Deep Dive: Cross-Border Payments Interoperability


The world is becoming more interconnected, boosting demand for fast and low-cost services that enable cross-border transactions. Such experiences require payments interoperability, which can be a significant challenge due to changing technologies and regulations. Many initiatives are currently underway around the globe to push such efforts along, meaning interoperability may not be as far off as once thought.

What is payments interoperability?

Payments interoperability typically takes one of three forms. The first is scheme interoperability, which is when two or more FIs agree to work on the same open-loop payments system, or scheme, allowing payments to readily flow from one bank’s customers to another’s. Examples of scheme interoperability include checks, electronic funds transfers (EFT) and open-loop debit and credit card systems.

The second is network interoperability, in which one payment scheme negotiates exchange agreements with another. This type of interoperability is almost exclusively used for cross-border payments, allowing consumers to make credit card purchases in countries with domestic currencies different from their own. Network interoperability is rare between FIs in the same market, as it allows out-of-network banks to compete for their business.

The third type is parallel system interoperability, wherein service providers act as intermediaries between merchants and card networks. A store that accepts both Mastercard and American Express could provide identical payment experiences for both cards, despite the fact that each uses different rails.

All three types of interoperability benefit from open-source platforms that allow developers to create new functionalities or solutions to enhance current structures.

Interoperability initiatives in the public sector

Collaboration between corporations and governments is essential to make interoperability a reality. The EU currently lacks an interoperable network that enables speedy payments across the continent, but the European Commission and the European Central Bank (ECB) are working to make such a solution a reality. The commission recently hosted a roundtable event in Brussels to find ways to overcome instant cross-border payment obstacles. A pan-European instant payments solution could be a game changer for European businesses, as it would allow real-time transactions and ease compliance needs.

The United States is also exploring payments interoperability with the Faster Payment Task Force, which the U.S. Federal Reserve created in 2015. Research from the task force found that establishing industry standards will enable faster and more secure payments, as well as allow for differentiation and competition between payment platforms — a net benefit for customers. Nexo standards, established in 2014, provide a continuous connection between members while resolving differences between countries the platform covers.

Interoperability for businesses

Interoperability initiatives are making headway in the private sector, as well, with global interbank messaging giant SWIFT propelling interoperability by allowing blockchain firms to make use of SWIFT global payments innovation (GPI) for near real-time payments. GPI was launched in 2017 and was created to enhance the speed and transparency of transactions.

Payments platform Modo is also making waves in interoperability with its new Checkout solution, which allows merchants to easily integrate a wide range of payment service providers. The system can also monitor a transactions entire life cycle, from initiation to settlement to chargebacks. Modo recently secured $13 million in Series A financing, indicating the industry’s interest in such tools.

InstaReM is also making headway on interoperability initiatives, especially when it comes to cross-border payments. The payments provider launched a new feature last year that enables small and medium-sized businesses (SMBs) to make payments in multiple currencies at the same time. The solution allows businesses to transfer money to multiple recipients, who receive the money in their local currencies. These transactions take less than 24 hours to process, compared to legacy cross-border payment methods, which can take days or weeks to settle.

Prajit Nanu, InstaReM’s CEO, stated the company recognized that smaller enterprises also have cross-border needs, and setting up individual transactions for each company these merchants conduct business with is expensive and time consuming. It created its cross-border solution in an effort to minimize these frictions.

Consumers in Southeast Asia tend not to use credit cards as often as American and European consumers, resulting in a lack of scheme interoperability. InstaReM’s digital wallet allows these customers to make cross-border payments, even if they do not have bank accounts — a common occurrence in countries like Indonesia and the Philippines.

It is only a matter of time before interoperability becomes the norm, especially as more governments and businesses launch related initiatives. All solutions must be explored until that point is reached.