Monday, 22 April 2024

Interoperability: The key to the future of cross-border transactions

5 min read

By Kevin Wong

Transformation in the global financial community across a variety of infrastructures, systems, and processes raises the risk of fragmentation.

  • Amid competition, banking sector shows rapid growth
  • Interoperability between payment systems across borders is key 
  • Swift experiment shows it can be done

To survive and thrive during the COVID-19 pandemic, organisations–regardless of size or mission–embraced digital transformation. According to IT research and consultancy firm Gartner, 69% of boards of directors increased their digital business initiatives, which helped speed up digital transformation ad saved many businesses from bankruptcy. Driven by the need to deliver on new and fast-changing customer expectations, this trend in digital investment can only continue across industries, including the financial services sector.

Disruptive technologies have created a new level playing field for fintechs, driving innovations that are transforming the financial services industry, for instance, chipping off services around digital payments that were traditionally offered by financial institutions. 

Amid competition, banking sector shows rapid growth

Despite their success, however, the fintech sector remains small in comparison to the banking sector. While global fintech activity reached around $210 billion in 2021, the size of global financial services in the same year was $23,320 billion. The latter is expected to grow to $25,839 billion in 2022 and up to $37,343 billion in 2026, or at a compound annual growth rate (CAGR) of 9.6%. 

In the face of increasing fintech competition, the financial services industry continues to demonstrate impeccable resilience, undergoing rapid digitalisation and modernisation through initiatives such as cloud migration, upgrading or replacement of legacy systems, mass adoption of smart chips, use of biometric sensors, deployment of branchless banking, use of artificial intelligence and machine learning, analytics, and more. 

However, as each member of the global financial community undergoes transformation, with a variety of preferred infrastructures, systems, and processes, it raises the risk of fragmentation akin to issues associated with digital islands.

Interoperability between payment systems across borders is key 

The industry’s vision of frictionless cross-border payments can only be realised if the different approaches currently being explored across the globe can address the issue of fragmentation. The key to overcoming this is interoperability using common standards that allow financial institutions to communicate seamlessly amongst themselves, and powered by the latest advances in technology. 

Interoperability and overcoming fragmentation on a global scale was a key focus of discussions during Sibos 2022. As the conference revolved around the theme Progressive Finance for a Changing World, the potential of digital currencies and tokenised assets to shape the payments and investments of the future was a highlight of many conversations. 

Currently, nine out of 10 central banks are actively exploring and developing digital currencies. Central bank digital currencies (CBDCs) are largely focused on domestic usage. Multiple CBDC platforms, infrastructures, and systems, on top of traditional payment systems, create issues of interoperability, impeding the ability of businesses and individuals to make frictionless cross-border payments. However, progress is being made. 

Swift experiment shows it can be done

Swift’s recent breakthrough experiment, carried out with Capgemini, found that it is possible for existing infrastructures and payment systems to interoperate with multiple distributed ledgers and CBDC networks around the world, all through a single gateway. 

Beyond CBDCs, cross-border payments also took the centre stage at Sibos. Cross-border payments often undergo a series of translations through a wide range of proprietary messaging standards, which can sometimes lead to data truncation and fragmentation as well as delays in processing payments. 

As the foundation for enhancing cross-border payments, ISO 20022, an open, global standard for financial information, presents an opportunity to promote greater interoperability. It offers richer, more detailed and structured data to be carried in payment messages end-to-end. This enhances straight-through-processing and helps make cross-border payments cheaper, faster and more transparent. 

While the ISO 20022 migration for cross-border payments and reporting (CBPR+) will only begin in March 2023, adoption of this standard is expected to unlock huge opportunities for financial institutions, boosting operational efficiency, enhancing customer experience and enabling new services.

This is a crucial time for banks and fintech organisations to collaborate. Alongside our community of 11,000 financial institutions, we have made tremendous progress in 2022, to not only deliver new solutions improving cross-border payments today, but also pave the way to the innovations of tomorrow. 

Kevin Wong is managing director, Asia Pacific at Swift


Keywords: SWIFT, Interoparabilty, Digitalisation, Technology, Fintech, AI
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