A fragmented future or the path to standardisation? What innovation means for the payments landscape
The payments landscape is full of innovation, competition and opportunity. While these are driving development and enhancing services, it also brings forth emerging and continual challenges.
Key to this is the issue of fragmentation; does it hinder future standardisation? How can interoperability be brought to consumers who increasingly demand and rely upon the ever-expanding range of available services and products? This big debate was the topic of discussion during a recent session presented at Sibos 2022: ‘Big Issue Debate: How to enable instant and frictionless payments – worldwide’. During the session, John Orchard, CEO of OMFIF was joined by Burkhard Balz, Member of the Executive Board at Deutsche Bundesbank, Jennifer Barker, Treasury Services CEO of BNY Mellon, Andrew McCormack, Centre Head for the Bank for International Settlements Innovation Hub and Michael Spiegel, Global Head of Transaction Banking at Standard Chartered.
Even though most transactions are domestic for consumers, the topic of cross-border payments always draws attention. Disruptive innovators have become active in the field, which has helped to make cross-border payments more efficient and reduce friction. As digitisation of the payments world continues, it is clear that we will see exciting developments in this space.
A fragmented landscape
While a fragmented payments landscape may not sound too positive, it may be an unavoidable step in driving providers and businesses to take the necessary steps to bolster their offerings and deliver enhanced value to their customers. As the Capgemini Research Institute's 2022 World Payments Report outlined, moving toward future-proof, versatile solutions and product offerings requires short-term complexity. Digital transformation of the payments landscape is leading to increased fragmentation of services as providers offer diverse ways to pay, different payment types and interconnected services. This fragmentation is unlikely to end anytime soon, as suggested by Michael, stating that: “it will first fragment further, for reasons that should be welcomed to have further innovation.”
At the same time arguments have also been made against innovation for innovations sake – that is, without full oversight, as touched upon by Jennifer during the session, who raised the question of: “When you think about innovation; what is the primary use case? What is the key problem we're trying to solve?”
The challenges that alternative forms of payment and how they are often heralded as game changers were touched upon during the session, with Andrew suggesting: "I think if you try to unpack this idea that a blockchain is going to become a shared ledger for the entire world, well, that's the same idea as having one super correspondent for the world as a whole, which doesn't make any sense at all, and that's not going to play out that way. So certainly, initiatives that help flatten the chain of transactions and streamline and reduce friction could work over time. But it's such a fragmented environment; it's perhaps unrealistic to think that something like this could exist in practice."
For some, fragmentation is seen as a short-term challenge in the journey towards the stability and efficiency that standardised services and technologies will offer. It is a necessary step that providers must embrace, a by-product of the innovation and competition that digital evolution has brought to the industry. Issues of risk, such as liquidity associated with wider innovation and its effects on the overall market have been raised when discussing fragmentation.
During the Sibos session, Michael suggested that banks and financial players have the stability necessary to provide needed innovation while ensuring overall efficiency and market stability. "I don't see the banking industry sit back and wait to get further disrupted,” he stated. “We innovate ourselves. We innovate with fintechs and we collaborate a lot; it is in our best interest to reduce friction and cost. I would argue that, as banks, we do this in a regulated environment and, therefore, potentially a safer environment."
Standardisation – the key to interoperability
Standardisation is seen as one of the main enablers to obtaining the necessary scale in terms of payment infrastructure. While embracing new forms of payment and digital technologies and platforms, standardisation in development, implementation, support and infrastructure can minimise complexity while providing consumers with in-demand products and services. During the session, an audience poll revealed that interoperability was prioritised by 84% of audience members, rising from 78% at the start of the session. Key to this field is trustworthiness and efficiency. As such, central bank digital currencies (CBDCs) can play a role in cross-border payments due to the high level of security that central bank money can offer.
This discussion has raised an important question for many National Central Banks and financial authorities; should they steer the market at a distance or take an active role by boosting change and innovation? The former can drive development and economic growth at the cost of increased fragmentation of services, while the latter offers more stable market-driven developments.
By outsourcing processes to providers such as Worldline, banks and other financial institutions can benefit from optimising and centralising payments services and ‘delegate’ the standardisation work to a specialised partner.
Through Worldline's connection to the Federal Reserve System, cross-border payments between the US and Europe are facilitated across multiple currencies. With substantial experience in this field and as a major processor for Instant Payments, Worldline is well-positioned to support the needed standardisation.
A play for the future
Standardisation and interoperability are already developing across the financial world, with many major National Central Banks introducing Instant Payments infrastructure, such as the European Central Bank's 'TIPS', a European-wide Instant Payments infrastructure. This is also occurring beyond Europe, with the facilitation of economic development being made in the US and Australia, among others. But how far could this go? The question of a global SEPA was raised during the session, with Andrew saying that: "This is very difficult and unlikely. Look at the length of time ISO20022 took.” Ultimately, he believes that we do not need a global SEPA, following the same line as the panellists in a previous Sibos session focusing on CBDCs. The takeaway of this prior session rings through once again: A truly global system is not realistic, but regional systems with interlinkages are logical and more tangible.
The session also touched upon the BIS Innovation Hub project Nexus, a model for connecting national instant payment systems into a cross-border platform. The project is now moving from the design phase to the testing phase. Globally, more than 60 countries have instant payments. So, this is an excellent time to begin discussing interoperability and see how we can create frictionless cross-border payments.
We see a lot of bilateral projects in this space. The question will be whether this is scalable and viable. During the discussion, Andrew also discussed the areas for improvement in the APAC region. "Several cross-border instant payment initiatives are running, but each project differs quite a bit and seems to start from scratch rather than re-using and leveraging other initiatives. Repeatability and operational simplicity are critical."
Time will tell how much more fragmentation will emerge as a result of innovation in the payments landscape. The speakers in the session all agreed that we will first see more fragmentation, but that ultimately some level of standardisation and interoperability will have to come. Therefore, as Andrew suggested, payment providers should strive for open-loop rather than closed-loop systems. Burkhard put things into a geographical perspective and noted that emerging markets and developing countries are likely to move up the ladder of innovation and that some countries will break out into the global market. Either way, we are still learning and exploring, as Jennifer said, and the payments industry is an industry where increased efficiency will always come to the fore.