Messaging Standards Bring Clarity To A Fragmented Payments Ecosystem

Payments messaging standards are a critical component of interoperability between the increasing number of payment networks around the world. As a method of “speaking the same language,” between various networks and banks, these standards elevate the efficiency of both domestic and cross-border transactions, promote security and often act as a backbone to innovations like real-time payments.

Yet, perhaps ironically, there is a lack of standardization across payments messaging, and with fragmentation plaguing the back-end systems of financial institutions (FIs) as well as the payments ecosystem overall. As such, ensuring all participants are on the same page when moving money is increasingly difficult.

Marius Bogoevici, chief solutions architect, financial services at Red Hat, told PYMNTS about the importance of industry-wide, worldwide cooperation on embracing messaging standards like ISO 20022, and how financial service providers can overcome the headache of fragmentation.

Bridging The Silos

Many financial institutions today face a double set of challenges in their efforts to support payments and other messaging standardization.

One of the largest is the ongoing hurdle of modernization as many financial institutions (FIs) need to integrate with existing, sometimes legacy systems. As Bogoevici explained, over time FIs have created connectivity capabilities that are often complex and lack transparency, developing individual methods of automating and streamlining their processes.

This, however, has “led to increasingly fragmented and sometimes overlapping payment processes, often supported by a suboptimal messaging infrastructure,” he explained. “This kind of sprawl and siloing is fundamentally at odds with processes that communicate with other systems in the bank or with external systems.”

Fragmented internal infrastructure compounds the challenges that result from a similarly fragmented payment network ecosystem as more jurisdictions accelerate innovation in their financial services sectors.

Ensuring these systems can communicate effectively to support seamless transacting, especially across borders, becomes a far greater challenge, as these individual networks are all tailored to their particular markets and their members, said Bogoevici.

Standardization Choices

Standardizing messaging — that is, standardizing the way data is formatted and sent from one FI or service provider to another — offers immense gains in efficiency. Yet with so many payment networks at play, there is also a growing number of financial messaging standards and messaging service providers in the market as well.

SWIFT is an industry leader on this front, thanks to its broad reach and adoption across numerous countries and thousands of participants, broadening the implementation of the ISO 20022 messaging standard.

“It’s almost a feat of international cooperation,” said Bogoevici.

But SWIFT has its critics, particularly when it comes to cost and speed, he noted, as well as geopolitical issues that have markets like China urging financial institutions away from SWIFT and toward the Cross-Border Interbank Payment System (CIPS) instead.

And CIPS is only one of several alternatives, which range from the J.P. Morgan-led Interbank Information Network to blockchain, with both state- and private-led solutions on the rise. With the pandemic heightening the importance of seamless global money movement and digital banking, Bogoevici said it’s possible these alternatives could gain greater traction moving forward.

Industry Progress

Despite this proliferation, Bogoevici emphasized that messaging standardization is not only possible; it’s where the market is headed.

“Just because you have different networks [for banks] to interact with each other doesn’t necessarily mean you have to use different data formats and protocols,” he said, highlighting the “general convergence” around the ISO 20022 standard which has been adopted by SWIFT, CIPS, SPFS, Ripple and many others, including domestic payment networks.

And the value of adopting a unified standard goes beyond moving money.

As various payment networks emerge, the ecosystem is experiencing diversification in use cases for such messaging standards, too. SWIFT transaction data reveal that security transactions have now exceeded the volume of payment transactions on its network, with securities transfers on the rise as well.

Whether it’s to move money or transmit data related to other types of transactions, financial institutions and organizations need to be able to do so quickly, securely, efficiently and affordably. The evolution of messaging standards reflects this internationalization, with Bogoevici pointing to the addition of international character sets and other data fields as one example of this shift.

The global financial system is far from achieving ubiquity of ISO 20022 or some other kind of messaging standard, but progress is being made as financial institutions overcome the friction of their own siloed systems and as payment networks and other industry participants overcome the friction of a lack of interoperability. Other initiatives, like open banking and PSD2, as well as growing cloud adoption, have also played essential roles in supporting this cooperation.

With standardization supporting the fight against security lapses and financial crime and enabling greater efficiency, transparency and speed in moving money and information, there is widespread value for service providers, end-users, and economies alike.

“Interoperability benefits everyone,” said Bogoevici, “and fragmentation brings friction and cost.”