Banco de Mexico acts as a strong central bank to affect payments adoption. Image: Alfonso21
Unfortunately, the siloed payment network infrastructure of today is not adequate to handle the demands of tomorrow. Given the growth of global commerce, cross-border payments make up $155 trillion annually and are increasing at a rate almost 3 times faster than the global GDP. This is partly why real-time payment adoption is being championed by many across the world but it will take time to adapt, migrate and implement.
So, what will really drive adoption of real-time payments?
Real-time #payments require cooperation and interoperability. Tweet This
Many countries are making incremental improvements to real-time global payments with strong central banks as the primary drivers. Take Mexico and Switzerland as examples:
Over a period of twelve years, Mexico’s central bank, Banco de Mexico has developed the country’s domestic real-time gross settlement system, called SPEI (Sistema de Pagos Electrónicos Interbancarios). Banco de Mexico was able to outpace private payments and settlement offerings because of its unique position in the nation’s financial system. By acting as both rule-maker and the largest volume processor, the central bank was able to make a series of important decisions intended to modernize core payments systems and replace older systems with SPEI.
As a rule-maker, the central bank sets message standards and protocols. Banco de Mexico has also set processing rules, requiring that banks offer real-time settlement to their customers and credit the beneficiary’s account within 30 seconds after receiving the transaction.
In Switzerland, the SIX Swiss Exchange has been in place for 27 years, providing payments, settlement, and acting as a central counterparty for clearing trades. However, this year SIX is “positioning the Swiss domestic payment system for greater innovation, flexibility and efficiency and to enable better integration with regional and global payment schemes.” In the case of SIX, this will involve a bank-by-bank migration to ISO20022.
Here again, the driving force between both the original infrastructure and recent upgrades to the system has been the Swiss National Bank, acting as both rule-maker and highest-volume processor of transactions.
In countries without a strong, activist central bank pressing for adoption, real-time settlement is difficult to achieve. It will require cooperation and adoption between banks and fintech, as well as adoption of a standard for interoperability.
“The role of regulators in supporting private industry groups ‘behind the scenes’ is of critical importance. In markets where regulators sit back, and allow private industry groups to act alone, those groups rarely achieve the effectiveness necessary to lead industry-wide actions. In the United States, for example, regulators have largely absented themselves from decisions around.” —CGAP, “Interoperability in Electronic Payments”
As shown in Mexico, Switzerland, and other places, industry-wide adoption must be driven by forces larger than individual enterprise interest. Without a central authority insisting on standardization, it’s easy to build a new set of siloed ledgers on top of the old one.
This is why Ripple is dedicated to working with regulators to create an interoperable system for cross-border payments, and why we support the Interledger Protocol.