Puzzle

While the CPMI provides a review of current interlinking arrangements, being a bit more prescriptive may help the industry in its quest to connect faster payment systems internationally. Heather McKenzie reports.

Harmonisation and interconnection have been pursued in cross-border payments for decades and despite advances in technology, such as application programming interfaces (APIs) and standards including ISO 20022, fragmentation persists. This has not stopped interlinking projects between payment systems proliferating, however.

In its report to the G20 on the role of APIs in cross-border payments, the Committee on Payments and Market Infrastructures (CPMI) notes that 14 payment systems surveyed said they could establish additional international links with other payment systems within the next five years.

This trend is largely driven by newer payment systems, particularly faster retail payment systems, which are increasingly using APIs for a variety of payment functions and ISO 20022 for messaging.

“The considerations underlying such payment systems are being driven by a range of potential benefits associated with interlinking, including shortening transaction chains, reducing transaction and funding costs, increasing payment speed and transparency, and improving competition in the provision of cross-border payment services,” says the report.

The report provides a review of current interlinking arrangements and provides a “non-prescriptive, high-level framework for thinking about a number of foundational design, operational, policy and risk considerations for establishing interlinking arrangements”. Ultimately, adds the report, operators and authorities must consider their jurisdiction’s unique circumstances in deciding whether an interlinking arrangement effectively serves the cross-border payment needs of its constituents.

Independent payments industry consultant Andrew Muir says the report is a “good, necessary and noble piece of work”, but he questions whether it indeed provides a framework. “The report pulls some punches in that it doesn’t really set out a framework for putting a network of real-time links together,” he says. “It is helpful in providing a list of some of the questions a payments infrastructure should ask. But it isn’t helpful enough to say, ‘If you are doing this, you need to use this’.”

Not prescriptive enough?

Mr Muir suspects there is a natural reluctance on the part of an organisation like CPMI to avoid being too prescriptive but “sometimes prescriptions can be good things”.

For example, if, as the report suggests, standardised APIs are appropriate for interlinking arrangements, it would be helpful if the report set out which of the technical, public, sandbox and data reporting API standards should be followed. The report stops short of this, merely observing that whether or not a payment system pursues an interlinking arrangement, greater harmonisation of financial messaging and data exchange standards “can provide broad global benefits for cross-border payments, including through traditional correspondent banking channels”.

Payment system interoperability may be fostered through a variety of channels such as alignment of business rules, regulatory frameworks, and service level agreements and schemes, says the report. At a technical level, the interoperability of payment systems is a precondition for interlinking arrangements. However, the report acknowledges that interlinking two payment systems can be “a challenging and complex undertaking” in the absence of interoperability, as it may entail connecting separate infrastructures with different legacy technologies and technical standards.

Mr Muir says there is a “natural latency” when it comes to adopting new standards and APIs in the payments world. “Before an organisation rolls out a new version of a particular transaction, it will have to inform everyone that uses that transaction of its plans. Everyone will have to absorb the change and build it into the infrastructure they are using, that is one of the trade-offs with standards.”

Building connections between payments infrastructures is not cheap, he adds, and there needs to be a strong business case to do so. “A big thing holding people back is whether international trade continues to grow in the areas where growth is expected. Added to that are geopolitical considerations – we don’t know how the picture might change and how it will affect the flow of money across borders. It is both expensive and politically charged to build interfaces between payment systems,” says Mr Muir.

At the same time, central banks are committing resources to digital currencies, which, from a payment systems perspective, is a very different form of money and settlement. Creating interoperability between digital and fiat currencies will consume “a lot of infrastructure brain power over the next three to five years”, he adds.

Finally, a more immediate challenge for banks in cross-border payments are the ISO 20022 migrations in the Eurosystem, Bank of England and the Swift network. “There is an awful lot of change happening in some very high risk channels and at this stage we don’t know if that change will be affected in the same way by all of the actors involved,” adds Mr Muir.

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