Interoperability in Fast Payment Systems | A

FOCUS NOTE

INTEROPERABILITY IN
FAST PAYMENT SYSTEMS
Part of the World Bank Fast Payments Toolkit

SEPTEMBER 2021
B | Fast Payment Systems: Preliminary Analysis of Global Developments

CONTENTS

1. SETTING THE CONTEXT   1

2. BACKGROUND  2
2.1. Defining Payment System Interoperability  2
2.2. Benefits and Challenges of Increased Payment System Interoperability  4
3. CURRENT CONTEXT SURROUNDING FAST PAYMENT SYSTEM INTEROPERABILITY   6
3.1. Examples of Fast Payment System Interoperability  7
3.2. Examples of Fast Payment System Interoperability with Mobile-Money Transfer Services  8
3.3. Examples of Interoperability of Fast Payment System with Merchant Acceptance
Infrastructure  9
3.4. Examples of Fast Payment System Interoperability with Legacy Systems:
RTGS, ACH, and SWIFT  9
3.5. Examples of Fast Payment System Linkages with Digital Currency Initiatives and Distributed
Ledger Technology  10
4. ENABLING FAST PAYMENT SYSTEM INTEROPERABILITY   12
4.1. Technical  12
4.2. Legal and Regulatory Framework 15
5. BEST PRACTICES FOR FPS INTEROPERABILITY   17
6. CONCLUSION  19
7. ACKNOWLEDGMENTS  20

FINANCE, COMPETITIVENESS & INNOVATION GLOBAL PRACTICE

Payment Systems Development Group

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1 SETTING THE CONTEXT

The World Bank has been monitoring closely the development of fast pay-
ment systems (FPS) by central banks and private players across the globe.1
This comprehensive study of FPS implementations has resulted in a policy
toolkit. The toolkit was designed to guide countries and regions on the likely
alternatives and models that could assist them in their policy and implemen-
tation choices when they embark on their FPS journeys. Work on the FPS
Toolkit was supported by the Bill and Melinda Gates Foundation. The tool-
kit can be found at fastpayments.worldbank.org and consists of the below
components:

• The main report Considerations and Lessons for the Development and
Implementation of Fast Payment Systems

• Case studies of countries that have already implemented fast payments

• A set of short focus notes on specific technical topics related to fast pay-
ments

This note is part of the third component of the toolkit and aims to provide
inputs on the technical, legal, and business implications of payment system
interoperability, with a focus on FPS. This topic is of relevance as new players
enter the payment services industry and as FPS continue to mature in many
markets.

| 1
2 BACKGROUND

In most markets, payment ecosystems are required to be ecosystem but also an important tool for facilitating fast
interoperable to some degree. Consumers and businesses payment adoption. Achieving critical mass of fast payment
have multiple options for sending and receiving electronic usage is essential to create the necessary foundation for the
payments. Many of these options are available through their market to build new and innovative fast payments-based
bank account or a third-party wallet. These diverse payment services for end users.
ecosystems cater to a particular payment instrument operat-
ing on different payment infrastructures that are not always
interoperable. Banks, infrastructure providers, and non-bank 2.1. DEFINING PAYMENT SYSTEM INTEROPERABILITY
payment service providers (PSPs) often manage a complex
Payment systems are not built through technology alone.
set of IT systems, operational procedures, and scheme rules
Payment systems also involve a set of scheme rules that
that enable them to connect to multiple payment systems
define the guidelines for operations and interbank service
and offer payment system functionality to their customers
levels. In addition, each payment system is made up of sys-
from a single account. Increased interoperability of payment tem participants that leverage payment system function-
systems has the potential to boost competition in payment ality to provide products and services to their customers.
services, resulting in more innovative products and services And all of this is underpinned by legal frameworks and
for end users. It could also add efficiency to payment pro- oversight bodies that ensure that the operations of each
cessing for system participants and help increase financial payment system follow the relevant laws and regulations
inclusion in markets where that is a public-policy priority. and have measures to mitigate any potential risks imposed
Reducing the barriers between payment systems can help by the operation of the system. In summary, a payment
bring about efficient, cost-effective, and innovative payment system is made up of the following core elements:
ecosystems that benefit end users and further digitalize the • Infrastructure: The technical systems that facilitate the
economy in both a domestic and cross-border context. clearing and settlement of payments. An infrastructure is
With the introduction of new payment systems—particu- made up of hardware (for example, servers, VPN connec-
larly FPS—the potential exists to expand the interoperability tions, and computer terminals) and software (transaction
of payment systems in numerous ways. Designed as plat- routing and fraud and risk management). The infrastruc-
forms of the future, FPS utilize state-of-the-art technology, ture is managed by a system operator who ensures that
software, operational processes, and data standards. Estab- the technical operations of the system are in line with the
lishing interoperability of FPS with other payment systems is scheme rules for that payment type.
not only a means of increasing efficiencies within a payment

2 |
 Interoperability in Fast Payment Systems | 3

• Scheme rules: Scheme rules define the set of rules, pro- platforms, and possibly even of different payment prod-
cedures, and technical standards for a payment system. ucts.”3 Payment system interoperability can occur both in a
This includes operational specifications for the clearing of domestic context and for cross-border payments.
payment messages, rules for settling transactions, access Any interoperability agreement requires both techni-
requirements for participants, dispute-resolution proce- cal interoperability and legal and commercial agreements
dures, maintenance procedures, liability and indemnity underpinning the exchange of payments in different sys-
procedures, and messaging standards, among others. tems. Developing the technical, legal, and commercial
• Applications: Applications are the payment services used agreements around interoperability requires broad col-
by end users (consumers and businesses) that leverage laboration and agreement among payment system stake-
the underlying functionality of a payment system. Appli- holders. In some cases, interoperability can be facilitated
cations may be developed collaboratively among pay- through new regulations. Ensuring interoperability is more
ment system participants (in which case, specifications complicated in a cross-border context, as it requires agree-
for these applications may be included in the system’s ment between a larger number of stakeholders and involves
scheme rules), or they can be developed individually by harmonization of such issues as know-your-customer pro-
system participants or a group of system participants. cedures, currency conversion, and legal jurisdiction. How-
(Broad parameters for these applications may be included ever, the underlying need for agreement on technical, legal,
in a system’s scheme rules, but detailed operational rules and commercial issues is the same for both domestic and
would be separate from the system scheme rules.) cross-border interoperability.
Most markets have multiple payment systems that
In the most basic sense, interoperability between payment cover different use cases. ACH systems enable bulk credit
systems involves the capability for one or more elements and debit payments and are often used for recurring pay-
of the payment system mentioned above to communicate ments, such as salaries and utility payments. Debit and
with each other. Payment systems underly all financial trans- credit card networks enable consumers to pay in store or
actions—this would not be possible without some degree online. Real-time gross settlement (RTGS) systems (also
of industry standardization. The Bank for International Set- referred as wire systems in some markets) are used for
tlements defines interoperability as “the technical or legal infrequent high-value transactions. FPS are the newest
compatibility that enables a system or mechanism to be type of payment system, enabling the instant exchange
used in conjunction with other systems or mechanisms. of low-value payments on a 24-hours-a-day, seven-days-
Interoperability allows participants in different systems to a-week, 365-days-a-year basis (24/7/365). Despite the
clear and settle payments or financial transactions across plethora of different payment systems that include many
systems without participating in multiple systems.”2 Put of the same participants, however, the elements of these
more simply, interoperability “enables the seamless interac- systems rarely interact with each other.
tion of two or more proprietary acceptance and processing

