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The challenging fragmentation of the international payments system

The rise of global e-commerce (particularly mobile commerce) and the emergence of fintech have significantly reshaped customer expectations on cross-border payments. Customers have come to expect simplicity, transparency and standardisation; whether this be paying with a card at the point of sale, making a transfer via a mobile app or conducting an international transfer.

These expectations do not apply exclusively to consumers however. Businesses, particularly SMEs, are increasingly adopting payment methods that address these needs for simplicity and common standards.

However, the international payments system is complex and fragmented. Different payment methods and countries impose different requirements, limiting customers’ ability to access international payments quickly and easily. Furthermore, the difficulties in managing this complex and fragmented landscape often results in high costs for financial institutions, which they inevitably pass on to customers.

The underlying issues 
The reason achieving a unified global payments ecosystem is so complex is that there are three areas in which processes significantly differ across regions. These being regulation, interoperability and common standards. 

An example of the differences in regulation can be seen in the requirements to collect and transfer certain payment-level information with each transaction – for illustration, the Travel Rule requirements in the United States are not entirely consistent with Wire Transfer Regulations requirements in the European Union. To complicate matters further, financial institutions often attempt to satisfy all potentially applicable requirements, which results in more information gathering than required for any individual requirement and customer friction.

When it comes to interoperability, mobile wallets are revolutionising payments in emerging economies, such as China, India and Africa. They are increasingly used for international payments as well, most notably in East Africa. However, most of these payment systems are proprietary and generally do not integrate seamlessly with other mobile payment systems or bank networks. This results in limited access and higher costs for customers.

In terms of adoption of common standards, a primary example is 3D Secure. This is an authentication and fraud prevention measure for card transactions online. While originally developed and launched by Visa in 2001, it has since been adopted by other card issuers, most notably Mastercard and American Express. However, despite these efforts by the market leaders to harmonise standards, there are significant differences in adoption by card issuers and merchants across countries and market participants.

Managing a solution
So how do we mitigate against the fragmented international payments ecosystem? There are two types of solutions. One driven by the market, and the other initiated by regulators. 

A market driven approach
Some fintechs are starting to demonstrate how some of these payments issues might be solved in the future. Market-driven solutions recognise that customers demand simplicity, transparency and standardisation. The emergence of fintech has introduced many innovative propositions addressing these customer needs through clever product design and deep understanding of what a frictionless customer experience is, notwithstanding the underlying complexities of the international payments infrastructure. 

For instance, Monzo card holders can simply transfer money through a text, or by sharing with friends in your Monzo account. Apple Pay and Amazon meanwhile allow for things to be paid for with a simple click or swipe on a phone. Once the market widely adopts Open Banking, the ability to initiate payments directly from a customer’s account would also significantly remove complexity and improve the customer experience. 

Regulatory drivers
The other way to achieve a common standard is through regulation. Market participants are more likely to invest in adoption of new standards when they are required to do so, as opposed to when it’s an optional value-added feature. However, regulatory action needs to consider a wide range of customer pain points and use cases to truly improve things for all market participants; if it only addresses a subset of the market, it risks adding more requirements for customers or creating an uneven playing field between market participants.

For example, the creation of the Single Euro Payments Area payment scheme is a truly successful regulatory action that has significantly improved customer outcomes by turning a fragmented payments landscape (over 30 different national payments in the European Economic Area) into one common payment scheme. Customers can easily pay or receive euros between more than 30 country members of SEPA as if they are executing a domestic transfer.

Coming to a conclusion
The idea of a united global payments system that would allow near instant transfer of funds may appear utopian in nature. Especially as the question still remains as to whether we can rely on individual countries or regional blocs to solve regulatory issues, or whether we will need to rely upon fintech to solve these underlying customer problems.

It will therefore likely require regulators to work in close partnership with established financial institutions and emerging fintechs to create the common global standards which ultimately benefit end consumers.


Comments: (2)

Arjeh Van Oijen
Arjeh Van Oijen - Icon Solutions - Amsterdam 12 August, 2019, 09:21Be the first to give this comment the thumbs up 0 likes

In 1996 the SET consortium was established by Visa, Mastercard, Microsoft, IBM, Netscape and others. They jointly created the SET standard and was supposed to become the de-facto standard to secure payments and other electronic transactions conducted via the internet. SET would be supported by the different browsers (at that time mainly Netscape and Microsoft) so that man-in-the-middle attacks were not possible. Apparently, the technology was too early/complex/expensive for wide adoption and conflict of interests too strong, which caused that it never became the overall transaction security standard that one had envisioned. As a result, alsmost 25 years later we are still facing multiple 'standards' and difficulties implementing SCA (like for PSD2).

Ketharaman Swaminathan
Ketharaman Swaminathan - GTM360 Marketing Solutions - Pune 12 August, 2019, 14:16Be the first to give this comment the thumbs up 0 likes

"International Payments" is in the title of this post. Problem definition is for international payments. AFAIK, the cited solutions from Monzo, Apple Pay and Amazon are domestic payment solutions. Curious to know what's their relevance in the context of international payments.

Also one point re. mobile wallets in India. The popular products are PayTM, PayZapp, PhonePe, BHIM, Google Pay. Even if some of them have a proprietary wallet, fact is, all of them support UPI, an interbank standard defined and administered by NPCI, a bank-consortium. UPI allows Person A using Google Pay to send payments from their account in Bank A to Person B's account in Bank B, notwithstanding whether Person B uses Google Pay or PhonePe, or whatever. Ergo, they are totally interoperable. They are also zero cost for customers and are not restricted in any usual sense of the term. (But they don't support international payments.)

Aleks Stefanovski

Aleks Stefanovski

VP Banking


Member since

23 Apr 2019



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