High cost may hamper adoption of new yuan clearing system

Cross-border yuan payment system CIPS faces hurdles, including a high cost of adoption that limit its viability to those banks with high transaction volumes

PUBLISHED : Friday, 16 October, 2015, 4:37pm
UPDATED : Friday, 16 October, 2015, 9:03pm

In the first phase of China’s new international payments system, banks are taking a cautious approach on the cost of bringing on the technology.

The system, called CIPS, launched last week, with 19 banks connected directly to the network. Those banks, nine of which are foreign institutions, are able to clear cross-border yuan payments without using an offshore yuan clearing centre.

The new system should eventually lower the cost clearing yuan for foreign banks. However, only banks with high volumes of cross-border yuan settlements will be able to justify becoming a direct member, if and when China’s regulators allow more foreign banks to link directly with the system.

The initial cost of the technology needed to join CIPS will likely keep many banks from joining, said Standard Chartered’s head of correspondent bank Ramaswamy Madhavan.

“There are some additional costs involved when you are a direct member but as an indirect member it’s free,” said Madhavan, speaking on the sidelines at Sibos, an international conference in Singapore put on by SWIFT.

Standard Chartered was one of the nine foreign banks directly linked with CIPS last week. However, the bank does not plan to use the new system to clear yuan between Singapore and the mainland anytime soon. For now it will stick with the 24-hour clearing service that Industrial and Commercial Bank of China offers here in Singapore.

CIPS is open for business for 11 hours during its first phase of deployment. Bank of China (Hong Kong), where the majority of yuan clearing has been done, is open for 20 hours.

Bringing CIPS into a bank is no small task, said Chrisol Correia, global director of anti-money laundering at LexisNexis Risk Solutions. He added that banks will have to invest heavily in adapting the technology, operating procedures and compliance to support the new format.

“The cost is going to be significant,” Correia said. “These are international payments. You can’t get this kind of thing wrong.”

Costs aside, direct member banks are also taking into consideration how comfortable clients are with switching to the system.

At present, Satvinder Singh, head of institutional cash and securities services at Deutsche Bank, said clients were still learning about CIPS and that it would take time to begin moving transactions to the network. In time, he said, it would likely become the dominant model for cross-border yuan clearing.

“It’s so new that clients haven’t had the opportunity to evaluate this,” Singh said. “I would be very surprised if in the long term this isn’t the way that payments will happen but time will tell how long it takes.”