Interoperability in Electronic Payments: Lessons and Opportunities
A robust environment of interoperability in payments systems benefits all participants in the payments ecosystem. End users, including consumers, merchants, governments, and other types of enterprises, find it easier to make and accept payments. Providers to these end users, including banks, networks, processors and other service providers, gain revenue from payments in interoperable systems that they may not be able to achieve with closed loop (or non-interoperable) systems. Interoperability in payments systems can also produce cost efficiencies and enable superior risk management. Interoperability of multi-party systems, however, rarely happens on its own. Independent development efforts may produce processes or use technologies that are not compatible, and, often, market competitors have reasons to hope that interoperability will not occur, and that their proprietary solutions will “win.”
This paper identifies three ways interoperability in payments systems can be achieved: (i) through simple scheme interoperability, (ii) by connecting networks through network interoperability, or (iii) by creating a business environment that enables parallel system interoperability to occur.
Scheme interoperability is a feature of open-loop payments systems, or “schemes,” which consumers and businesses access through their relationships with their banks. Banks join a scheme and agree to be bound by the rules set by that scheme. Payments can flow from an end user that is the customer of one bank to an end user that is a customer of another bank; both banks are “in the scheme.” Checks, ACH or Electronic Funds Transfer (EFT) systems (including “direct debit” and “credit transfer”), and open-loop debit and credit card systems are all examples of this type of interoperability.
Network interoperability exists when one payment scheme negotiates an exchange agreement with another scheme. This is most typically used for cross-border or cross-regional payments acceptance - allowing the holder of a domestic credit card, for example, to use that card in another country. Network interoperability is rarely used when bank network members are competing for business within a single market. This is because network interoperability would facilitate out-of-network banks competing for business with local banks.
Parallel system interoperability allows the merchant or agent accepting payment from a consumer to participate in multiple schemes. A commercial service provider acts as an intermediary between the various schemes and the merchant. Although the merchant is technically separately accepting payments in the various schemes, doing so is made simple and achieves some of the effects of interoperability. In many markets around the world, for example, merchants accept multiple card brands (Visa, MasterCard, American Express, etc.). These brands do not interoperate, but the experience for the merchant is essentially the same with each brand: this is made possible by products and systems provided to the merchants by card acquirers and processors.