FIGURE 1 Three Core Elements of Payment Systems

Third party
APPLICATIONS P2P mobile app Request to pay applications

Appliations can be specified in the

scheme rules or offered separately
by banks and third parties

SCHEME RULES

Central bank
INFRASTRUCTURE Clearing and settlement mechanism
settlement

Source: Own elaboration

4 | Interoperability in Fast Payment Systems

2.2. BENEFITS AND CHALLENGES OF INCREASED also help boost volumes, which may make a system more
PAYMENT SYSTEM INTEROPERABILITY profitable for system operators and participants alike.
• Increased competition and innovation: All of the
Interoperability of payment systems is not an end in and of
above-mentioned factors—expanded reach, greater effi-
itself; interoperability is a means for achieving other goals
ciencies, and a minimum level of service for end users—
that will depend on the local or regional market context.
will ideally lead to greater competition that leads to more
Expanded interoperability can help promote greater effi-
innovative products and services. Devoting less time to
ciency of payment systems, expand payment networks
managing the operational complexities of connecting to
to enable ubiquity of reach, boost financial inclusion, or
different payment systems, each with its own technical
enhance competition (among other goals). But the pursuit
and messaging standards, banks and other system par-
of interoperability can also entail a number of challenges
ticipants can focus more of their efforts on developing
that must be managed by national authorities and payment
new products (either on their own or through partner-
system stakeholders alike. The following is an overview of
ships with other players). Expanding the reach of pay-
key benefits and potential challenges associated with pay-
ment systems and connecting closed-loop networks to
ment system interoperability.
interbank payment systems has the effect of expanding
Benefits the number of participants offering payment services.
This essentially expands access to core payment systems
• Increased efficiencies for payment processing: Increas-
such as FPS and ACH to new players who may be able to
ing efficiency can ensure that the cost of payment pro-
develop services that banks might not be offering.
cessing remains as low as possible for payment system
participants, which may translate into lower fees for end • Increased transparency for national authorities and
users.4 A key enabler here is the use of common techni- system participants: Interoperability of payment sys-
cal and messaging standards that enable seamless com- tems can allow system operators and national authorities
munication between payment systems. Banks and other to gain a more holistic view of payment flows in a given
payment system stakeholders today often have to man- market. This holistic view can help these entities combat
age multiple separate technical and messaging standards fraud more effectively (for example, by detecting mule
for different payment systems in the same market. This accounts), which is more difficult when payment systems
tangle of different standards is even more pronounced remain separate. In a cross-border context, interoperabil-
when sending cross-border payments. Developing com- ity can bring a level of transparency to payment process-
mon standards for multiple payment systems with sep- ing that not only helps combat fraud but may also help
arate message sets for different use cases (that is, bulk system participants more accurately identify bi- and mul-
payments versus fast payments, retail payments versus tilateral payment corridors. This information can be used
wholesale payments, and so on) can help participants to develop new products for these corridors, thereby
and system operators streamline their IT and business boosting revenue.
processes and reduce costs. • Uniform service levels for end users: Enabling interop-
• Expanded reach for electronic payments: Payment sys- erability between payment systems can help ensure a
tems are fundamentally networks, and the utility of any minimum standard of service for end users, thereby min-
network expands as the number of users in that network imizing different functionality found in separate payment
grows.5 Achieving ubiquity (measured as the percent- systems, which translates to a different level of service for
age of bank accounts reached by a payment system) is end users. For instance, payments made using an ACH
a key building block of successful payment systems. But system are not instantly available in a customer’s account,
expanding reach may not be limited to bank accounts whereas payments made using an FPS are available to
alone. A significant percentage of users in a given market the beneficiary within seconds. While some differences
or markets may also be using third-party wallets, such as in service levels can always be expected from varying
those offered by mobile-money service providers. Link- payment systems, problems may arise when service lev-
ing these third-party networks with interbank payment els in one system fall far short of a minimum standard
systems can help expand the reach of electronic pay- set by a national authority or payment system operator.
ments. This may help support public-policy goals, such This is often a challenge with closed-loop payment sys-
as increasing financial inclusion or decreasing the use tems developed by third parties. If a payment takes days
of cash. Expanding the reach of payment systems can or weeks to arrive in a customer’s account (as is often
 Interoperability in Fast Payment Systems | 5

the case with cross-border payments), or if a payment ticipants, and national authorities new opportunities
message can enable only a few characters of additional to detect and prevent fraud, the opposite is also true.
information related to the payment, a national author- Fraudsters will pursue any advantage they can to transfer
ity (or group of payment system participants) may pur- fraudulent funds faster and mask the transfer of these
sue interoperability as a means of improving the level of funds through the use of different systems and accounts.
service for end users. Allowing different payment sys- Any interoperability initiative must account for this and
tems to communicate could allow for an expansion of develop safeguards that must be constantly reevaluated
one system’s functionality or for a consolidation of the as fraudsters develop new ways to take advantage of
functionality of two systems into a single offering for a these systems. Harmonizing fraud-prevention practices
bank’s customers. It can also give end users increased by system participants in different networks may be
choice in payment services and functionality—either in advisable in this context, as would the sharing of infor-
a domestic context (for example, by linking an FPS with mation between system operators to detect fraud at a
a closed-loop network offered by a third party) or for network level as it occurs.
cross-border payments (for example, by giving consum- • New barriers to access: While interoperability promises
ers the choice between traditional remittance providers, to expand the reach of payment systems and enable
third-party networks, or FPS-based payments from their new players access to payment system functionality,
bank account). this potential is highly dependent on technical speci-
fications and scheme rules. If interoperability between
Potential Challenges
payment systems is developed in a way that raises the
• Different payment systems tailored to different use technical and compliance burden on system partic-
cases: Another key reason for the proliferation of sepa- ipants, it may lead to a situation in which only some
rate payment systems is that many of these systems are players can afford to comply with the new system
tailored to a specific group of use cases that may not requirements. If this occurs, it may have the unintended
be a target for other systems. Batch-based ACH systems effect of reducing the number of participants who can
feature both credit and debit functions that can be use these systems—which may lead some PSPs to rely
used for high-volume scheduled payments such as sal- on other PSPs to access payment systems (so-called
ary disbursements or regular bill payments (for exam- indirect access) or cause a proliferation of closed-loop
ple, rent or mortgage payments). Debit and credit card solutions by some players. Interoperability must be pur-
systems are tailor-made for merchant payments (both sued with an understanding of the needs of a variety of
in store and online). Wire payments (RTGS) are typically payment system participants—especially those groups
used for high-value and time-critical transactions with of participants who do not access interbank systems
real-time settlement of payments, transfer instructions, (for example, fintechs or telecommunication firms that
or other obligations. FPS target retail ad hoc payments provide mobile-money services). Any interoperability
where speed of funds transfer is paramount—for exam- arrangement needs to strike a balance between direct
ple, person-to-person (P2P) payments, nonscheduled participants who comply with all security requirements
bill payments, wage disbursements, and so on. While and the need to ensure cost-efficient methods for
interoperability between these systems may be pos- smaller participants and fintechs to access payment
sible on a technical level, the business logic behind systems directly.
interoperability may not always be clear. Thus, any
• Reduced resilience in case of system(s) failure: One of
attempt to boost interoperability between payment
the perceived advantages of having separate, non-in-
systems should be done with a clear business or tech-
teroperable payment systems is that failure in one pay-
nical goal in mind.
ment infrastructure does not affect the operations of
• Risk of increased fraud: The development of any new other payment systems. If an ACH system goes down
payment system always entails the potential for an for a time, PSPs have the option to route payments via
increase in fraud. Fraudsters are very flexible and innova- another system, such as FPS. Depending on the length
tive, and the development of a new system or payment of a system failure, the process for recouping payments
channel will always raise their attention. By facilitating the in one payment system can be difficult. As payment sys-
real-time exchange of funds between accounts, FPS may tems become more interoperable, the risk that a system
be particularly attractive to fraudsters. While interoper- failure might affect other systems could grow as well,
able payment systems provide system operators, par- which in some cases might result in a systemic risk.
3 CURRENT CONTEXT SURROUNDING
FAST PAYMENT SYSTEM INTEROPERABILITY

Today, many segments of the payment ecosystem are States, where there exists two ACH operators (the Federal
already interoperable. However, this interoperability is not Reserve and the Clearing House), ACH payments are com-
evenly distributed across all payment types. ATM withdraw- pletely interoperable due to the National Automated Clear-
als and debit and credit card networks see relatively high ing House Association, the industry governing body, which
levels of interoperability. Consumers are able to go to ATMs develops and administers operating rules for ACH trans-
around the world without worrying that the machines won’t actions processed over both ACH networks.7 In Europe,
read their card. Merchants across the globe have adopted ACH interoperability has been achieved through a set of
an “accept all cards” approach at checkout, so consumers pan-European scheme rules despite the proliferation of
do not need to worry whether their specific card scheme national and pan-European ACH infrastructures. SEPA now
will be accepted. Other payment types, such as ACH and has three ACH schemes governed by the European Pay-
FPS, generally see lower levels of interoperability due to a ments Council: SEPA credit-transfer scheme, SEPA direct-
lack of need. Most markets have only a single ACH or FPS debit scheme, and SEPA direct-debit business-to-business
system, which obviates the need for interoperability. But scheme. The schemes facilitate 43 billion transactions
markets with multiple ACH or FPS, such as the United States annually across 36 countries.8
or the Single Euro Payments Area (SEPA), do need to ensure Enabling interoperability within cross-border payments
interoperability between infrastructures—generally through has garnered more attention from both the industry and
common scheme rules. And as the topic of cross-border fast regulators over recent years amid the glaring inefficiencies
payments gains steam, it is expected that links between of the legacy correspondent banking arrangements. For
domestic FPS will grow.6 example, the key challenge facing cross-border payments is
Interoperability between payment systems is typically that a cross-border arrangement does not fall under a single
achieved through large-scale industry cooperation to set of laws and regulations.9 In practice, most cross-border
develop common operational and technical standards as payments today do not use a payment system at all. Instead,
well as operating rules governing different transaction types. cross-border payments are processed using a proliferation
For example, card interoperability at the merchant point of of bilateral agreements between institutions, often leverag-
acceptance in many markets is due to the creation of com- ing international messaging networks for communication
mon standards for physical cards and terminals, their inter- (but not for payment processing). Developing interopera-
action, and data-security standards (for example, PCI DSS). bility within cross-border payments is especially challenging
Interoperability of ACH payments has also been successfully due to different country data standards and formatting, as
achieved through the creation of common scheme rules for well as varying legal and regulatory frameworks. The foun-
certain ACH transaction types. For example, in the United dation for global interoperability is ISO 20022—the de facto

