Wider use of CBDCs for cross-border settlements dents banks’ fee income

Lenders will have to reduce cross-border fees once CBDCs become more mainstream.

The wider adoption of central bank digital currencies (CBDCs) for cross-border settlements could hurt banks’ fee income and commissions, as fees will likely be reduced with its wider adoption, reports Moody’s Investors Service.

On 3 September, the Bank of International Settlements (BIS), together with the central banks of Singapore, Australia, Malaysia, and South Africa, started testing CBDC for cross-border settlements under Project Dunbar. The project reportedly aims to build a platform that can use multiple-CBDCs for faster, cheaper and more secure cross-border payments and settlements between financial institutions.

But whilst its success would be a positive for businesses, it would have a negative effect on banks’ fees and commissions--particularly those that are active in foreign-currency payments, clearing, and remittances.

Banks charge hefty fees for cross-border transactions such as remittances. On average, banks charge 6.4% on outward remittances, World Bank data showed. These fees will likely be reduced with the wider adoption of CBDCs, Moody’s said.

This, in turn, will hurt the billions in revenue that banks make from cross-border transactions. APAC banks alone generated $100b in revenue from cross-border transactions in 2019, according to data from consulting firm McKinsey, with most revenue coming from commercial transactions such as bank-to-bank. Globally, banks generated $230b in revenue from cross-border transactions in 2019