Interoperability in payments: for the old and the new?

Speech by Agustín Carstens, General Manager of the BIS, Singapore Fintech Festival, 8 November 2021

BIS speech  | 
08 November 2021

It is my great pleasure to speak to you today1. I would like to thank the organisers of the Singapore Fintech Festival and the Monetary Authority of Singapore for their kind invitation to be virtually present.

Singapore is the home of one of the BIS Innovation Hub's five global centres. It is also a pioneer in cross-border payments. In April 2021, Singapore linked its PayNow service to Thailand's PromptPay, allowing users to make payments across borders with just a mobile phone number. This is a great achievement. Many challenges had to be overcome – and it is these challenges that I would like to discuss today.

Cross-border payments have been an important priority for the BIS for a long time. Over the years, the BIS has advanced many initiatives to make cross-border payments faster, cheaper and more efficient. Our BIS Innovation Hub is building new technological approaches to strengthen the framework for cross-border payments and, for this purpose, is collaborating closely with a broad range of stakeholders. It is therefore not surprising that the Hub is playing a key role in the G20 Roadmap to Strengthen Cross-border Payments that is being led by the Committee on Payments and Market Infrastructures and the Financial Stability Board in Basel.

The ambitious agenda of work laid out in the G20 Roadmap highlights measures that will improve existing payment infrastructures. But it also highlights the potential of new infrastructures, for example, in the form of central bank digital currencies (CBDCs). Some would argue that we should simply replace the old with the new, but I believe there is benefit in improving what we have, while ensuring that CBDCs apply the lessons from the successes – and limitations – of existing infrastructures.

Many of those lessons concern interoperability.

What do I mean by interoperability? In its simplest terms, interoperability refers to the ability to make something happen in one payment system based on something happening in another payment system. For example, can I initiate a payment from my bank here in Basel, using the Swiss payment system, and have the funds credited to your account in Singapore through the Singaporean payment system? This can only happen if different payment systems can speak to each other – in other words, if they are interoperable.

But the devil is in the details – there are many reasons why payment systems may not be interoperable:

  • The first challenge is Systems may use different technical standards, communication protocols, and supporting hardware and software infrastructure.
  • The second challenge is around data and semantics. Payment systems often speak different languages. Translation can be used to allow systems to speak to each other, but poor translation can lead to data being lost or corrupted.
  • The third challenge concerns the business rules governing payments systems. These rules deal with questions like who can access the payments platform and how obligations are settled. Differences in business rules between payments systems can undermine interoperability.

Let's consider the case of interoperability between fast payment systems. Fast payment systems are live in at least 60 countries today. They provide fast and inexpensive payments between accounts within the same country. If these systems could be connected across borders, they could also provide fast and inexpensive payments between countries.

Linking two payment systems together requires interoperability, which can be complex and challenging to achieve. It is a testament to the work of the Monetary Authority of Singapore, the Bank of Thailand and their respective payment system operators that they have already built a link between their fast payments systems. I wish them success with the forthcoming bilateral connections to India and Malaysia.

The BIS Innovation Hub is working hard to facilitate interoperability between Fast Payment Systems. Project Nexus in our Singapore Centre aims to enable and speed up the process of linking fast payment systems. It will do so by standardising the way that these systems connect to each other. Rather than a payment system operator building custom connections for every new country that it connects to, the operator can make one connection to the Nexus platform. This single connection allows a fast payments system to reach all other countries in the network. This provides a more scalable way to build up instant cross-border payment networks.

The Singapore Centre has published a detailed technical blueprint for Nexus. We will now test its design through a technical proof-of-concept. I'm pleased to announce today that the BIS Innovation Hub will be working with the Monetary Authority of Singapore, the Bank of Italy and the Central Bank of Malaysia, as well as with BCS in Singapore and PayNet in Malaysia, to connect the payment systems of Singapore, Malaysia and the euro zone in an experimental proof-of-concept.  

Nexus is designed to improve interoperability between existing payment infrastructures. But interoperability is just as important when we build something completely new. With the introduction of CBDCs, we have an opportunity to build payment systems that are interoperable from day one.

The BIS Innovation Hub is exploring the use of wholesale CBDCs to improve cross-border payments and settlements between banks and other financial institutions.

Today, banks that want to hold currencies outside their jurisdiction must hold foreign currency accounts with banks – or central banks – in other countries. These accounts are time-consuming and expensive to set up. Without interoperability between national payment systems, manual processes may be needed to ensure that the payments are actually received when expected.

Project Dunbar in the Singapore Centre addresses these interoperability challenges through a multi-CBDC arrangement. Dunbar creates a common platform that can be cooperatively managed by multiple central banks and used by commercial banks and financial institutions in their jurisdictions.

On this platform, multiple central banks would issue CBDCs. Each commercial bank would be able to hold multiple CBDCs, even if the bank does not have a branch or presence in the country issuing that CBDC. Banks can then use these CBDCs in multiple currencies to make payments directly to each other with no intermediaries. This streamlined process could make cross-border payments faster and cheaper for banks and ultimately individuals and businesses.

Dunbar's use of a common platform solves the first two of the three challenges of interoperability I mentioned earlier. It does so by enforcing common technical standards, data architectures and terminology. But the third challenge relating to differences in business rules poses difficulties. Not all business rules can be standardised because many reflect the specific circumstances of individual jurisdictions. Project Dunbar address this third challenge by giving each central bank the autonomy to apply specific business rules at the level of an individual CBDC, within the parameters of a common platform-level framework.

The Dunbar platform will also need to be interoperable with other payment systems – and, in particular, with each central bank's domestic payment systems such as its real-time gross settlement or even future retail CBDC systems.

In conclusion, we all recognise the challenges confronting cross-border payments today. A multitude of systems, built independently over decades, pose an obstacle to interoperability between payment systems. We can improve interoperability between existing legacy systems. But, as we plan for future payments systems using CBDCs, we have to consider interoperability from the start. By addressing the technical, terminology and business aspects of interoperability, we can ensure that CBDC systems can speak to each other with fewer of the challenges faced by existing payment systems.

Getting interoperability right could have important implications for the financial industry. Interoperability could ensure that the new world of fintech innovations is open and competitive. It could become the cornerstone on which a new payment ecosystem develops. Open platforms could give rise to a virtuous circle of greater access, lower costs and better services. CBDCs are an opportunity to enable an open finance architecture that welcomes innovation and competition.

All of this is in pursuit of the long-term aim of making cross-border payments faster, less expensive, more transparent and more inclusive. Reaching this goal will require a lot of hard work and close collaboration between the public and private sectors in financial centres around the world. The BIS Innovation Hub will play its part in advancing this agenda. And, with this goal in mind, the Hub's Singapore Centre looks forward to working closely with public agencies and private industry in Singapore to harness the enormous creativity and dynamism that they have to offer.  

1  As prepared for delivery.