6 |
 Interoperability in Fast Payment Systems | 7

global standard for fast payments. However, a common data 3.1. E

 XAMPLES OF FAST PAYMENT SYSTEM
standard alone is not enough; cross-border schemes that fit INTEROPERABILITY
within the context of different national legal and regulatory
frameworks will also be required. Scheme Interoperability: SEPA SCT Inst
Many FPS have been designed and implemented with To adopt ubiquitous fast payments successfully, it is crucial
the eventual goal of enabling interoperability with other to have a single scheme governing all fast payment transac-
payment systems. When considering how an FPS is interop- tions in a given market. Because a single currency is used by
erable with other payment systems, it is helpful to evaluate 19 member states of the European Union (each with its own
from the perspectives described in box 1. national authorities and legacy payment system operators),

BOX 1 FAST PAYMENT SYSTEMS AND OTHER PAYMENT SYSTEMS

• FPS and ACH: While FPS and ACH systems are sim- developing interoperable links between these net-
ilar in that they offer account-to-account electronic works and an FPS system could help expand the
transfers between bank accounts, these systems are reach of electronic payments while providing addi-
fundamentally aimed at different use cases. ACH tional security and transparency on electronic pay-
systems process bulk payments at regular intervals, ment flows. The real-time exchange of payment
whereas FPS process individual payment messages messages in each of these types of payment sys-
in real time. ACH payments are typically scheduled tems makes interoperability easier on an operational
payments, such as salary disbursements or bill pay- level, although differing approaches to settlement,
ments, whereas FPS payments tend to be for more payments messaging, and customer accounts will
ad hoc, flexible payments made on a one-off basis. require collaboration and legal and commercial
Beyond the technical difficulty of interoperability agreements to enable interoperability between FPS
between bulk-based and message-based payment and closed-loop networks.
systems, there may be little need for true interopera- • FPS and RTGS: While operationally similar, in that
bility between ACH and FPS due to the different use both FPS and RTGS systems process individual
cases targeted by each system. payment messages in real time, the lack of 24/7
• FPS and card networks: Both FPS and card net- operations of RTGS systems in a majority of the juris-
works can be used for point-of-sale (POS)/e-com- dictions has resulted in most FPS and RTGS systems
merce merchant payments. While the systems differ remaining separate, yet the possibility of interoper-
in terms of technical components, clearing and set- ability between FPS and RTGS systems rises. Adding
tlement times, fees, and pricing, both FPS and card FPS to an RTGS platform could enable operational
systems enable real-time authorization of payments efficiencies for banks and other system participants
between consumers and merchants. Interoperability and improve the oversight capability of central
between these networks is often enabled by third- banks. Ultimately, whether to make FPS and RTGS
party aggregators. Further interoperability may best interoperable through a single technical platform will
be pursued on the application or even scheme layer, be up to local authorities. Some authorities may want
rather than between the underlying infrastructures. to continue separating low-value payment platforms
• FPS and closed-loop networks: Both FPS and (FPS) from high-value systems (RTGS) to mitigate
closed-loop networks (for example, mobile-money risks and ensure systemic stability and security for
remittances) are well suited for P2P payments and end users. But this could also be achieved by devel-
remittances, as well as ad hoc bill payments. In mar- oping different scheme rules for high- and low-value
kets with high use of closed-loop networks (often payments that are processed on a single platform.
the case where bank-account penetration is low), Source: Own elaboration
8 | Interoperability in Fast Payment Systems

fast payment transactions in Europe are united by a single with a “translator” for ISO 8583 to ISO 20022 messages
set of scheme rules, instead of a single payment infrastruc- and a proxy lookup service that securely maps recipient
ture. In addition to national payment system operators, such mobile numbers to bank account details.15 Similarly, Pay-
as Equens (Netherlands), Stet (France and Belgium), Iberpay now is a highly successful central addressing scheme that
(Spain), nexi (Italy), and others, SEPA also has two pan-Euro- builds on Singapore’s FAST FPS system and allows regis-
pean FPS infrastructures: RT1, which was launched in 2017 tered users to send money in real time using their mobile
and is operated by EBA Clearing (itself owned by 48 Euro- number.16 Both systems were originally built by Vocalink,
pean Union banks), and the TARGET Instant Payment Settle- the United Kingdom’s payment system operator for ACH
ment Service, which was launched in 2018 and is operated and FPS payments (now owned by Mastercard). In August
by the European Central Bank. Similar to the approach taken 2020, the deputy governor of the Central Bank of Malay-
to enable interoperability of ACH transactions in Europe, all sia (Bank Negara Malaysia) announced that the linkage will
of these systems are interoperable through a common set of be extended to Malaysia’s DuitNow, an equivalent service
operating rules and technical standards, known as the SEPA available only in Malaysia at present.17
Instant Credit Transfer scheme (SCT Inst). The scheme is
based on the SEPA credit-transfer scheme and similarly gov-
erned by the European Payments Council. Important oper- 3.2. E
 XAMPLES OF FPS INTEROPERABILITY WITH
ating rules include mandating that funds be made available MOBILE-MONEY TRANSFER SERVICES
to the beneficiary within 10 seconds, capping the transac-
tion limit at € 100,000, and stipulating 24/7/365 availabil- Mobile-money transfer systems have exploded in popularity
ity of all infrastructures processing SCT Inst payments.10 Like over the last decade, particularly in developing economies
the other three SEPA schemes, SCT Inst is based on the ISO where bank account penetration is low. In many markets,
20022 messaging standard. The scheme is updated every payments made via mobile wallets on such apps as M-Pesa
two years to reflect market needs and the evolution of tech- (Kenya), AliPay (China), and Paytm (India) are used and
nical standards.11 accepted almost as widely as cash. Many of these systems
The United States will have to confront a challenge sim- operate as closed-loop systems18 and do not connect directly
ilar to that of Europe, as the Federal Reserve is expected to to users’ bank accounts.19 In some markets, the existence of
launch its FedNow service by 2023, operating alongside multiple closed-loop schemes has led to market fragmen-
the Clearing House’s existing Real-Time Payments (RTP) tation. In countries such as Tanzania and Nigeria, regulators
system.12 Although both the Federal Reserve and industry have responded to this development by issuing mandates
stakeholders have acknowledged that achieving interop- to enable interoperability between the various closed-loop
erability is important for fast payments to achieve wide schemes. In Kenya, the approach to achieving interopera-
reach in the United States, the Federal Reserve has indi- bility across closed-loop schemes was market led, and the
cated that interoperability with RTP will likely not be the Kenyan market has now achieved interoperability across
case at its initial launch and has not yet indicated a time- services offered by Safaricom (owner of M-Pesa), Airtel, and
line for interoperability with RTP. Some industry stakehold- Telkom Kenya.20 Also, mobile-money transfer platforms have
ers have suggested that this could lead to a fragmented moved from the traditional role of transferring money to
market for fast payments and delay the adoption of fast providing banking services for both banked and unbanked
payments in the United States. The Federal Reserve has customers. The commercial banks have partnered with
committed to using ISO 20022 for FedNow, which should mobile-network operators to enable customers to access
help facilitate interoperability with the Clearing House’s their bank accounts through mobile phones, including with-
RTP system.13 drawing and credit facilities.21
Enabling interoperability with FPS could offer a basis
Infrastructure Interoperability: Technical Linkage for linking multiple closed-loop systems to each other in
between PromptPay and Paynow the future. From the perspective of the end user, mobile-
In April 2021, the Bank of Thailand and the Monetary money transfer services always make funds available in the
Authority of Singapore jointly launched a cross-border payee’s mobile wallet immediately, even if the underlying
linkage between the mobile peer-to-peer transfer services settlement occurs in commercial bank money instead of
PromptPay and Paynow to facilitate cheaper and easier central bank money. At present, there are several exam-
remittance flows between the two countries.14 Used by ples of interoperability between money-transfer services
approximately a third of Thai consumers, PromptPay com- and FPS. Global examples include the Zelle network in the
prises a real-time clearing and settlement infrastructure United States, a bank-owned real-time P2P transfer service
 Interoperability in Fast Payment Systems | 9

