For a specific Nexus payment, the FXP is effectively trading with the Source PSP by selling them the Destination Currency. This means the Source PSP is a corporate customer of the FXP. The FXP therefore has a regulatory obligation to complete due diligence (Know Your Business, KYB) on a PSP before it can provide FX conversion to that PSP.
A PSP can only select quotes from FXPs with which it has completed the due diligence process.
Once the FXP has completed due diligence on a PSP, it should inform Nexus (via the Nexus administration portal or Nexus APIs) that it is willing to provide FX to that PSP. When generating quotes in response to the
GET /quotes/API, Nexus will only provide quote IDs for the FXPs that have approved the PSP.
(Nexus will include rates from other FXPs so that PSPs can see if other FXPs offer better rates; if so, the PSP may choose to onboard with other FXPs.)
To ensure the FX market in Nexus is competitive, it is best if each PSP in an IPS is onboarded with each of the FXPs that provide FX in the PSP’s home currency. This means a PSP must apply to be onboarded with multiple FXPs, and each FXP must onboard multiple PSPs.
One challenge is that this due diligence can result in a large number of KYB processes with significant duplication of effort. The administrative cost of this process can:
- discourage FXPs from onboarding smaller PSPs as the benefits of doing so (additional payment flows) may not outweigh the costs of the due diligence process
- discourage PSPs from onboarding with multiple FXPs, as the benefit of doing so (more competitive rates) may not outweigh the costs of onboarding with additional FXPs
It is therefore important to streamline the PSP-FXP onboarding and due diligence process as Nexus scales. Possible measures to streamline this process (which would need to be explored further) include:
- Mandatory use of the Wolfsberg Correspondent Banking Due Diligence Questionnaire (CBBDQ). This is a standard questionnaire that can be used for due diligence by FXPs on PSPs (and by SAPs on FXPs). It ensures that a PSP only needs to complete the questionnaire once (and keep it up to date), rather than dealing with a bespoke application form for every FXP. From the FXP's side, the questionnaire ensures that each PSP provides the same information in a consistent structure.
- Possible digitalization of the process for a PSP to apply to onboard with an FXP, including the possibility of a repository for relevant information (such as the Wolfsberg Questionnaire, incorporation docs) that can be accessed (with the PSP’s permission) by FXPs
- The possibility for an FXP to see which other FXPs have already onboarded a specific PSP. This does not remove the need for the FXP to complete their own due diligence but may provide some degree of social proof for lesser-known PSPs, making it progressively easier for a PSP to complete the KYC process as a PSP becomes approved by a greater number of FXPs.