The case for national payment system modernisation

Payment ecosystems have become increasingly diverse and complex

Looking across the globe, payment ecosystems look quite different today compared to just five years ago. The implementation of real-time payment systems in many markets has created new opportunities for payment system participants to deliver value-added services, e.g. request-for-pay payments. However, such systems create new challenges, including real-time fraud and anti-money laundering risks alongside privacy and data protection concerns. Non-bank third parties, e.g. fintech and big tech companies, and other non-traditional players have entered this space, offering a myriad of highly customised and convenient payment options. This poses serious competition to traditional players. Meanwhile, scheme changes and more stringent regulatory oversight have made compliance challenging and more costly, leading to increased business process outsourcing (BPO) by banks. All of this combines to make the case to modernise national payment systems stronger.

Should infrastructures build out the core infrastructure or outsource infrastructure provision?
To what degree should international standards be taken into consideration when developing the messaging standard?
Will outside help be required to operate the system in an efficient manner, or would it be cheaper to outsource day-to-day operations?
How will system participants connect to the infrastructure, to what degree will modern connection methods, such as APIs, be used, and will only participants that settle on their own behalf be allowed to access the infrastructure or will non-settling participants be able to do so as well?

This white paper offers a high-level view on key topics to consider when contemplating payment system modernisation, including the role of national payment system providers in this effort, the importance of interoperability both in terms of domestic ecosystems and cross-border payments, and the significance of focusing on digitisation as a driving force.

As Figure 1 below shows, stakeholders need to think ahead in ways that allow them to appreciate market demands and consider some important questions, such as the following:

The case for national payment system modernisation

National payment system operators need to keep pace with technology

Traditional players have had to reassess their relevance and role in today’s competitive landscape amid rapid changes in the payments industry, largely caused by changing technology and consumer habits.

For instance, the rise of fintechs demonstrated to many banks the extent as to which their legacy core-banking technology is outdated, forcing them to consider how to upgrade their technology stack while maintaining operational resilience. Legacy technology stacks are not able to handle modern, real-time payment processing. Many national payment system operators have come to a similar realisation as they attempt to provide domestic payments ecosystem with infrastructures that can support innovation while maintaining safety, stability, and resilience. The importance of delivering value to the ecosystem has never been greater, while failure to do so could lead to a shift towards systems that offer more modern services. For instance, the increasing pace of real-time payments adoption across the globe is making payments faster, improving liquidity management both for banks and businesses, and enabling new business models on top of creating new products and services. Nevertheless, as mentioned before, payment systems must be resilient and keep up with the challenges posed by fraud, which have been a growing concern globally in the payments landscape.

Another key focus for national providers should be migration to a modern payment system. Issues can arise from changing market priorities and false estimations regarding the scale of the modernisation effort, leading to increased costs. Furthermore, while the system operator’s objective is to complete migration as swiftly as possible, it might not always align with bank timelines, which often requires flexibility, even if the migration is mandated by the regulator. A perfect example of this is the postponement of ISO 20022 migration.

The deployment of migration tools that have been previously proven in other markets is vital to de-risk the process and ensure effective and on-time results, limiting friction between stakeholders. There are different approaches that have worked well in the past, but choosing the right way is heavily dependent on market characteristics such as fragmentation and pre-existing interoperability. A good example is Thailand’s shift to PromptPay, where the government offered an adaptor layer for banks enabling them to leverage existing message standards and speed up the migration process to the new system.

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The role of ISO 20022, cross-border interoperability, and CBDCs

While payment system modernisation has immediate effects on the market, the payment infrastructure needs to be flexible enough to support innovation, adapt to new technological advancements, and to facilitate interoperability with both international counterparts and disruptive new payment instruments. Enabling and supporting innovation is often limited by the rigidity of legacy technologies. The prolonged and costly migration of ISO-20022-based payment messaging in many markets highlights the difficulties of migration processes, especially when the new solution is complex and involves multiple stakeholders across the payments value chain. ISO 20022 has the potential to enhance payment flows and support interoperability between international payment systems once it becomes more widely adopted. The establishment of cross-border connections offers tremendous value in terms of cost, transparency, and speed, boosting international trade. There have been multiple initiatives in recent years to facilitate cross-border flows, such as the recent launch of the Immediate Cross-Border (IXB) initiative between the real-time payment networks in the U.S. and the Euro zone. Another approach includes building bilateral connections between systems, exemplified by the Monetary Authority of Singapore’s pursuit of linking its “FAST” system with multiple other real-time payment systems in the region, including Thailand’s PromptPay.

It is also important to consider the facilitation of interoperability with emerging payment types. The most notable examples are central bank digital currencies (CBDCs), which could disrupt and force national payment systems to reassess their role. CBDCs have the potential to be a faster, cheaper, and safer payment option than many traditional instruments, so payment system providers must prepare for their creation. Establishing common messaging and data standards is key to facilitate the easy flow of funds between CBDC and fiat payment systems. A number of issues can arise such as a failure to establish common technical aspects and legal frameworks and various privacy concerns from a consumer protection perspective. These issues need to be thought through before any payment system upgrade or overhaul takes place.