that recently moved settlement from the ACH network to rules for different payment types. The core infrastructures
the RTP network. Another example is Singapore’s Paynow, of these different payment types are rarely interoperable.
a similar service to Zelle, which settles via the country’s In markets where adoption of fast payments is high,
FAST infrastructure. In some markets, the popular Chinese integration of FPS at the merchant point of acceptance is
mobile apps Alipay and WeChat also connect to FPS. For already becoming more common. In Sweden, for example,
example, in Hong Kong SAR, China, Alipay and WeChat carry consumers are able to make Swish payments at the POS by
out settlement via the Hong Kong Monetary Authority’s fast scanning a QR code from their mobile app into the mer-
payment infrastructure.22 FPS are attractive for linking with chant’s card terminal.27 This is similarly true for MobilePay in
closed-loop systems due to operational similarities: both FPS Denmark. A cross-border example is the linkage between
and closed-loop schemes operate 24/7/365, make funds India’s UPI-based BHIM app and Singapore’s Network for
available to the beneficiary in real time, and are often used Electronic Transfers, Singapore’s local debit card network.
with mobile phones. The widespread use of ISO 20022 for A QR code–based app, the BHIM UPI app is able to scan
fast payments should also make links between closed-loop the Singapore Quick Response Code at the POS and pay for
schemes and FPS easier, as a closed-loop scheme operating transactions in Singapore while using India’s UPI system for
in multiple markets may have to develop only a single link to settlement. This allows Indian bank account holders to make
access multiple FPS. fast payments in Singapore at the POS without the need for
Another cross-border example of this is the recent currency conversion or a credit card.
partnership between Western Union and India’s Unified One interesting development in this space was the
Payment Interface (UPI). The partnership allows West- launch in July 2020 of the European Payments Initia-
ern Union customers globally to send money into bank tive, which aims to create a unified card, online, and
accounts in India simply by using the receiver’s UPI ID, mobile-payment solution leveraging SCT Inst and reach-
rather than providing bank account and routing details.23 ing across Europe (that is, across both euro countries and
India is currently the world’s largest remittance recipient non-euro-based countries).28 The initiative is intended to
country,24 and leveraging UPI could help improve customer overcome the problem of a fragmented European retail
experience and boost Western Union’s remittance volumes payment market for consumers while leveraging fast pay-
in India. PayPal’s Xoom service also enables cross-border ment infrastructure in Europe, such as the TARGET Instant
transfers to India using a recipient’s UPI ID.25 Other remit- Payment Settlement Service.29
tance providers, such as MoneyGram, have partnered with
card schemes such as Visa to enable real-time cross-bor-
der remittances.26 As fast payments networks expand and 3.4. EXAMPLES OF FAST PAYMENT SYSTEM
use cases mature, remittance providers may look to these INTEROPERABILITY WITH LEGACY SYSTEMS:
systems as a cheaper and more efficient link for real-time RTGS, ACH, AND SWIFT
cross-border payments.
The challenge of enabling interoperability between FPS and
legacy payment systems, such as RTGS and ACH systems,
3.3. E XAMPLES OF INTEROPERABILITY OF FAST is quite hard to overcome, and there are few examples of
PAYMENT SYSTEM WITH MERCHANT ACCEPTANCE this globally. This is due not only to the technical challenges
INFRASTRUCTURE associated with integrating two systems that were often
developed at different times and using different technolo-
Integrating fast payments at the merchant acceptance gies, but also to the differences in the operational require-
point, whether at the POS or online, is another important ments between running an ACH versus an FPS. Similarly, the
area of interoperability that is gaining traction. From an operating rules for high-value wire transfers (RTGS) are likely
end user’s perspective, merchants can already accept many to differ from those governing low-value fast payments so
different payment types, including multiple card schemes greatly that scheme interoperability between RTGS and FPS
(Visa and Mastercard, along with American Express and is often not seen as appropriate.
other card networks), payments made via closed-loop Nevertheless, potential benefits are associated with
schemes, and, in some cases, even ACH payments. The offering these services via a single interoperable platform,
ability of merchants to accept multiple payment types is including reduced operational costs for banks, which no
due to common standards and processes for accepting longer have to connect to multiple payment systems, and
cards, as well as a market of payment aggregators who expanded access to new players that can help drive sys-
help merchants with the technical links and operational tem reach and ubiquity. In Mexico, for example, RTGS and
10 | Interoperability in Fast Payment Systems

fast payment services are offered in a single interopera- 3.5. E

 XAMPLES OF FPS LINKAGES WITH DIGITAL
ble infrastructure called the Interbank Electronic Payment CURRENCY INITIATIVES AND DISTRIBUTED
System (Sistema de Pagos Electrónicos Interbancários, or LEDGER TECHNOLOGY
SPEI). Operated by the central bank, SPEI processes both
high- and low-value fast payments on a message-by-mes- Digital currency is on the rise globally, whether it be cen-
sage basis. Although the system does not impose a trans- tral bank digital currencies (CBDC) such as China’s DCEP,
action value limit, different rules apply for transactions third party-issued stablecoins (such as Facebook’s Diem),
depending on value.30 In the United Kingdom, the New or private cryptocurrencies (Bitcoin or Ethereum). As these
Payments Architecture (NPA), currently in development, new forms of payments go live and gain more mainstream
seeks to take this to another level by creating a system that acceptance, the question arises whether or how these digital
will run the previously separated retail infrastructures (Fast currencies will become interoperable with existing payment
Payments, Bacs, Cheque and Credit Clearing) on a single systems. The additional functionalities and future designs of
infrastructure platform based on ISO 20022.31 The NPA digital currency may require the standards and schemes of
system architecture will also include an access layer that legacy payment system to be adjusted.
enables the development of value-added services based Over the past few years, central banks have carried out
on application programming interfaces (APIs) that lever- several experimental projects that explored how distributed
age the underlying clearing and settlement mechanism.32 ledger technology could be used in RTGS and securities set-
In the case of the NPA, while the core infrastructure may tlement systems. The main benefits of applying distributed
offer various payment types on one consolidated platform, ledger technology to these systems include programmabil-
it will still require different standards and rules for different ity and increased automation, transparency, and network
transaction types (for example, bulk-based ACH payments resilience. More recently, the industry has been giving more
versus message-based FPS payments). thought to how integrating this technology with FPS or
In 2017, SWIFT launched the gpi initiative in an effort to connecting FPS to existing distributed ledgers could facil-
provide increased transparency on cross-border payment itate programmable fast payments. In July 2020, five Span-
flows and transaction fees as well as speed up international ish banks successfully completed a proof of concept for an
transaction processing. Features of the service include pro- interbank smart payment platform managed by Iberpay, the
viding each transaction with a unique ID number, allowing owner and operator of Spain’s ACH and FPS. Iberpay con-
for real-time tracking, as well as access to a global directory nected a blockchain network to its existing payment sys-
of all gpi members. By late 2019, the majority of SWIFT tem, which included the deployment of an interbank smart
international transactions were processed using SWIFT gpi, payment platform and a permissioned interbank blockchain
and almost half of these payments were received by the network. The proof of concept entailed the automatic exe-
beneficiary within 30 minutes.33 SWIFT also launched an cution of SCT Inst payments triggered by business smart
additional service known as GPI instant, which connects contracts running in the blockchain network and their set-
the gpi service to domestic real-time infrastructures and tlement through connecting with the Spanish Retail Pay-
further improves the speed of cross-border payment pro- ment System.35 This arrangement requires interoperable
cessing on its network. In December 2020, the service messaging between the blockchain network and Iberpay’s
went live in the United Kingdom with a link to the Faster FPS system to facilitate the automated execution of pay-
Payments System to facilitate near real-time cross-border ments. Iberpay plays the role of system integrator between
payments. SWIFT has also conducted several pilots of the the blockchain network and the FPS.
service in cooperation with several major payment system As central banks continue to explore the development of
operators and central banks, including in Australia, the CBDC (the People’s Bank of China has already gone live with
European Union, and Singapore.34 a pilot of its DCEP project, and the Swedish Riksbank has
recently begun the second phase of its e-krona project), the
interplay between CBDC and FPS is likely to receive further
attention. A CBDC network and an fast payments network
do not necessarily have to compete. One potential option in
this space would be using a CBDC as a settlement currency
for a fast payment system. This may be particularly attrac-
tive in a cross-border context, where settlement risk is high
today due to slow and inefficient processes for cross-border
payments.
 Interoperability in Fast Payment Systems | 11

FIGURE 2 Proof of Concept for Interbank Smart Payments Platform: Iberpay

Bank 1 Bank 1
Company A

red-i
Interbank Interbank
Interbank payments
instant
smart network
credit
payments
transfers
Bank 2 Smart Smart platform Bank 2
platform
contracts payments

Company B
Bank 3

Bank 3

SMART PAYMENTS SPANISH PAYMENTS SYSTEMS

Source: European Payments Council
4 ENABLING FAST PAYMENT SYSTEM
INTEROPERABILITY

