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Written by Karl Kaluza
on September 26, 2023

Payment systems that can talk with different merchants, financial institutions, and countries benefit consumers and businesses. Such interoperability allows a payment system to interact outside of its own network, which is critical to any successful payment system. We're going to look at four major components that are helping drive interoperability in the payments space.

Technical

The technical aspect of interoperability deals with creating standards and having payment systems adhere to those standards. If standards did not exist, payment systems would be isolated from each other, creating many closed-looped systems. Standards allow for cross-network access, which we'll discuss in the next topic.

Also following under the technical umbrella are developments specific to a payment system. These developments include fraud detection, faster processing, and the ability for merchants to get up and running fast and easily with a payment system.

Network

Before electronic payment systems were available, human intervention was required at multiple points from consumer to merchant. This greatly slowed how quickly any payment was able to process payments. Because of human intervention, errors were not uncommon. Modern electronic payment systems are able to communicate with each other because of standards. Standards enable the smooth flow of payment information from consumer to merchant.

Standards in network interoperability allow for cross-border payments. Due to integration standards, service features such as fraud detection can also be plugged into a payment system.

Regulatory

Regulatory interoperability makes the above two components viable. Different countries have different regulations. To provide cross country interaction through payment systems, countries will need to work with each other and, in some cases, adjust their regulations. If regulations are too strict from one country to another, it could result in certain payment systems being unable to work in some countries.

FedNow

The RTP (real-time payment) network is what banks use to send money to each other. When consumers use ACH to transfer funds to another bank, they use the RTP network. The Federal Reserve has devised a new scheme called FedNow, which is meant to enable payments from bank to bank in real-time, 24/7. But it will also need to work with the existing RTP network. This means the two will need to create a new interoperability scheme, which they are in the process of doing.

 

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