Interoperability in Payment Systems
Enhancing interoperability among payment systems has been a longstanding objective due to their often isolated nature. This goal aims not only at improving operational efficiency and boosting digital payment adoption but also at fostering robust commerce, reducing transaction costs, and expanding credit accessibility.
The Value of Interoperability
A study from the International Monetary Fund (IMF), titled “Growing Retail Digital Payments: The Value of Interoperability,” highlights the impact of India’s Unified Payments Interface (UPI) as a prime example. UPI, unlike closed-loop systems, facilitates seamless transactions between users of different payment providers.
Driving Digital Payments Adoption
The role of interoperability in promoting digital payments cannot be overstated. By allowing multiple payment apps to integrate seamlessly, it expands the reach and convenience of digital payments, giving users the freedom to choose their preferred app.
According to the IMF study: “Regions where interoperability increased saw a significant rise in digital payment adoption both in absolute terms and relative to cash.”
Interoperability not only enhances user choice but also simplifies access and paves the way for innovative services within the payments ecosystem. It encourages existing providers to improve their offerings to retain users.
Challenges and Examples
Despite advancements, interoperability remains a challenge in many countries, including the United States, where different payment rails operate on separate systems. For instance, a U.S.-based company might use FedNow for real-time payments while another defaults to ACH.
The IMF study compared UPI transactions with data from an unnamed major fintech firm that operates over a closed network, requiring both parties to use the same wallet app. After sampling both systems, users predominantly chose UPI due to its interoperability, especially for transactions where sender and recipient used different apps.
This trend led the fintech company to eventually join the UPI system, underscoring the significance of interoperability in driving adoption and innovation.