FPS offer the potential for an expansion of interoperability of stakeholders. Beyond technical issues, enabling interop-
across payment types. Many of the examples of interop- erability will require an assessment of legal and regulatory
erability mentioned in section 3 focus on interoperability frameworks and the potential adjustment or addition of
between payment systems processing the same payment new regulations. Lastly, successful interoperability will likely
type—card-to-card interoperability or ACH-to-ACH interop- involve educational efforts for system participants and end
erability. There are numerous reasons for this—most notably, users to boost usage of these interoperable links.
that legacy payment systems tend to be older and built on
a less flexible technical foundation, and that these systems
have different operational guidelines. To take one example, 4.1. TECHNICAL
two ACH systems may have different clearing windows, with
one processing payment files five times daily and the other Enabling different systems to communicate and exchange
processing payment files twice daily. These ACH systems messages is ultimately achieved through technical harmo-
may have different operating hours as well. In contrast, FPS nization of platforms that translate between different pay-
operate on a 24/7/365 basis, and end-to-end clearing of fast ment systems. These technical connections are underpinned
payments occurs within seconds.36 This makes interoperabil- by scheme rules and commercial agreements between sys-
ity between FPS and closed-loop networks easier. It could tem participants. Technical connections do not require each
also form the basis for interoperability with card networks system participant to use the same technology providers.
and ACH systems.37 In addition, many FPS use ISO 20022 for Rather, they enable communication between different net-
messaging. As use of ISO 20022 expands both domestically works and subsystems operated by system operators and
and cross-border, existing FPS that are ISO 20022 compliant individual participants.
may become an attractive option for linking between differ-
4.1.1. Messaging
ent payment systems and applications.
Enabling interoperability between payment systems Payment messaging is a foundational piece of any payment
requires more than just technical compatibility. As with the system. As such, it is a crucial element in any effort to enable
development of any new payment system, the first step in interoperability. Common messaging standards enable com-
enabling interoperability comes is understanding the use munication between payment systems and system partici-
cases and goals that interoperability seeks to achieve. These pants. Different payment systems traditionally use different
determine whether interoperability is the appropriate option. standards. ISO 8583 is widely used for card processing, while
In general, technical solutions should be developed only after ACH payments typically use a variety of national proprietary
these strategic discussions are held between a wide variety standards. These standards are different not only across

12 |
 Interoperability in Fast Payment Systems | 13

different system types but also for similar payment system • Universal translation language: While most payment
types in different jurisdictions. Incompatible messaging systems today do not use ISO 20022, many proprietary
standards are key obstacles to payment system interopera- standards have been mapped to ISO 20022. This allows
bility and greater efficiency in payment processing. payments using different proprietary standards to use
International standards, such as ISO 20022 or ISO 8583, ISO 20022 as a universal translation language to map
can help facilitate greater efficiency in both a domestic payment messages from different systems and jurisdic-
and cross-border context. ISO 8583 has been adopted in tions and enable interoperability between systems.39
such major FPS as the UK’s Faster Payments System in large • Global deployments of ISO 20022: ISO 20022 is now live
part because the standard was already well integrated into in more than 70 markets globally, and almost half of these
many bank processes due to its ubiquity for card payments. deployments are for fast payments (either live or in devel-
Despite plans to move from ISO 8583 for FPS in markets opment). While cross-border links between FPS remain
such as the United Kingdom and South Africa, the standard rare, global interoperability is one of the key benefits of
can nevertheless facilitate interoperability between card sys- ISO 20022 cited by stakeholders across the world. Many
tems and FPS or between FPS in different markets. Since ISO expect cross-border interoperability to expand once more
20022 is still integrated in many bank systems today, ISO systems go live with systems based on ISO 20022.
8583 could be an attractive option for banks.
One of the key developments with the rise of fast pay- 4.1.2. Application Programming Interfaces
ments is the widespread use of ISO 20022 for payment APIs40 are a key technical enabler for secure electronic com-
messaging. The reasons for using ISO 20022 for FPS differ munication between networks. The use of APIs in payments
for each jurisdiction. Some markets, such as SEPA, value the and financial services has expanded in recent years. A
standard’s political neutrality (compared to choosing one plethora of PSPs and technology vendors use APIs to enable
country’s proprietary messaging standard), while other mar- connections to payment networks or elements of a bank’s
kets prize ISO 20022’s rich data capabilities. ISO 20022 is underlying core systems. In Europe, the revised Payment
increasingly being used for FPS38 and also in other areas of Services Directive (PSD2) mandates that banks open access
financial services, such as securities and corporate-to-bank to customer accounts to authorized third parties. While the
communication. ISO 20022 has many advantages that PSD2 does not mandate the use of APIs, European stake-
enable interoperability between FPS and between FPS and holders are developing API standards for the technical
other payment systems, including the following: enablement of open-banking services under the PSD2.41
• Extensive data capabilities: Unlike many legacy mes- APIs can enable community services or be offered by indi-
saging standards, ISO 20022 does not limit the amount vidual institutions to allow authorized third parties secure
of data that can be included in a payment message. access to processes and information that would previously
Many ISO 20022 deployments have set artificial limits be available only to participants of a payment system or
to payment data (many limit the data to 140 characters in a financial institution. Enabling interoperability between
to maintain compatibility with SWIFT MT standards), but payment systems with APIs would require the development
these limits can be expanded or removed entirely over of open APIs that can be accessed by all participants in a
time. system(s).42
• Flexibility to add new payment messages to the ISO APIs can enable interoperability between payment sys-
20022 repository: The ISO 20022 organization includes tems without the need to change the underlying techni-
processes for adding new payment messages that can cal infrastructures. Two payment systems could connect
be used by others. When the United Kingdom devel- to a common API access layer or gateway that enables the
oped its Current Account Switch Service, it applied to the exchange of payments or transactional information. This
ISO 20022 organization to add new message types for would occur on the application/services layer and may be
account switching. These message sets are now part of complemented by changes in scheme rules to specify the
the ISO 20022 message repository and can be used by operational requirements for transactions that go through
any other market. As use of ISO 20022-based payment the API gateway. In Nigeria, mobile-money operators can
systems expands, the potential to add new messages to connect via APIs to the national central switch operated by
the ISO 20022 repository makes the standard an attrac- NIBSS, the country’s payment system operator for fast pay-
tive choice. ments, ACH, and card payments.43 For interbank payment
systems, API gateways are often used in payment hubs
14 | Interoperability in Fast Payment Systems

offered to banks to help them connect to multiple payment would enable banks and other PSPs to offer multiple pay-
systems.44 API gateways can also be deployed for an entire ment types using a single identifier standing in for a trans-
market to connect various payment systems and services. action account number, thereby facilitating interoperability
The Mojoloop Foundation has been active in deploying its of payment systems via a single application. This would not
API-based payment platform to spur financial inclusion.45 require significant changes to the underlying infrastructure
Whether deployed by a market player or an entire payment and may require only minor additions to scheme rules.
community, API-based payment gateways can facilitate the
exchange of payments between payment systems without 4.1.4. Payment System Architecture
the need to rework the underlying payment infrastructures. As the development of FPS expands and new players
This concept could also be used to connect multiple domes- become active in the payment services industry, some
tic payment systems to ease cross-border payments. newer FPS have embedded the need for interoperable ser-
vices in the system architecture itself. This involves devel-
4.1.3. Payment Addressing oping an access layer to enable authorized third parties to
Proxy databases are a key tool for enabling interoperabil- leverage the underlying clearing and settlement infrastruc-
ity of services between payment systems as well as provid- ture while providing payment services to all participants in
ing added convenience and security for end users. Proxy the network. Australia’s New Payments Platform includes
databases enable end users to route payments according an overlay-services mechanism intended to allow autho-
to a commonly remembered identifier (most commonly, rized overlay-service providers to offer customized payment
a mobile-phone number or email address). A proxy data- services to any participant in the network. These overlay
base can be connected to one or more payment systems services are optional (that is, not a requirement for system
to execute clearing and settlement. FPS are tailor-made for participants) but are intended to add value for system par-
proxy P2P and consumer-to-business payments. Prominent ticipants and end users.49
examples include UPI in India, Sweden’s Swish network, and This concept is being expanded with the development
the Danish app MobilePay. All of these systems utilize each of new payment systems. The United Kingdom is currently
country’s FPS infrastructure to clear and settle payments. In developing the NPA, a payment system based on ISO 20022
countries without a centralized proxy database, individual that will consolidate legacy payment systems (ACH and
banks may manage their own proxy databases for their cus- FPS) into a single core clearing and settlement mechanism.
tomers. In the United States, the Zelle network is a P2P proxy System participants will access the underlying payment
database that allows consumers from participating banks to infrastructure through an access layer that will also include
send and receive payments using their mobile-phone num- API-based overlay services. The NPA has interoperability in
ber instead of a bank account number. Zelle currently uti- its DNA, as it separates the underlying payment infrastruc-
lizes the ACH network to settle transactions even though ture for bulk- and message-based payments into a single
payments are cleared instantly between participants. In engine that participants access through a single access layer.
early 2021, the first Zelle banks began routing transactions Banks can route payments according to the functionality
through the country’s FPS, RTP.46 needed by end users and will no longer need to connect
Proxy databases are not limited to consumer payments. to separate payment systems for different payment types.
Account-masking services enable corporations to use a The NPA will also see consolidation on the scheme level as
unique proxy identifier to send and receive payments. This well, as the Bacs (ACH), Cheque and Credit Clearing (check
identifier can be linked to one or more bank accounts, imaging), and Faster Payments (FPS) schemes are being
allowing businesses and their banks to manage their liquid- subsumed under the new scheme body Pay.UK.
ity more flexibly. The Clearing House, which operates one of These systems point the way to a future in which the
the two ACH networks in the United States, has developed underlying payment “engine” (clearing and settlement
the Universal Payment Identification Code, which busi- infrastructure) is separated from the application layer.
nesses47 can use to route payments to one or more bank Enabling this requires collaboration on scheme rules and
accounts.48 If a company changes its bank or wants to route technical standards, as well as new authorization processes,
payments to a different account, it can do this while con- particularly for non-bank PSPs. Whether consolidating mul-
tinuing to use the same code. tiple domestic payment systems into a single infrastruc-
The use of proxy databases is typically limited to a sin- ture or linking multiple domestic payment systems into a
gle payment system, but use of such databases can be con- cross-border payment system, this new type of payment
nected to multiple infrastructures or payment schemes. This system architecture may be the most efficient way to enable
 Interoperability in Fast Payment Systems | 15

