The Future is Within Reach: Extending Interoperability Beyond Europe
The introduction of the single euro payments area (SEPA) is transforming the face of the European payments landscape. It will improve the efficiency of cross-border payments by turning fragmented national markets for euro payments into a single domestic area. It brings standardisation, opportunities for cost reduction and encourages competition, all of which means that the customer should ultimately benefit. But why can’t the principles of SEPA extend beyond Europe? The world’s economy isn’t limited to Europe alone.
We need to harmonise payment processing to help achieve this goal. Interoperability plays a key role and much progress has already been made. Since 2006, the European Automated Clearing House Association (EACHA) has worked to establish an interoperability framework. Furthermore, the International Payments Framework (IPF) was set up to support the growing requirement for efficient processing of low-value cross-border payments on a global scale. Its aim is standardising the technical operating model for interoperability of clearing and settlement mechanisms (CSMs), facilitating reach between infrastructures carrying out payment processing, clearing and settlement. In three to five years, it is expected to enable members to offer clients payments to new countries and/or currencies in a low-cost and efficient manner, eliminating the complexities in international non-urgent payments. This is a significant step towards addressing the issue of international cross-border payments.
However, the group is not alone in striving for this goal. Earlier this year, the National Automated Clearing House Association (NACHA) commenced work to create international standards for e-payments schemes. This signals the first move towards globalising interoperability of payment infrastructures. The development will initially focus on the delivery of a new International Automated clearing house (ACH) Transaction (IAT) rule. The organisation’s goal is to link all participating schemes so that a consumer in one country using online banking can seamlessly make a purchase from an online merchant located in a different country. Interoperability provides a huge opportunity for online merchants by providing access to a global online customer base across participating schemes.
So what are the benefits of interoperability? And how do the benefits move us towards a true standard?
Banks and payment processors will benefit from the seamless payment processing environment that global interoperability creates. Operationally, it promotes the opportunity for straight-through processing (STP), supporting the principles of SEPA beyond the European marketplace. It could facilitate the removal of unnecessary boundaries enabling banks to choose from a wide range of processors, thereby encouraging competition in the payment processing market. Greater competition results in lower costs, which will further enhance services leading to benefits for the customer. Furthermore, there will be no need for proprietary interfaces with CSMs for payment service providers, as they can easily link up to CSMs or other payment service providers at a comparatively low cost.
Additionally, under the EACHA framework, settlement, credit and liquidity risk will be mitigated through the ‘settlement before output’ model. The model guarantees the payments by ensuring messages are only ever forwarded to the bank of the receiving CSM once settlement has been successfully completed.
All these benefits will ultimately reach the customer, but interoperability can offer a direct benefit to the end consumer. If a cross-border interoperability model is implemented, money can be transferred more quickly, more cost-effectively and without the need to connect to multiple CSMs. This model represents an opportunity to support not only the worldwide financial community but also recipients of international remittances. These are usually family members of foreign workers and the beneficiaries are often dependant on the funds to cover day-to-day living expenses, providing a cushion against emergencies or as funding for small investments. However, transaction fees incurred through bilateral relationships expose a direct expense to the remitter/beneficiary, which is currently expensive compared to the often low incomes of migrant workers and the relatively small amounts sent.
There are markets that are uncompetitive or have regulatory barriers to the provision of remittance services. As a direct result, higher-risk alternative international remittance providers are often used to avoid these high fees. Some remitters revert to unregulated or even illegal cash-based channels and the financial streams disappear in the grey and black economy. Moreover, underdevelopment of a domestic financial infrastructure, particularly in receiving countries, may mean that transferring funds to the access points is slow and unreliable. In some cases, non-cash payment services may only be available in urban locations. Mobile payments service providers are actively entering this space in Latin America and Africa.
An important aspect of the infrastructure is correspondent banking, widely used for cross-border transfers of funds, which can be expensive for low-value payments such as remittances. The opportunity to leverage and enhance interoperability of global payment system infrastructures gives rise to the potential to increase the efficiency of remittance services. Ultimately, this not only aids the customers remitting payments but also reduces the cost of their transfers. This gives banks the opportunity to improve their customer service and increase loyalty while competing with international remittance providers, some of which are looking to enter into the banking world.
Finally, interoperability can support the reduction of fees associated with cross-border ATM withdrawals. At present, the majority of foreign visitors wishing to withdraw money from an ATM can only use dual-currency credit cards, which carry high withdrawal fees. However, in 2007, the Euro Alliance of Payments Schemes (EAPS) was formed to unite the networks of independent domestic card schemes (LINK, ZKA, SIBS, Euro 6000, Eufiserv and Consorzio Bancomat). The scheme, which supports SEPA standards, enables European banks to deliver a standard card payment experience direct to cardholders and retailers alike. This reaches right across Europe, at the lowest cost for all participants achieved through interoperability.
Card interoperability, beyond SEPA, is also taking shape. In 2008, China Union Pay signed an interoperability agreement with LINK to enable their customers to withdraw from any LINK ATM.
While interoperability has numerous benefits for banks, their customers and payment providers, there are also challenges to consider. To ensure consistency of communication formats, the introduction of ISO 20022 enabled standardised the communication for interoperability between financial institutions, their market infrastructures and end-user communities. In the long term, there needs to be a common format for all. For now, however, there are still major obstacles to be overcome in the implementation of a standardised communication format. Nevertheless, the fact that businesses are increasingly automating manual processes as they evolve might help achieve this aim, since it makes it possible for banks to implement XML rather than continue with the outdated MT formats. Ultimately, standardisation of these formats will reduce the complexity and costs of corporate-to-bank communication while increasing the STP rate, not just within SEPA but also beyond Europe. These standards are also helping to achieve a shorter turnaround and delivery time for payments, which is supporting the Payment Services Directive (PSD) requirements in Europe.
What’s more, the large number of clearing houses which payment processors must connect to, as well as bilateral agreements between banks, add time and costs to the transaction cycle. Moving forward, banks should be looking at a direct connection to a CSM to complete the transaction cycle. The CSM infrastructure can also be re-used to support bilateral arrangements. In this way, banks will be able to cut their fees and reduce the risk of payments being delayed or failing, which will ultimately benefit the customer.
Market demand for efficient payments processing on a global level is on the increase. To future-proof services and support banks in offering the services that their customers want and need, payment providers must leverage the opportunity that interoperability offers.
While SEPA has introduced a new payments landscape, it is time to start looking beyond the borders of Europe, extending interoperability, and introduce a new approach to payments that promotes efficiency and reduces costs for banks and their customers. The industry has already taken its first steps towards achieving this goal. It must, however, continue to work collaboratively in order to create a truly efficient, interoperable infrastructure beyond SEPA.