Bank's Role in Forex Reform: Balancing Convenience and Security in Cross-Border Finance

Recently, several foreign banks have initiated pilot programs for foreign exchange business. It has been noted that Citibank (China) Limited (hereinafter referred to as "Citi China") has taken the lead in conducting pilot programs for foreign exchange business in Beijing, Shenzhen, and Chongqing; HSBC Bank (China) Limited (hereinafter referred to as "HSBC China") has been approved to simultaneously implement foreign exchange business reform projects in five branches in Shanghai, Beijing, Guangzhou, Shenzhen, and Hangzhou.

The reform of foreign exchange business is not only a reengineering of the bank's foreign exchange processes but also a more powerful promotion of financial services to the real economy, effectively preventing the risks of cross-border capital flows. Interviewees suggested that cross-border financial services, as an important part of the modern financial system, are facing unprecedented development opportunities and challenges. In the future, efforts should be made to strengthen top-level design, improve legal and regulatory systems, and promote the coordinated development of financial technology and regulatory technology to push cross-border financial services towards a healthier and more orderly direction.

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Promoting the facilitation of cross-border payments

The foreign exchange business carried out by HSBC China and Citi China this time responds to the "Bank Foreign Exchange Business Management Measures (Trial)" (State Administration of Foreign Exchange Announcement No. 1 of 2023, hereinafter referred to as the "Business Measures") issued at the end of December 2023.

To further enhance the bank's foreign exchange business capabilities, promote the facilitation of cross-border trade and investment, and prevent the risks of cross-border capital flows, the "Business Measures" came into effect on January 1 of this year. The "Business Measures" propose transformation requirements in many aspects, including the bank's organizational structure, internal control systems, procedural processes, data integration, and information system construction.

A person related to Citi China told the reporter that under the guidance of the competent department, the bank actively promotes the reengineering of foreign exchange business processes. This time, the advanced experience and practices of the previous projects have been further expanded to Shanghai and other branches, continuing to expand the scope of cross-border financial service facilitation and helping high-quality enterprises with cross-border payment facilitation.

HSBC China stated that in accordance with the requirements of the "Business Measures," the bank has built a brand-new foreign exchange business framework, including the establishment of a foreign exchange compliance management organizational structure and internal control system adapted to the new process, and the development of a corresponding management system, achieving a systematic management of foreign exchange business before, during, and after the event. Under the new process, enterprises that meet the conditions no longer need to submit supporting documents for bank review for each foreign exchange receipt and payment, and can directly handle cross-border receipts and payments according to the payment instructions stipulated in the "Business Measures," achieving a fully electronic cross-border transaction process.

As an important measure to promote the facilitation of cross-border finance, the reform of foreign exchange business is not only a reengineering of the bank's foreign exchange processes but also a more powerful promotion of financial services to the real economy.

"Since the implementation of the new process, HSBC China's domestic and foreign enterprise customers have responded enthusiastically, with more than 100 enterprises actively consulting, among which, more than 50 enterprises have completed the due diligence of the business and obtained the relevant certification for business opening. The average time for enterprises to handle foreign exchange business has been shortened by 50% to 75%, effectively improving the efficiency of fund management. We look forward to expanding the new process to other branches as soon as possible on the basis of the steady implementation of the first batch of five branches, and continue to play a positive role in the field of cross-border payments," said Zeng Shu, Managing Director of HSBC China's Global Payment Solutions Department.

In early August of this year, the State Administration of Foreign Exchange's foreign exchange management work exchange meeting for the second half of 2024 clearly stated that one of the key tasks for the second half of the year is to promote the reform of bank foreign exchange business and improve the cross-border transaction management mechanism of "substance truth, diversified methods, due diligence exemption, and safe and efficient".How to Build a Risk Defense Line?

Under a series of policy efforts, the management of cross-border capital flows has ushered in more favorable conditions. However, how to build a good risk defense line while promoting foreign exchange facilitation policies and achieving "opening up while maintaining control" has become a common topic for banks to explore the optimization of foreign exchange business.

Deloitte China interprets that the current "Business Practice Method" breaks the past "risk prevention" dependency on the in-process link, guiding banks to effectively prevent risks before, during, and after the entire life cycle of the business through pre-emptive, in-process, and post-event risk control, empowering the facilitation of business operations, and creating a regulatory environment adapted to high-level opening.

Journalist interviews revealed that the safety of cross-border payment funds and the prevention of exchange rate risks are particularly important.

Duan Ran, Director of Solutions at the global payment solutions company Worldpay, pointed out: "With the development of AI and other technologies, fraud methods have become more diverse and difficult to detect. Whether it is for the purpose of protecting financial assets and customer data, or maintaining one's reputation and reducing chargeback rates, anti-fraud tools and dispute prevention solutions have become a necessity. In addition, optimizing payment costs and simplifying back-office processes are also key to fund management. Payment cost management mainly refers to optimizing handling fees, building the most cost-effective payment matrix and multi-currency solutions, and minimizing exchange rate fluctuations through currency hedging. Back-office operations can be optimized by simplifying reconciliation procedures, improving customer service processes, and conducting transaction settlements in stable currencies, which not only reduces costs and increases efficiency but also minimizes regulatory obstacles and reduces international trade risks."

Worldpay's latest report points out that when merchants cannot provide payment methods favored by consumers, they may face more than 40% of transaction losses. This means that diversified payment methods and currency choices have become a necessary condition to improve consumer satisfaction and retention rates, thereby driving revenue. First, convenience is king, one-click payment, automatic card information updates, and other technologies can effectively simplify the payment process, making the payment process smoother. Second, habits come first, providing a variety of local payment methods and supporting local currencies, in addition to reducing the payment threshold, also helps to stimulate consumer desire.

Overall, Chen Sheng, a senior partner at Dacheng Law Offices, pointed out that regulatory arbitrage in cross-border financial services is quite common. Due to differences in financial regulation among different countries and regions, some service providers use these differences for arbitrage activities. This behavior not only disrupts market order but also increases the complexity of risks in cross-border financial services. At the same time, the electronic and digital characteristics of cross-border financial services make it difficult for traditional regulatory methods to cope. Since cross-border financial services involve regulatory agencies and legal systems of multiple countries and regions, there are many obstacles to data sharing and information exchange, making it difficult for regulatory authorities to fully grasp the operational status and risk conditions of cross-border financial services, and it is difficult to identify and deal with risk events in a timely and effective manner.

Chen Sheng suggests that regulatory authorities need to continuously innovate regulatory methods and means. On the one hand, they can use advanced technological means such as big data and artificial intelligence to improve regulatory efficiency and accuracy; on the other hand, they can strengthen cooperation with international regulatory agencies, establish cross-border regulatory information sharing mechanisms, and achieve data sharing and information exchange. This will help regulatory authorities to have a more comprehensive and accurate grasp of the operational status and risk conditions of cross-border financial services, and improve regulatory efficiency.