interoperability between payment systems and participants 4.2. LEGAL AND REGULATORY FRAMEWORK
moving forward.50
Beyond technical links and commercial agreements, interop-
4.1.5. Integration with Merchant Payment Systems erability can also be facilitated through new or revised legal
Consumers typically have multiple options to pay merchants and regulatory frameworks that either reduce legal obsta-
(particularly in an online context), and card payments dom- cles to interoperability or mandate links between payment
inate noncash merchant payments in most markets.51 In systems or PSPs. Interoperability can even help contrib-
recent years, both bank and non-bank payment provid- ute to improved oversight or enforcement of regulations
ers have entered the merchant payment space with new (for example, regulations around controlling or combating
options for consumers that do not rely on global card net- fraud). While legal and regulatory frameworks alone cannot
works. One notable trend in this space is the rise of buy- ensure successful interoperability of payment systems, they
now, pay-later schemes from third parties such as Klarna. can provide a foundation that facilitates the technical and
These schemes allow consumers to buy items on credit from commercial agreements necessary for interoperable pay-
a buy-now, pay-later provider without using a credit card.52 ment systems.
For banks, FPS represent the greatest potential to enable
4.2.1. Open-Banking Regulations
merchant payments without a debit or credit card, as FPS
mobile-payment apps in Denmark53 and Sweden54 have Open banking is a term that has gained wide relevance in
seen increasing success in recent years. But this increase in the payment services industry in recent years. Open bank-
merchant payment options also presents added complex- ing entails the use of APIs to enable third parties to develop
ity for banks and merchants, who have to manage separate products and services in collaboration with banks and other
payment streams and liquidity channels. financial institutions. Open banking can be pursued on a
For merchants and their banks, the ability to accept any bilateral basis (for example, a bank developing proprietary
payment type used by consumers is paramount to ensur- or open APIs that third parties can use to offer products
ing convenience for their customers and to remaining com- and services to a bank) or on a community-wide basis (for
petitive with other merchants offering similar products. For example, the development of open APIs that are available to
smaller merchants in particular, the lack of interoperability all market participants and allow for third-party services to
in payment types is a problem, as connecting to separate be used by any system stakeholder). APIs can also be used
schemes can be an expensive and lengthy process.55 Enabling to enable authorized third parties to offer products and
merchants to manage this complexity is often done by third- services that leverage the underlying payment infrastruc-
party payment aggregators who help retailers connect to ture for all system participants. Australia’s New Payments
and process payments from multiple payment schemes.56 Platform uses APIs for its overlay-services platform, as does
The service provided by these third-party aggregators could India’s UPI, which has developed a comprehensive set of API
also be enabled through interoperability between payment specifications for system participants.60
infrastructures and schemes—enabling merchants to access Some markets have chosen to facilitate open-banking
multiple payment types through a single connection. In mar- services through new regulations. The most notable exam-
kets with multiple closed-loop mobile-money services, this ple here is the European Union’s PSD2. The PSD2 mandates
may be pursued through common operating standards that that all banks provide access to customer accounts to any
make it easier for merchants to accept payments from differ- registered third party authorized to do so by its customers.61
ent services or schemes.57 Interoperability between card net- As a directive of the European Union, the PSD2 has to be
works and fast payment schemes is still in the early stages, transposed into national law by each member state of the
although prominent examples—such as the cross-border European Union.62 Each member state is at a different state
link between India’s UPI FPS scheme and the Network for of implementing the PSD2 into national law. Some major
Electronic Transfers, Singapore’s debit card network—show members, such as the Netherlands, have seen progress on
that the barriers between payment systems are becoming the PSD2 stall after implementing the directive into national
easier to bridge.58 Increased interoperability between net- law.63 The United Kingdom—which left the European Union
works for merchant payments can benefit all parties. Con- in 2021 but was still a member state by the January 2018
sumers gain convenience and flexibility; merchants may see PSD2 deadline—has taken the spirit of the PSD2 farther than
increased volumes, lower merchant fees, and quicker access perhaps any other European state. The payment industry in
to funds; and payment system operators may see expanded the United Kingdom has developed market-wide open APIs
revenue through increased transaction volumes.59 to facilitate open banking for a wide variety of banks, fin-
16 | Interoperability in Fast Payment Systems

techs, and other third parties.64 The open-banking initiative network, access to an FPS can provide a link between an
includes a centralized portal that offers a list of all regulated interbank payment system and a closed-loop network.
providers and more than 100 apps that can be accessed via
open APIs. 4.2.3. Merchant Routing Options
The example of the United Kingdom shows that merely Interoperability can also be facilitated through legal deci-
implementing new regulations is insufficient to ensure suc- sions that give market stakeholders the flexibility to choose
cess in an effort such as open banking. While the PSD2 and how they route certain payment types. The Reserve Bank of
the various national laws transposing the directive have Australia has been active in monitoring least-cost routing
been integral to enabling open banking, spurring adoption for debit card transactions.66 Australia has three debit card
requires some level of market collaboration to ensure that networks that merchants can use to route POS and e-com-
new services have a chance at success. This collaboration merce transactions: the eftpos domestic debit scheme and
requires not only bringing in the perspective of new players, debit card networks operated by Visa and Mastercard. When
such as fintechs, but also outlining the benefits to traditional customers provide their PIN for debit card transactions, they
players, such as banks. also choose the network to use. But when making a con-
tactless card payment, the customer does not choose the
4.2.2. Authorization (Banks versus Non-Banks) network through which the payment is routed. Since the
Authorizing access to bank accounts for registered third domestic eftpos network now has contactless capabilities,
parties as envisioned in the PSD2 mandates access only merchants can now choose to route contactless payment
to customer bank accounts; the PSD2 does not mandate through their network of choice.
access to an underlying payment system. The authorization The principle of least-cost routing67 could also be expand-
of entities to join a payment system can occur either from a ed to non-card networks as well. As FPS-based POS/e-
payment system regulation or as part of a system’s scheme commerce options continue to expand (typically using a
rules (which themselves must be in compliance with all rele- mobile-payment app, as is done in Sweden and Denmark),
vant laws and regulations in that jurisdiction). This may facil- merchants will have another option for routing payments.
itate interoperability between non-bank PSPs and banks in Merchants or their bank could then choose to route a con-
a given market. The United Kingdom’s Faster Payments Sys- tactless or mobile payment via the cheapest network or
tem (as well as the Bacs ACH system and check image-clear- according to other priorities. For example, an FPS network
ing system) allows for direct access by authorized non-banks would provide a merchant with instant access to funds,
(either with an e-money license or a payment institution compared to the delayed access to funds when processed
license).65 Providing direct access to a payment system for by a debit card network. From a consumer’s perspective,
authorized non-banks can help improve service to end users the network in which payments are routed is usually unim-
and control risk (by making non-banks either open a settle- portant. But a merchant may see real benefits to having the
ment account at the central bank or use a settlement cor- ability to route payments in the cheapest, faster, or most
respondent). In this case, authorizing non-banks does not efficient network. In the long run, routing more POS/e-com-
by itself enable interoperability between payment systems. merce payments via an FPS network can affect the pricing
But if an authorized non-bank operates its own closed-loop of payment services.
5 BEST PRACTICES FOR FAST PAYMENT
SYSTEM INTEROPERABILITY

