Efficient, accessible and safe retail payment systems and services are necessary to extend access to transaction accounts to the 2 billion people worldwide who are still unserved by regulated financial service providers.
Having interoperable payment services addresses several important challenges regarding financial access and broader financial inclusion. This is because interoperability enables people to make payments to anyone else in a convenient, affordable, fast, seamless and secure way via a single transaction account.
Establishing payments interoperability is a formidable task. Our experience shows it is important to find the right balance between cooperation and competition when reforming retail payment systems. Despite the advantages that interoperability brings, not all market participants will necessarily embrace interoperability initiatives, e.g. if they fear to lose their dominant position and/or competitive advantage. In an earlier Blog the role authorities to facilitate interoperability has been discussed. Central banks are a key driving force in any payment system reform, but they cannot – and should not – act alone. Other regulators – such as financial and telecom regulators – are also important to achieving interoperability.
But what coordination structures are needed to make interoperability happen?
Cooperation among authorities to promote safe and efficient financial market infrastructures is a well-established concept, and international standards (such as the Principles for financial market infrastructures) require central banks, market regulators and other relevant authorities to cooperate, both domestically and internationally.
Collaboration is key to make interoperability happen . If only two partners are involved, they can bilaterally agree on the arrangements. However, the true value of interoperability will materialize if it is implemented at the industry level. At the industry level, a collaborative approach and a working cooperation framework are essential considering the complex arrangements and business rules required to implement interoperable payment solutions. Moreover, some of the challenges to improve efficiency, safety or security can only be overcome by the industry as a whole.
Another reason for cooperation is that no single entity possesses all the knowledge needed to address payment system reforms. However, balancing cooperation and competition among private sector market participants isn’t easy and a lack of coordination and cooperation introduces inefficiencies and duplications - which is relevant not only for interoperability but also for other areas of payment systems development.
How can we best put interoperability into practice?
It’s best to leverage existing coordination structures to realize payments interoperability , especially if interoperability is a market wide-ambition, as opposed to interoperability between selected market participants. Central banks in many countries, such as the Bahamas, Bangladesh, Moldova, and Trinidad and Tobago, have established a so-called National Payments Council (NPC) or National Payments Committee. Other coordination structures have been successfully established on a regional level, such the Euro Retail Payments Board.
NPCs are especially useful in countries and regions that have engaged in significant payments reforms. They consist of a structured mechanism, very often with central bank leadership. The World Bank Group has published model terms of reference for establishing National Payments Council (see annex 2 of this report).
Similarly, many countries have established a National Council for Financial Inclusion (NCFI) as the main body responsible for promoting financial inclusion and coordinating financial inclusion reforms. NCFIs are valuable for the internal coordination efforts needed both during the formulation and implementation of a national financial inclusion strategy, as explained in the report on coordination structures for financial inclusion strategies and reforms.
However, if these structures don’t exist and/or if not all market participants are (yet) interested in interoperability, a taskforce among the market participants can be formed, involving authorities as observers. When it comes to the NPC or the NCFI and interoperability, the role of different stakeholders should be clarified and agreed upon in a memorandum of understanding.
The International Telecommunications Union’s Focus Group on Digital Financial Services, an initiative funded by the Bill & Melinda Gates Foundation, just finished its 6th meeting in Dar Es Salaam, Tanzania. The record number of participants are a proof for the relevance of the topic and the success of the Focus Group in bringing together authorities, development partners, and market participants.
The Focus Group’s Interoperability working group, co-chaired by the World Bank Group, took the meeting in Tanzania as opportunity to publish a comprehensive paper on cooperation frameworks between authorities, users and providers. The document, authored by Jose Antonio Garcia and Hemant Baijal, highlights the need for concerted actions to address barriers in establishing interoperability.
This paper will help the ITU’s interoperability working group develop a recommendation on coordination structures to foster interoperability and ensuring that it doesn’t remain a theoretical concept, but is put into practice for the benefit of all end users.
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