türkiye, India, and China have been predominant in accumulating gold reserves recently.
Moreover, the relationship between gold prices and real yields altered post-2022 due to geopolitical factors, impacting investment patterns and altering long-established correlations.
Observations indicate that the presence of financial sanctions tends to elevate the proportion of gold within central bank reserves, particularly in nations involved in geopolitical tensions.
As tensions persist, the demand for official gold reserves seems poised to depend heavily on supply responses to fluctuating global demands.
The evolution of global payment systems is significantly impacting the role of major currencies within the international monetary framework, affecting transaction settlements and costs in financial markets, while also creating strategic interdependencies between trade and finance.
Currently, most cross-border payments are processed through interbank systems known as correspondent banks—a network of intermediaries that facilitates transactions between banks across varied countries.
Research indicates that these transactions can often be slow and expensive due to the necessity for multiple intermediaries and currency conversions, leading to a significant demand for faster and more efficient solutions.
To address these challenges, the rise of Fast Payment Systems (FPS) has been notable, providing the capability to settle transactions in seconds.
FPS have been adopted across more than 100 jurisdictions, with several countries actively pursuing linkages between their domestic systems.
As of 2024, the landscape of FPS connections is primarily centered on large regional platforms, showing limited interconnectivity across distinct clusters.
Data indicates a total of 523 dyadic connections involving 117 FPS worldwide, with particularly dense networks in regions like Europe and Africa.
The Eurosystem's TARGET Instant Payment Settlement (TIPS) currently facilitates real-time payments in multiple currencies, with future expansions anticipated.
While advances in FPS offer potential for more efficient cross-border transactions, the interlinking of these systems is influenced by economic, technical, and geopolitical factors.
Enhanced interlinking can lead to reduced transaction costs by minimizing the number of intermediaries involved, yet establishing interoperability is complex and contingent upon sufficient cross-border transaction volumes.
Countries may pursue heightened technological independence due to concerns over reliance on foreign-controlled payment technologies.
Additionally, payment systems can offer geopolitical leverage, serving as tools for enforcing economic sanctions due to the monopolistic nature of payment networks and the latency of substitutes.
Analyses suggest that geopolitics plays a significant role in determining the interconnection of payment systems.
An assessment using a logit model indicates that geopolitical factors have a more pronounced impact on establishing payment links than geographical distances or trade volumes.
Specifically, one standard deviation increase in geopolitical distance—analogous to the geopolitical distance between the United States and China—diminishes the likelihood of payment links significantly.
The persistence of such geopolitical challenges over time could further inhibit the formation of new interconnections.
Disruptions in payment connections may lead to a weakened position for major currencies within the international monetary system, creating upward pressure on trade costs.
A proliferation of regional settlement systems could emerge if bilateral FPS gain traction.
Consequently, this fragmentation could increase operational costs for international trade, particularly if interoperability is not maintained.
Efforts to mitigate the effects of payment fragmentation were highlighted when the G20 established a roadmap in 2020 aimed at enhancing cross-border payment systems.
As part of this initiative, the European Central Bank has recently explored the possibilities of interlinking TIPS with FPS in key non-euro area economies.
In related developments, the demand for gold has been closely tied to geopolitical dynamics and central banking strategies.
In 2024, gold prices reached unparalleled heights, and central bank gold reserves neared levels not observed since the Bretton Woods system.
Central banks accounted for more than 20% of global gold purchases in 2024, a stark increase from previous years.
The demand for gold surged following economic instability instigated by geopolitical tensions, particularly after Russia’s invasion of Ukraine in 2022, sustaining high demand for the asset.
Surveys conducted among central banks reveal that gold holdings are primarily aimed at portfolio diversification, acting as a hedge against geopolitical uncertainty and inflation risks.
Central banks in emerging and developing economies expressed concerns about the implications of sanctions and changes in the international monetary framework, which have influenced their investment strategies, leading to significant purchases of gold.
Countries like Türkiye, India, and China have been predominant in accumulating gold reserves recently.
Moreover, the relationship between gold prices and real yields altered post-2022 due to geopolitical factors, impacting investment patterns and altering long-established correlations.
Observations indicate that the presence of financial sanctions tends to elevate the proportion of gold within central bank reserves, particularly in nations involved in geopolitical tensions.
As tensions persist, the demand for official gold reserves seems poised to depend heavily on supply responses to fluctuating global demands.