Increasing interoperability of FPS and fast payments-based 2. Identify existing systems with common use cases or
services can help boost efficiency, grow network ubiquity, operational similarities to FPS: Assess existing legacy
increase financial inclusion, and lead to more competition payment systems or closed-loop systems for overlaying
and innovation in the fast payment ecosystem. There are use cases. P2P transactions are a clear overlapping use
many potential approaches to FPS interoperability, but case, for example, between FPS and closed-loop systems.
they will depend on the specific challenges or problems RTGS and FPS are operationally similar but may require
that need to be solved, the legal and regulatory context, different operating rules depending on the transaction
and the stakeholders in the market(s), and they will be lim- value.
ited by inflexible technology and/or processes associated
3. Perform a cost-benefit analysis: A key consideration
with legacy systems. Because any interoperability initiative
should be how the costs of enabling interoperability with
will necessarily depend on these factors, there is no sin-
existing systems (for example, disrupting or changing
gle blueprint to achieve interoperability. In some instances,
existing systems) can be weighed vis-à-vis the benefits.
it may make sense to focus on the application layer and
Achieving interoperability on the scheme or application
leave the underlying payment infrastructure untouched.
layer may be less disruptive than achieving interopera-
In other cases, interoperability may be enabled by using a
bility between underlying systems (clearing and settle-
common data standard or through common scheme rules.
ment mechanisms). Or it may be infeasible to require
Other markets may have a plethora of closed-loop schemes
merchants to invest in a completely new card terminal
(for example, mobile-money schemes) that result in a frag-
or POS technology. It is also possible that this assessment
mented environment that requires new regulation to make
may lead to the development of a new infrastructure or
it interoperable.
scheme, as the United Kingdom is currently pursuing
Regardless, best practices to consider when enabling
with the NPA. Each market will have a different mix of
interoperability of FPS with other payment systems include
payment systems and closed-loop networks, so deter-
the following:
mining the proper level(s) for interoperability will have to
1. Understand the key challenges facing the current be led by a wide array of market stakeholders.
payment ecosystem: Such challenges may include a
4. Assess IT and business processes related to exist-
fragmented landscape of closed-loop payment options,
ing payment systems: Building interoperability will
a lack of fast payment adoption, or inefficient and costly
be successful only with a detailed view of the technical
payment processing among banks (particularly in a
infrastructure and business processes for each payment
cross-border context).
system that may require links. This will help determine

| 17
18 | Interoperability in Fast Payment Systems

the type of interoperability that can/should be pursued. bank payment systems (for example, ACH and FPS) with-
For example, if interoperability between two payment out a change to access requirements, then this step may
infrastructures or schemes with proprietary data stan- be unnecessary. But if interoperability expands access
dards and legacy technology is desired, perhaps it would to new players, a change in scheme rules or business
make more sense to develop an application layer or API processes may be necessary. A major consideration here
gateway to connect the two systems. If two payment may be whether to allow authorized third parties direct
infrastructures share a similar technological basis or data access to the new interoperable payment arrangement,
standard, more direct links between systems may be or to mandate that third parties partner with a financial
more appropriate. institution that holds a settlement account at the central
bank. This determination is one of many that each mar-
5. Identify which layer(s) of payment system require
ket will have to make when expanding interoperability
harmonization (for example, infrastructure, scheme,
between payment systems.
or services): Once an understanding of the IT and busi-
ness processes in payment systems and related legal 8. Build technical and operational specifications and
and regulatory frameworks is achieved, the next step is develop a request for proposal: If a decision has been
determining which level of interoperability is appropri- made to build a gateway or an access layer to link pay-
ate for the stated goals of the initiative. This may occur ment systems, the technical and operational specifica-
on (one or more of) the following three levels: (1) infra- tions should be detailed at this stage and can be turned
structure, (2) scheme, and (3) applications. into a request for proposal for tender to the market. Even
if this gateway is being built in-house (for example, by
6. Review legal and regulatory frameworks: Legal and
a central bank or payment system operator), the tech-
regulatory frameworks may require updating to allow for
nical and operational specifications will be necessary at
interoperability between payment systems. For example,
this stage. These design specifications will also assist in
interoperability between an FPS and a closed-loop net-
the crafting of new scheme rules or additions to existing
work offered by a third party may be legally difficult if
scheme rules.
only banks are allowed access to an FPS. Would interop-
erable links between an FPS and a closed-loop network 9. Consult stakeholders, if going to market: The consul-
be considered “access” to the FPS by the third-party tation should assess the market need and readiness for
PSP? In some cases, new laws or regulatory frameworks participation in the interoperable infrastructure.
may be necessary. In other instances, legal clarifications
10. Set a timeline and end date for when the interopera-
on existing laws and regulations may be sufficient to
ble connection will go live: Once a decision has been
determine the level of interoperability that is allowed in
reached on building a gateway to link payment systems,
a given market. Additionally, interoperability between
relevant stakeholders should set a timeline and a firm
payment systems may require new regulations to ensure
end date for the implementation of the gateway. Hav-
that data security and data privacy are ensured under
ing a clear timetable and end date is crucial to provide
the new arrangement, particularly in a cross-border con-
guarantees to payment system stakeholders and system
text.
operators alike.
7. Develop a framework for which entities can access
11. Conduct testing: Connecting two systems through
interoperable connections: One of the key outcomes
standardization or API connectivity does not guarantee
of any interoperability initiative is expanding the reach
the smooth interoperability of payments. Stakehold-
of payment services. In many cases, this may involve
ers will need to test cross-system payments vigorously
the inclusion of third parties who either do not have
and be prepared to make additional changes once an
legal access to interbank payment systems or choose
interoperable link goes live.
not to access these systems for commercial reasons. If
an interoperable connection merely connects two inter-
6 CONCLUSION

Market stakeholders considering whether to increase Ultimately, the use of any payment system will depend
interoperability between payment systems should under- on the applications and services that a system enables (or
stand that there is no single “best approach” to achieving systems enable). Interoperability between payment systems
interoperability. Some markets may see interoperability at has many potential benefits—expanded reach of payment
the application layer as the best approach, while other mar- networks, increased transparency for system participants
kets may focus on enabling interoperability at the scheme and national authorities, increased efficiencies in domes-
or infrastructure level, due to common data standards and tic or cross-border payments, and increased competition
technology between payment systems. Having a firm under- that leads to more innovative products and services for end
standing of the payment system’s current context and the users. As electronic payment volumes expand and more
goals or use cases that interoperability targets is always a consumers and businesses transact at home and across bor-
vital first step in any successful interoperability initiative. FPS ders, more interoperability between payment systems can
offer a unique opportunity to link payment systems that be expected. FPS in particular offer a foundation for inno-
require speed or availability and can also be used to bridge vative digital payments that can work with other payment
interbank payment systems and their participants with systems and types. The actual level and type of interopera-
closed-loop networks offered by non-banks. FPS interop- bility pursued in any market or region will depend on local
erability also offers the possibility to shut down or replace conditions, legal and regulatory frameworks, and the use
legacy payment systems over time, provided that this is cases and goals that such interoperability hopes to achieve.
desired by market participants. This could be achieved by
consolidating different payment types on a single techni-
cal platform or by migrating payment volumes from legacy
networks to an FPS system (for example, moving all standing
order payments from ACH to FPS).

| 19
7 ACKNOWLEDGMENTS

Organization Contributor
Lipis Advisors Lipis Advisors
World Bank Harish Natarajan
Nilima Ramteke
Holti Banka

