Can the Nexus Payment System Template in ASEAN Be Applied to Latin America?
The Nexus Payment System, a breakthrough initiative in Southeast Asia, has revolutionised cross-border payments by creating a unified infrastructure for faster, cheaper, and more secure transactions between countries like Singapore, India, Malaysia, Thailand, and the Philippines. As Latin America grapples with fragmented payment systems, regulatory challenges, and a large underbanked population, it begs the question: Can the Nexus model be applied to Latin America to improve cross-border payments and facilitate economic growth?
The Nexus Scheme: A Game-Changer in Southeast Asia
The Nexus Scheme, initiated by the Bank for International Settlements (BIS), addresses key challenges in cross-border payments by streamlining the connection between domestic instant payment services like PayNow in Singapore, PromptPay in Thailand, and UPI in India. This unified platform allows users to send money across borders with the same ease as domestic transactions. With instant mobile transfers, competitive exchange rates, and reduced reliance on intermediaries, the system significantly reduces transaction costs and processing times.
Crucially, the success of Nexus lies in the collaborative effort of central banks, payment service providers, and fintech firms, all operating under a standardised protocol that integrates various domestic systems into a cohesive network. This is particularly important for regions like Latin America, where disparate financial infrastructure presents significant barriers to seamless cross-border payments.
Latin America's Payment Landscape: Current Challenges
Latin America’s payment infrastructure is fragmented, which has historically hindered trade, both regionally and globally. While e-commerce is booming, with sales expected to almost double from $85 billion in 2020 to $160 billion by 2025, cross-border transactions remain complex and costly. The reliance on multiple intermediaries and the lack of standardised infrastructure across nations like Brazil, Mexico, and Chile, makes it difficult for businesses and individuals to facilitate efficient payments across borders.
The challenges in Latin America are multifaceted:
Financial Inclusion: Only 51% of Latin American adults have a bank account, leading to a large underbanked or unbanked population. This lack of access to formal financial services forces many to rely on cash or informal remittance systems, which are less secure and harder to regulate.
Disparate Payment Systems: While some countries like Brazil have developed robust payment systems, many smaller economies still struggle with inadequate infrastructure and regulatory barriers.
Regulatory Complexities: Each country in Latin America has its own set of rules governing cross-border payments, leading to a fragmented regulatory environment. Some nations, like Brazil, have made strides in simplifying cross-border transactions through new frameworks, but others lag behind.
Given these challenges, a unified solution like Nexus could potentially address several of the region’s payment inefficiencies.
Nexus Model: Can It Work for Latin America?
Applying the Nexus model in Latin America could help resolve many of the region’s cross-border payment issues by standardising protocols across different countries. Here’s how:
Unified Payment Infrastructure: Like in Southeast Asia, Latin America could benefit from a regional payment infrastructure that integrates various national systems into a single platform. Countries like Brazil, Mexico, and Chile could lead this initiative, similar to how Singapore spearheaded Nexus in ASEAN.
Collaboration Between Central Banks: The success of Nexus is largely due to the cooperation between central banks and regulatory bodies in the participating countries. Latin America would need similar coordination between central banks, financial institutions, and governments to establish a unified payment system.
Financial Inclusion: A platform like Nexus could boost financial inclusion by offering simple, low-cost, and secure payment options. Mobile-based payment systems, already popular in Southeast Asia, could be adapted to cater to Latin America's underbanked population. Countries could take inspiration from models like PayNow or UPI, which allow users to transfer funds using mobile numbers, ensuring ease of use even for those with limited access to banking services.
Cost Efficiency: One of the key advantages of the Nexus system is its ability to reduce transaction costs by eliminating intermediaries. This feature would be highly beneficial in Latin America, where cross-border transactions are often burdened by high fees, making trade and remittances more expensive for individuals and businesses.
Security and Anti-Money Laundering (AML) Protocols: The Nexus platform adheres to strict AML and counter-terrorism financing standards. Implementing such security measures in Latin America would help address concerns about the use of informal remittance channels, which are prone to abuse. Additionally, robust cybersecurity measures could improve trust in digital financial systems, encouraging greater participation from businesses and individuals.
Country-Specific Applications
Several Latin American countries could take immediate steps toward adopting a Nexus-like payment system:
Brazil: Already a regional leader in payment innovation with its PIX instant payment system, Brazil could play a crucial role in developing a regional Nexus model. Its new foreign exchange framework aims to simplify international transactions, positioning it as a key driver of cross-border payment reform.
Mexico: With a growing e-commerce market and relatively strong payment infrastructure, Mexico could quickly adopt and benefit from a standardised system. Given its position as a hub for regional trade, a streamlined payment platform would be particularly beneficial for merchants and consumers alike.
Chile: Chile has already made significant progress with its digital transformation. Its relatively stable economy and advanced regulatory framework make it an ideal candidate for early adoption of a Nexus-style system.
Challenges in Adopting the Nexus Model in Latin America
While there are many benefits, implementing a Nexus-like system in Latin America would not be without challenges. The region’s varying levels of digital infrastructure and internet accessibility could pose significant barriers. Countries like Guatemala, for instance, still have limited internet penetration, making it difficult to roll out digital payment solutions uniformly. Additionally, harmonising regulations across so many countries will require substantial political will and international cooperation.
Conclusion: A Viable Model for the Future?
The Nexus payment system, with its standardised protocols and instant transfer capabilities, offers a compelling model for improving cross-border payments in Latin America. While challenges remain, the success of Nexus in Southeast Asia demonstrates that such a system is feasible, provided there is regional collaboration, investment in infrastructure, and a focus on financial inclusion.
Latin America, with its rapidly growing e-commerce market and increasing need for efficient payment systems, could greatly benefit from applying a similar approach, helping to boost trade, financial inclusion, and overall economic growth in the region.
