Interoperability refers to the ability of different systems to work together. In the context of digital payments, interoperability allows customers to transact beyond the network of their own DFSP. Interoperability can make digital payments more convenient for customers, can reduce costs and economy of scale for providers, and encourage competition in financial services. However, achieving interoperability can be very difficult.
In this webinar, Dylan Lennox, Souraya Sbeih, and William Cook from CGAP cover the key steps to building instant and inclusive payment systems, which comes from CGAP’s Guide to Inclusive and Instant Payments System. These include:
- Achieving interoperability and highlighting some examples of how countries around the world have approached this challenge.
- Addressing how interoperability enables users to make digital payment transactions with any other user in a convenient, affordable, fast, seamless, and secure way, possibly via a single transaction account.
- Discussing key components of a payment system: oversight, scheme, switch, and settlement.
Interoperability is a necessary, but not a sufficient factor for market development. Financial inclusion is driven by four key regulatory enablers:
- Regulation of e-money issuance (are non-banks permitted to issue e-money?)
- Agent regulation (Are both banks and non-banks can have agents?)
- AML/CFT: Risk-based CDD (are they tiered, simplified due diligence?)
- Consumer protection regulation (are they tailored to market risks? (e.g., transaction limits. Funds safeguarding)
William summarizes the technical guide by using an analogy of a 3-step cookbook for interoperability. The first part of the guide explains the ingredients/elements that the system must take into account. The recipe is the process of how those ingredients can be merged to create the system. Lastly, the cookbook provides practical examples of what the ingredients and recipe can produce.
The ingredients consist of:
- Payment System Provider Oversight: Central banks should promote safe and efficient payments by monitoring and assessing payment systems and, where necessary, induce change.
- Payment Scheme: The rules that govern the functions of the system, supported by clear ownership and governance.
- Payment Switching Service: The technology that enables safe and efficient transactions. The operator may also perform other operational functions (e.g., monitoring for fraud).
- Real-Time Gross Settlement: The actual transfer of funds to the receiving institution—before or after the customer considers funds received.
The recipe must have a:
- Plan: Identifying the problem, creating a shared vision, and securing buy-in from the market.
- Design: Answering key questions about the proposed solution, including ownership/governance, economic incentives, scalability, and the operational model.
- Go to market/launch: Making sure that services are available to customers, driving volumes, and planning for ongoing innovation. You need to look at who is responsible for brand awareness?
Australia, India, Jordan, Mexico, Peru, the Philippines, and Tanzania have instant and inclusive payment systems, however, each combines the ingredients and follows a different recipe based on their context. You can find more details in CGAP’s Guide to Inclusive and Instant Payments System
Interoperability can improve customer outcomes but isn’t the most important element to market development or financial inclusion. The most successful instant payment systems have benefited from strong public/private collaboration, which involves clear oversight requirements and methodologies, but also private sector buy-in. The most successful instant payment systems typically plan for continuous innovation. Many have started with the P2P use case but are moving to new/emerging use cases such as person to merchant (P2M payments, and use of QR codes