Domestic Payment Interoperability – A Fading Prospect

Cross-border interoperability of domestic real-time payments systems was a hot topic a few years ago, but seems to have gone off the boil – possibly due to the reality of bedding in new real-time payments systems and the challenges of domestic adoption – from the USA, to Europe, to Asia to Australia - putting the subject on the backburner.

However, the need still exists – all cross-border payments end up in an account that is “domestic” somewhere, often requiring a domestic leg to reach it. Typically, this reach is provided by RTGS systems such as Target2 in Europe, or Fedwire in the USA, but these systems are expensive, slow and work only on business days, when compared to the shiny new 24/7 real-time systems such as NPP (Australia), RT1 (Europe) and TCH (USA) among many others.

Paradoxically, these new domestic real-time payments systems offer a premium service at a much lower cost compared to RTGS payments, and this has been noticed by cross-border payments service providers and their customers, from migrant workers, to expat managers, to pensioners, to international students, to SMEs, internet platforms and even corporates. They want fast low cost, payments with reach and certainty to anywhere in a specified country.

Unfortunately, domestic payment systems are often unable to provide this reach – they are walled gardens, focused on their domestic market, seemingly unaware of the opportunity to facilitate cross-border payments.

It is evident that no global standard or initiative to make domestic payments system interoperable will emerge in the foreseeable future. There have been initiatives such as the RTPG to promote interoperability, but concrete developments have yet to happen. Additionally, much of the focus in the past has been on adoption of ISO20022 for interoperability, but the role and relevance of this standard is changing fast in a world of open banking and open APIs.

Designing Domestic Payment for Inbound Reach

However, there is a practical and fast route to interoperability of domestic payments systems and that is to provide inbound clearing and reach domestically for payments originating cross-border. This means designing domestic credit transfer schemes to support incoming cross-border payments to be forwarded from one financial institution to any another that is reachable using the scheme. This could be achieved simply by a change to an existing domestic credit transfer scheme.

Of less concern to domestic payment systems is enabling outbound cross-border payments. The source of cross-border payments is increasingly coming from a vibrant new industry of cross-border payment service providers, such as Instarem, Transferwise, Revolut, Transfast to name a few. This industry can provide the outbound payment services, but it needs access to domestic real-time payment systems on the inbound side to get low cost 24/7 real-time ubiquitous reach, instead of through costly RTGS or bilateral arrangements.

Some domestic schemes already support cross-border payments, such as the UK’s Faster Payments providing real-time cross-border reach to all UK bank accounts (with its dubiously named POO – payment originating overseas); IMPS in India is another example, providing real-time reach to over 80% of bank accounts there, albeit with a limit of 20,000 INR (about $280).

Requirements for such a design are:

1.     A means for the beneficiary institution to recognise the payment is an incoming cross-border payment

2.     Identification of payer and sending institution, so that the beneficiary bank can screen and monitor transactions

3.     Preservation of all payment data, without truncation or loss, to be forwarded to the beneficiary bank, including reference information

4.     Ideally, provision of a return status to send back to the sending institution to indicate successful (or rejected) on-forwarding.

The first three can be achieved through appropriate additions to rules for existing credit transfer schemes. It is only the fourth which requires a technical change, but this is a nice-to-have rather than a pre-requisite.

New Business Models, Customer Experience and Fighting Financial Crime

Payments are atomising – I have blogged on this before – real-time payments are driving a sea change in volumes, where certainty of immediate fulfillment and low costs are enabling users to make smaller payments more frequently, on demand, 24/7. Atomising payments are evidence of innovation, new business models and great customer experiences.

This is true too for cross-border payments – sending a payment real-time from say the UK to India is a delight, and a powerful experience.

A further key benefit is fighting financial crime. Typically, domestic payments are outside the same controls as cross-border, such as sanctions screening. However, with the advent of third party PSPs, open banking, and the growth of non-bank PSPs there is scope for cross-border payments to seep into domestic payments systems, without being recognised as such, creating financial crime risks, in particular for the beneficiary bank. By designing domestic payment schemes to recognise and support payments originating cross-border, this risk can be addressed head-on.

Breaking Down The Walls

It is odd that addressing these requirements appears to be a low priority for domestic real time payment systems and schemes. A case in point is in Europe where the European Payments Council allows SCTs to originate only from a payment account located in Europe. Further, in its most recent change cycle for SCTs, the EPC rejected last year a proposal for payments originated outside of SEPA to be allowed to be sent / processed as SCT transactions in SEPA.  The reason given cited “too many possible implications requiring first a thorough operational and legal analysis”.

Whether they realise it or not, domestic payment systems have a key role to play in cross-border payments, and by implication, in cross-border trade, ecommerce and globalisation. Now is the time to make this connection and open up the walled gardens of domestic payments to cross-border payment flows, for the benefit of all.