Beyond Babel: A New Blueprint for Global Instant Payments – Part 2
Following on from the topic of fragmentation in Part 1, we have much to discuss.
Techno-genies, the value chain and realism
Rather than lamenting the lack of international interoperability, we should consider whether it is even desirable. Imagine that some payments techno-genie granted our wish that all national schemes were magically migrated to technically interoperable systems. What next?
Well, the systems would have to start connecting to each other, and each connection would have to be tested. Routing rules and tables would need to be created and maintained, so each participant knew which banks are reachable via which CSM. The connections would not be purely technical – each pair of schemes would need to put settlement arrangements in place, and operating rules and processes would need to be agreed.
For an instant payment, time is of the essence, and each additional link in the processing chain adds to the time taken to process the payment. It also increases the complexity and hence the likelihood of failures, and makes it more difficult to track down problems that do occur. Hence each CSM should have a direct bilateral connection with every other for settlement tracking/resolution.
Assuming there will soon be 50 instant payment CSMs worldwide each one would need to operate 49 bilateral connections, giving a total of 1,225 separate connections. Every change in payment message specifications would require all of those links to be re-tested, incurring massive costs and a major disincentive to enhancement and innovation. It was precisely to avoid the problems associated with such an explosion of inter-bank connections that national “hub and spoke” CSMs were introduced.
The idea of a global patchwork of bilaterally connected CSMs is not workable and it’s not going to happen. So how can the vision of international instant payments be realised?
Enter Visa and MasterCard
Here’s an alternative solution. Let’s accept that domestic instant payments are already fragmented and just get on with using the existing schemes while we look for a different solution specifically for cross-border payments.
Now, it so happens that the international card schemes, Visa and MasterCard, have a number of assets and capabilities that could be used for exactly this purpose:
- Global communications networks optimised for real-time payment messages
- Connectivity with every significant retail bank in the world
- Routing mechanisms to ensure payments arrive at the right destination
- Established mechanisms for handling multi-currency payments and cross-border settlement
- Largely automated processes for investigation and dispute resolution
- Sophisticated real-time fraud monitoring systems
- An enviable record for systems availability and reliable operation
Visa and MasterCard could adapt those assets to handle non-card cross-border payments. They have experience in establishing and enforcing global standards for technical communications, so they could define a full set of ISO20022 real-time payment messages much faster than the RTPG. Critically they could ensure that all banks are using them consistently via a technical on boarding process similar to that currently used for card systems, guaranteeing interoperability in the real world, not just on paper.
If Visa or Mastercard introduced the same centralised model to process account payments that they already use for card payments the benefits would be huge. Each bank would only have to establish and maintain one connection providing instant global reach and a single point for cross-border settlement.
This solution would also stack up commercially. Consumers accept that there is a charge for cross-border payments. The current charging levels could be maintained as instant cross-border payments are introduced. The cost to banks would fall compared with the current byzantine correspondent banking arrangements, defraying the costs of implementation. The “card” schemes would tap into a massive new revenue stream. Consumers would benefit from much faster and more reliable international payments with no surprise charges imposed by correspondent banks, and the likelihood of absolute costs falling in the longer term. Current domestic payment schemes would continue unaffected, protecting the investments already made in these systems, and meeting consumer expectations for domestic payments to be cheap or free.
The conclusion is compelling: a centralised solution specifically for international instant payments would be technically simpler, faster to implement, and less costly to operate than a federated approach; it would complement existing domestic schemes and protect the investment made in them; and it would benefit banks, scheme and consumers.
Come on Visa and Mastercard, what are you waiting for?