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The Importance of Standardization in the Global Payments Ecosystem

Boaz Gam

Boaz Gam


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3 min
Article content
  1. Where Do the Interoperability Challenges Begin?
  2. Addressing the Lack of Payment System Interconnectivity
  3. Final Thoughts: Replicating SEPA Success Through Global Standards

Transforming Global Payments Through Unified Standards

In recent years, many domestic instant payment systems have become capable of handling international transactions. In turn, these advancements have set the stage for significantly faster, cheaper, more accessible, and transparent global payments.

While this trend is expected to keep gaining steam in the upcoming years, there are still obstacles on the way to completely seamless real-time transactions on a worldwide scale. In this article, we will delve deeper into this topic and explain how establishing harmonized standards could promote interoperability among domestic instant payment systems and transform the entire ecosystem.

Where Do the Interoperability Challenges Begin?

In the context of payment systems, interoperability means that a domestic payment message can be converted into a cross-border transaction and vice versa while ensuring all necessary data for the target leg is provided consistently and securely.

Achieving this level of interoperability for domestic instant payment systems presents a significant challenge due to the following reasons:

  • Operational timings. Instant payment systems often operate on different schedules based on local banking hours and public holidays. Coordinating these timings to facilitate 24/7 cross-border transactions requires significant resource investments.
  • Conversion rates. Cross-border transactions inherently involve currency conversion. The rates and fees associated with these conversions can vary widely, adding complexity to achieving real-time processing. Besides, fluctuations in exchange rates can impact the predictability and consistency of payment amounts.
  • Security measures. Different countries and regions often have varying standards and technologies for fraud detection and prevention. Harmonizing these measures to maintain security without compromising speed requires significant international cooperation efforts.

However, the key reason behind the lack of interoperability between domestic payment systems is linked to the unique legal regulations and technical standards developed to fit local requirements. This disparity typically involves variations in message formats and communication protocols, making the establishment of a global seamless payment network a long-term project.

Addressing the Lack of Payment System Interconnectivity

Transforming Global Payments Through Unified Standards

The speed of achieving scalable payment systems highly depends on the pace of integration of unified standards within the global financial industry. Fortunately, there are a variety of initiatives promoting this evolution, including:

  • ISO 20022. One major step toward interoperability is the fact that some of the major Real-Time Gross Settlement (RTGS) platforms nowadays are transitioning to ISO 20022, a comprehensive financial messaging standard designed to replace its outdated counterpart, MT.
  • Cross-border Payment & Reporting Plus. To facilitate the seamless adoption of ISO 20022 and promote interoperability, Swift created CBPR+, which is a set of standardized usage rules for international payment messaging.
  • High Value Payments Systems Plus. The HVPS+ working group was formed to define and maintain a standardized framework of message usage guidelines that are tailored for global adoption yet have a degree of flexibility to accommodate domestic requirements.

Moreover, fostering trust and cooperation among different jurisdictions is essential for overcoming regulatory barriers. International organizations like the Financial Stability Board (FSB) and the Committee on Payments and Market Infrastructures (CPMI) play a crucial role in facilitating dialogue and coordination among policymakers to address interoperability challenges.

With the efficient use of these resources, it should be possible to recreate the success of the Single Euro Payments Area (SEPA) initiative worldwide in the foreseeable future.

Final Thoughts: Replicating SEPA Success Through Global Standards

All in all, while the evolution of real-time international transactions depends on a variety of factors, standardization is paramount for unlocking the full potential of the global payments ecosystem. By establishing and following harmonized guidelines, stakeholders can reduce costs, improve efficiency, enhance security, and promote financial inclusion on a global scale.

What’s more, SEPA serves as an excellent benchmark in cross-border interoperability, demonstrating how cohesive standards can lead to significant advancements in financial transactions. With this blueprint for global implementation, the payments ecosystem is well-positioned for a more interconnected future.

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