Payment modernisation brings economies to the next stage of digitalisation

Consumer demand for an enhanced payment experience has put pressure on central payment systems. These pressures include the need for instant, open, secure, and flexible solutions, including cloud-based solutions. Modernisation at the infrastructure level needs to enable participant-level enhancements, including multi-channel strategies (mobile, tablet, desktop, e-commerce, and physical POS, etc.), the consolidation of legacy products (often paper-based), and support of new and innovative products and services such as request-to-pay, confirmation-of-payee, digital authentication methods, and real-time payments. Other issues around enhancing competition via more open participation rules are enabled by changes in the scheme rules as well as promoting new connection methods. Adopting international standards such as ISO 20022 and developing API-based services can go a long way towards creating a future-proof infrastructure solution that enables innovation and competition.

Changes to the core infrastructure do not take place in a silo, therefore it is important that system participants be involved at an early stage in discussions when a plan is being developed. This is true whether the changes are driven by regulatory changes, as was the case with the Revised Payment Services Directive (PSD2 ) in the Euro zone or by system participants such as The Clearing House’s Real-Time Payments (RTP) network in the US. System overhauls should be seen as an ongoing development rather than a one-off project with definite start and end dates. This often means that both infrastructure operators and participants need to shift their mindset to one of continuous, dynamic change rather than static, one-off efforts.

Upgrading to a newer system can help support other national policy priorities, such as promoting innovation and improving financial inclusion such as with Pix in Brazil or the Unified Payments Interface (UPI) in India. Inclusive payment system participation models have become a trend, so payment system operators should be prepared to support a greater number of and more diverse system participants.

Modernisation takes time, so payment system operators should not delay

While the end goal of a more open, inclusive, and innovative payments ecosystem is clear, a “one size fits all” approach does not exist nor would it be helpful if it did because each group of stakeholders have different requirements and priorities. Changes to core infrastructure have typically had a domestic focus, but this should not obscure the global perspective, where the opportunity for standardisation exists.

Every market varies in defining its needs and goals. As of 2021, 66 markets have access to real-time payments, demonstrating the need for harmonisation; add to this the complications around e-commerce and the need for standardisation and international interoperability becomes self-evident. At a high level, improving and addressing ever-changing customer demands, reducing costs, enhancing efficiencies, and opening additional revenue streams are a few areas stakeholders need to consider when looking to modernise. Legacy systems operate across multiple standards and are based on varied technology stacks, hindering harmonisation.

Creating new payment infrastructures is a global trend, as evidenced by Figure 2. Changing consumer needs, the need to remain competitive and the evolving landscape of e-commerce, trade, and digitalisation are forcing payment stakeholders to re-think legacy platforms – it is not a question of “if” but “when” and “how.” Large-scale modernisation initiatives take years to complete, as evidenced by the UK’s New Payments Architecture (NPA) and Canada’s Real-Time Rail (RTR). One key decision the community must make includes how the central infrastructure addresses the “buy or build” question. If the infrastructure is outsourced, decisions must be met regarding how the service is installed: a hosted solution, a cloud-based hosting model, or a licensebased hosting model. System participants must ensure that their staff are trained whereas operators have to decide whether outsourcing day-to-day operations may be a more efficient use of resources, depending on the utilised system. While there is no right or wrong answer to these questions, all stakeholders need to understand what implications these choices have for them and their business.

Changes to payment systems can take many forms. For example, there can be the creation of new systems like Canada’s RTR or TCH’s RTP in the U.S or irregular updates like Iberpay’s SNCE in Spain. There can also be pre-defined incremental updates as with the Zengin system in Japan. Figure 3 shows the World Bank GPSS survey, which outlines the different approaches taken by over 99 central banks. Contrasting approaches are observed primarily due to the differences in strategic outlook and the country’s operational particularities. Regardless of the approach, payments modernisation is not a one-and-done project, but a continuously evolving process.

The time to modernise is now

While there are plenty of questions to answer, this white paper has raised a few key considerations that payment system operators must discuss, sparking a wider discussion within the payments community. While there is no right or wrong answer, working through the issues these questions raise will help operators understand the basic goals around payment system modernisation. Upgrading a system or building a new future-proof infrastructure is not a quick or easy task. The decision whether to build a new infrastructure in-house or to outsource it and whether the new system should be cloud-native with APIs or utilise pre-existing connection methods are critical issues to work through. Furthermore, whether day-to-day operations should be managed by local staff or outsourced remains a key consideration. Thoughtful discussions with stakeholders are also necessary to plan the extent as to which an infrastructure should adopt international standards and be prepared for current trends.

Entire payment communities must come together to think strategically about the market’s future needs. The time to do so is now. As Figure 2 shows, more and more markets have already done so, and banking communities do not want to fall behind.

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