Imagine you own a digital wallet. Its primary function is to let you spend viz., shop with partner merchants, make payments, and transfer money to other wallets and bank accounts. Then the same wallet offers a card (any authorized card network Visa, MasterCard, RuPay) to facilitate card-based in-store and online payments. Further, the wallet also comes with a UPI virtual ID to allow payments via QR codes and UPI.
This is payments interoperability making life easy for you.
What is Payments Interoperability?
Now, there are several definitions for interoperability. But at its core, it is the basic ability of multiple digital systems, applications, and databases to connect and communicate with each other.
Payment platforms leverage financial technology to connect and share data among ecosystem partners, viz., banks, payment gateways, payment processors, merchants, and consumers. This integration helps carry out transactions between payment service providers, third-party processors, and other networks without hassles. The interoperability occurs at the origination point, at the network level, or through an intermediary, both in national and international payment systems.
Here are a few common attributes of interoperability.
Payment system interoperability can be at domestic (national) and international levels.
National Payments Interoperability
National payment interoperability is limited to payment systems within a single country. National interoperability usually involves the same type of accounts. It happens between:
- Deposit accounts issued by various banks
- e-money transaction accounts offered by mobile network operators
National interoperability is ensured through bilateral agreements between Payment Service Providers (PSP) and Payment Systems Infrastructures (PSIs). Or through a centralized interoperability solution, with standardized regulatory measures stipulated by the central bank.
RBI’s Mandate for Domestic PPI Interoperability
Governments and Central Banks are giving interoperability a significant push to accelerate cashless ecosystems. RBI aims to make interoperability mandatory for all full-KYC Prepaid Payment Instruments (PPIs) and acceptance infrastructure by 31 June 2022. The move is to drive inclusion in cashless payments, and optimally utilize payment instruments like cards and wallets, given the constraint of scarce acceptance infrastructures like point-of-sale (POS) devices, ATMs, QR codes, and bill-payment touch points. Any user who signs up for a wallet, prepaid card, or UPI on PPI rails should be able to make digital payments via any network.
LivQuik is the first PPI issuer in India to achieve full interoperability as mandated by the RBI. This feat enables customers to enjoy optimized card and UPI payments across wallets. Similarly, initiatives like Central Bank Digital Currencies (CBDC) will further drive interoperability, inclusion, and innovation.
Need for Interoperable Cross-Border Payments
Interoperability in cross-border payments is critical to making financial services accessible, affordable, and reliable. It involves coordination between multiple stakeholders, including central banks and regulators. It encompasses technical, regulatory, and usage interoperability to enable quick, convenient, secure, and seamless transactions regardless of the Financial Services Provider (FSP) network.
According to a recent Visa survey, only 50% of merchants have a cross-border trade-compatible payment processing infrastructure. Without globally interoperable payment systems, small and medium-sized merchants cannot tap into international trade and markets. Interoperability levels the playing field and eliminates the inefficiencies of a closed-loop payment systems, i.e., payments between users of only one payment provider.
An end-to-end interoperable platform delivers access to cross-border payment services through an integrated gateway. It enhances the user experience through its ease-of-use customer onboarding and digital KYC.
A centralized interoperability platform calls for stringent global regulatory compliance and data security standards for utmost security. It enables faster reconciliations with real-time reporting and data-driven insights into payment patterns and customer behavior. Moreover, an automated platform saves time, reduces human error, and cuts costs. It enables infrastructure and data sharing which helps tech-driven payment ecosystems reach economies of scale.
While international interoperability comes with a few challenges, it can be overcome with the support of the regulators, the global schemes, and a compatible business model across international borders and technology.
Global Partnerships with Payment Networks
A clear example of an interoperable cross-border payments partnership is that between India’s UPI and Singapore’s PayNow. The need for faster cross-border payments and financial inclusion has been a catalyst in establishing the link between India and Singapore. The interoperable link between UPI and PayNow, enables instantaneous, cost-effective, and transparent payments across borders.
Now for those new to UPI, it is India’s real-time payment system with a Virtual Payment Address (VPA). It is completely mobile-based and supports person-to-person (P2P) and person-to-merchant (P2M) payments and funds transfers.
And PayNow is Singapore’s real-time payment system available to all participating banks and non-bank financial institutions. It is also a mobile-based system and enables peer-to-peer funds transfer using mobile numbers, VPA, or Singapore NRIC/ FIN. The UPI-PayNow partnership is only the beginning and is established to foster faster and smoother transactions between India and Singapore.
India also holds strategic partnerships with the following payments networks and banks to enable seamless, interoperable transactions on our payments rails.
- Discover Financial Services (DFS), US
- Japan Credit Bureau (JCB), Japan
- Union Pay International (UPI), China
- Royal Monetary Authority (RMA), Bhutan
- Mashreq Bank, UAE
- Lycra Network, France (in the pipeline)
Benefits of Payments Interoperability
Interoperability benefits the entire payment ecosystem, including customers, merchants, end-users, and businesses. In addition to enhancing user experience and helping mitigate security risks, it delivers the advantages below.
- Payment flexibility: The ability to accept all forms of payments is a game-changer. Universal payment acceptance helps customer retention and increases customer reach. Though there are several digital payment systems and digital offerings from payment system providers, customers are not required to sign into multiple systems and complete their KYC many times. Interoperability brings issuers and acquirers together to undertake, clear, and settle payment transactions across payment systems, ensuring universal payments and consumer retention.
- Faster payment system: Electronic transactions are the key to reconciling and collecting payments, unlike cash-based systems. Advanced technology and fast internet connectivity make it easier to increase the speed of transactions.
- Secure payment and POS integration: Integration pushes the transaction directly to the payment terminal and eliminates manual entries, thereby enhancing security.
- Low operational costs: Integrated payment platforms reduce operating costs and seamlessly communicate with multiple devices across different financial service providers. It helps save money on adding new payment terminals.
Addressing Challenges — Getting it Right
Getting interoperability right through open API-based platforms is a start toward harnessing and expanding the payments ecosystem. Interoperability can be tricky when dealing with legacy systems. Technical challenges usually comprise systems that use different technical standards, communication protocols, and related software and hardware infrastructure. Another common challenge relates to data and semantics. Payment systems may use different languages and need to be translated. Inadequate translation leads to corrupted or lost data.
It is crucial to address the regulatory, technical, and business challenges of interoperability to make cross-border payments affordable, faster, transparent, and inclusive. Strategic partnerships with fintech firms, banks, exchange houses, and Money Transfer Operators (MTOs) with a focus on regulatory compliance and technology innovation will pave the way to overcome challenges and enable frictionless international transactions.
Need of the Hour for Today’s Generation
Payments interoperability is the linchpin of today’s digitized economy. When done right, it can lead to greater convenience, speed, reliability, security, and seamlessness. It is the need of the hour today, as it enables people from all walks of life to benefit from the convenience that the cashless economy offers. It can increase service offerings, reduce costs, empower the end-user and help improve payment systems. Thus, interoperability is a strong facilitator for financial inclusion.
By leveraging API-based cross-border payment platforms with simple integrations across domestic switches, bank accounts, mobile wallets/e-wallets, MTO transfers, and forex card solutions, we can enable financial inclusion and seamless payments across APAC and MENA regions. With India to start with and then extended globally.
Along these lines, M2P is proud to partner with LivQuik for UPI services on exiting PPI offerings like cards, wallets, gift certificates, and other products. Thereby enabling interoperable payments on the LivQuik platform.
Want to know more about building interoperable payment systems?
Write to us at firstname.lastname@example.org.
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