20 |
NOTES

1. According to the Committee on Payments and Market Infrastructures, a fast payment can be defined as a
payment in which the “transmission of the payment message and the availability of ‘final’ funds to the payee
occur in real time or near-real time on as near to a 24-hour and seven-day (24/7) basis as possible.”
2. Bank for International Settlements (BIS), “Glossary” (web page), https://www.bis.org/cpmi/publ/d00b.
htm?&selection=177&scope=CPMI&c=a&base=term.
3. Committee on Payments and Market Infrastructures and World Bank Group, Payment Aspects of Financial
Inclusion (BIS, April 2016), 34, https://www.bis.org/cpmi/publ/d144.pdf.
4. Committee on Payments and Market Infrastructures and World Bank Group, Payment Aspects of Financial
Inclusion (BIS, April 2016), 34, https://www.bis.org/cpmi/publ/d144.pdf.
5. https://saylordotorg.github.io/text_developing-new-products-and-services/s04-12-there-is-power-in-
numbers-netw.html
6. For more information on the topic of cross-border payments in the context of FPS, see the corresponding note
that is part of the World Bank’s Fast Payments Toolkit.
7. The National Automated Clearing House Association mandates the use of its proprietary message standard for
ACH transactions over the network, and it designs the required procedures for risk management, data security
and handling, dispute management, and so on.
8. https://www.europeanpaymentscouncil.eu/about-us/introducing-epc
9. Committee on Payments and Market Infrastructures, Cross-Border Retail Payments (BIS, February 2018), 20.
10. Individual scheme participants can agree bilaterally or multilaterally on more ambitious targets regarding the
maximum execution time and amount of an SCT Inst transaction.
11. https://www.europeanpaymentscouncil.eu/sites/default/files/kb/file/2020-07/EPC090-16%20v4.0_QA_
SCT%20Inst%20scheme_Updated%20July%202020.pdf
12. https://www.theclearinghouse.org/payment-systems/rtp/institution
13. https://www.federalreserve.gov/paymentsystems/fednow_faq.htm
14. https://www.bot.or.th/English/AboutBOT/Activities/Pages/JointPress_29042021.aspx
15. https://www.vocalink.com/news-insights/case-studies/case-study-thailand-promptpay/
16. https://www.abs.org.sg/consumer-banking/pay-now
17. https://www.bis.org/review/r200807c.htm
18. A closed-loop payment system involves a network that is developed by a single PSP and connects both parties
to a transaction on an internal network. It is also known as an in-house or intragroup network. For more, see
BIS, BIS Quarterly Review, March 2020, 33, https://www.bis.org/publ/qtrpdf/r_qt2003.pdf.
19. Many markets that have high usage of closed-loop payment systems also see low bank-account penetration,
making third-party closed-loop networks the only option for sending and receiving electronic payments for many.
20. https://kenyanwallstreet.com/safaricom-airtel-telkom-set-to-launch-mobile-money-interoperability-in-kenya/
21. https://www.centralbank.go.ke/national-payments-system /
22. https://www.fpsconsole.hkicl.com.hk/pub/p1/FPSD2005.pdf
23. https://ir.westernunion.com/news/archived-press-releases/press-release-details/2019/Western-Union-Expands-
Real-Time-Global-Cross-Border-Payments-to-India/default.aspx
24. In 2019, India received $83.1 billion from inbound remittances. For more information, see https://
migrationdataportal.org/themes/remittances
25. https://news.xoom.com/s/article/paypal-s-xoom-adds-upi-payments-enabling-nris-and-pios-to-remit-money-
to-india-in-real-time
26. https://ir.moneygram.com/news-releases/news-release-details/moneygram-launches-industrys-first-real-time-
p2p-payment
27. Swish was initially developed as a bank-owned P2P app that clears and settles payments using Sweden’s BiR/
PRT FPS system. Swish has since expanded its scope to include consumer-to-business payments at the POS
and online.
28. See the European Union’s Retail Payments Strategy at https://eur-lex.europa.eu/legal-content/EN/TXT/
PDF/?uri=CELEX:52020DC0592&from=EN.
29. https://www.ecb.europa.eu/press/pr/date/2020/html/ecb.pr200702~214c52c76b.en.html
30. The CoDi app allows banks to exchange low-value mobile payments up to Mex$8,000 in value, with clearing
and settlement occurring via SPEI. See https://www.pymnts.com/news/banking/2021/how-mexicos-central-
bank-plans-to-move-payments-to-digital/.
22 | Interoperability in Fast Payment Systems

31. Retail payments in the United Kingdom have historically been processed using separate infrastructures—
meaning that there has been a mix of rules, standards, and processes to follow. Bringing all of these payment
systems together into one organization has created a historic opportunity to rebuild the core clearing and
settlement infrastructure from the bottom up, simplifying requirements for PSPs through interoperability and
catalyzing innovation. See https://www.wearepay.uk/programmes/new-payments-architecture-programme/.
32. Pay.UK is already developing two value-added service: confirmation to payee and request to pay. See https://
www.wearepay.uk/programmes/new-payments-architecture-programme/new-payments-architecture-core/
33. https://www.finextra.com/newsarticle/34458/sibos-2019-the-adoption-of-swift-gpi-and-impact-on-global-
payments
34. https://www.swift.com/news-events/news/swift-enables-instant-247-cross-border-payments
35. https://www.europeanpaymentscouncil.eu/news-insights/insight/programmable-instant-payments-dlt-
networks-and-distribution-digital-money
36. End-to-end processing times in different FPS may differ slightly, but this difference is measured in seconds,
rather than hours or days, as with some ACH and card systems. Additionally, different FPS may have different
settlement procedures. Some FPS settle payments in real time, while others settle payments on a deferred net
basis.
37. Accomplishing this would require additional mechanisms to translate between message-based FPS and
file-based (bulk) ACH and card networks. For example, sending payments between an ACH system and an
FPS system would require a mechanism for translating between bulk payment files and individual payment
messages. The United Kingdom’s Faster Payments System has such a mechanism for allowing corporations to
send bulk payment files directly to the FPS system. For more information, see https://www.fasterpayments.org.
uk/about-us/types-of-faster-payments.
38. https://www.iso20022.org/catalogue-messages/additional-content-messages/iso-20022-real-time-payments-
group-rtpg
39. https://www.swift.com/our-solutions/mystandards/swift-translator
40. APIs are sets of codes and protocols that decide how different software components should interact, allowing
different applications, processes, and workflows to communicate with one another.
41. The European Banking Authority has developed regulatory technical standards for customer authentication
under the PSD2 and chairs a working group on APIs. For more, see: https://www.eba.europa.eu/regulation-
and-policy/payment-services-and-electronic-money/eba-working-group-on-apis-under-psd2.
42. This is in contrast to proprietary APIs, which are developed by a single institution to be used on a bi- or
multilateral basis with its partners.
43. https://www.cbn.gov.ng/out/2016/bpsd/approved%20guidelines%20on%20transaction%20switching%20
in%20nigeria.pdf
44. https://www.finastra.com/viewpoints/blog/seven-characteristics-payment-api-enabled-hub-all-adding-
multiple-benefits-along
45. https://mojaloop.io/how-it-works/
46. https://www.pymnts.com/digital-payments/2021/early-warning-services-tch-now-allow-zelle-payments-via-
rtp-network/
47. Businesses have different needs for proxy identifiers than consumers do. After all, no business has just one
phone number or email address.
48. https://www.theclearinghouse.org/payment-systems/-/media/1b336b9932b24e1fadee79c3e11693d4.ashx
49. https://nppa.com.au/wp-content/uploads/2019/10/NPP-Process-for-assessing-overlay-services.pdf
50. For more information on the topic of cross-border payments in the context of FPS, see the corresponding note
that is part of the World Bank’s Fast Payments Toolkit.
51. In the European Union, card payments make up over half of all noncash payments. Card payments are
particularly strong for merchant payments. The European Central Bank and other authorities have been active
in developing harmonized European card standards as well as pushing other noncash payment options, such as
SCT Inst (FPS) payments and open-banking options via the PSD2. For more, see: https://www.ecb.europa.eu/
pub/pubbydate/2019/html/ecb.cardpaymentsineu_currentlandscapeandfutureprospects201904~30d4de2fc4.
en.html.
52. https://bankingblog.accenture.com/payment-innovation-extends-marketplace-for-credit-at-point-of-sale
53. https://mobilepay.dk/erhverv/fysiske-butikker/mobilepay-point-of-sale
54. https://docs.adyen.com/payment-methods/swish
55. https://www.cgap.org/research/publication/interoperability-why-and-how-providers-should-pursue-it
 Interoperability in Fast Payment Systems | 23

56. https://www.uschamber.com/co/run/finance/payment-aggregator-explained
57. https://www.cgap.org/blog/how-tanzania-established-mobile-money-interoperability
58. https://www.nets.com.sg/faqs/business/accept-foreign-cards-and-payments/#faq_group1
59. https://www.cgap.org/blog/interoperability-and-customer-value
60. https://www.mygov.in/digidhan/pages/pdf/sbi/NPCI%20Unified%20Payment%20Interface.pdf
61. There are two types of authorized third party under the PSD2: account-information service providers, which
are authorized to access a customer’s bank account information, and payment-initiation service providers,
which are authorized to initiate payments from a customer’s bank account. Both service providers must register
with a national authority (not a European Union-wide authority). For more information, see https://www2.
deloitte.com/content/dam/Deloitte/lu/Documents/financial-services/Banking/lu_psd2-payment-services-
directive2.pdf.
62. https://ec.europa.eu/info/law/payment-services-psd-2-directive-eu-2015-2366/implementation/
implementation-eu-countries_en
63. https://www.computerweekly.com/news/252466212/Why-PSD2-adoption-in-the-Netherlands-is-lagging-
behind
64. https://www.openbanking.org.uk/customers/what-is-open-banking/
65. https://www.bankofengland.co.uk/-/media/boe/files/markets/other-market-operations/
accessfornonbankpaymentserviceproviders.pdf
66. https://www.rba.gov.au/payments-and-infrastructure/debit-cards/least-cost-routing.html
67. Least-cost routing gives the merchant the ability to choose the debit card network with the lowest fees for
contactless payments.