As previously discussed, enabling solutions to transmit payments to, and receive payments from, end users served by other solutions will promote broad adoption and ultimately faster payments ubiquity. Even as each solution continues to compete for market share and end users, transmission and settlement of payments across solutions will help solution operators, as well as service providers, to collectively achieve critical mass much quicker by providing a seamless and satisfying user experience. Even if only one or two faster payments solutions initially emerge, the faster payments system needs to address challenges to interoperability in order to ensure equitable access and fair competition for other solutions seeking to enter the market. For example, consistently applied technical standards, coordinated development of digital identities and alias directories, and broad access to settlement mechanisms will facilitate payments that securely traverse and settle across solutions.
Common message format and business process standards help solution operators and service providers deliver payment services with lower operational complexity and greater consistency.[1] Many of the faster payments solution proposals, as well as other existing and proposed solutions, outside the task force have adopted or are moving toward adoption of the ISO 20022 message format and business process standards. While the momentum toward these common standards is encouraging, the use of ISO 20022 alone is not sufficient to ensure interoperability because that standard allows a great amount of flexibility in implementation. For example, solution operators and service providers that implement ISO 20022 message format standards may employ various types of data elements that meet their specific use cases, and these elements may vary across different geographies or different types of users that need to interact with each other. In addition, ISO 20022 business process standards can be implemented with a degree of flexibility, resulting in, for example, varying roles and responsibilities for similar participants in different faster payment solutions. Implementing common message format and business process standards in a consistent way is needed to minimize these complexities. Doing so likely involves development of information on how standards may be translated or mapped, both for payment messages and for supplemental information that may flow with a payment message.
Interoperability also depends on being able to appropriately route payments to payees. To do so, many solutions may choose to use directories and associated routing mechanisms. Directories and routing mechanisms can exhibit a variety of characteristics and perform several functions (see Box D: “Directories and Routing Mechanisms” in the Final Report Part Two ) that may vary by use case. For example, business–to–business payments require directories and routing mechanisms that can carry more detailed remittance information than might be required for a person–to–person use case.
Many solution proposals use alias directories to send payments without the payer having to know the payee’s account number, and some solution proposals leverage digital identities and secure messaging in order to enhance both security and efficiency. However, in order to allow payments to cross solutions and facilitate ubiquity, routing mechanisms need to interact with multiple distinct alias directories. Failure to provide a mechanism like a federated directory design / model or a single national directory could lead to the use or development of multiple, non–interoperable routing mechanisms, which in turn could lead to fragmentation and slow the path to ubiquity.
Although a single national directory would reduce the need for interoperability between different directory models, it could also be a target for cyber theft and raise issues related to data privacy. In addition, because several alias–based payment services are already in the market or in development, creation of a single national directory may not be commercially feasible. Therefore, a federated directory might be preferred. A federated directory model would reduce the time required to achieve ubiquity and might allow for a variety of solutions to coexist, promoting competition, while also providing the benefits of interoperability to end users. Still, a federated directory model would have to address several challenges including overcoming potential reluctance of various directories to share information, achieving a predictable end–user experience, and ensuring the integrity of directory entries in order to prevent fraud and erroneous payments.
Broad access to clearing and settlement mechanisms may also be an important part of enabling interoperability across faster payments solutions. If multiple solutions come to market, there may be cases where payer and payee service providers are not part of the same solution and their separate solutions do not have access to the same settlement mechanism. In these cases, additional settlement layers may be necessary to allow for settlement across solutions. For example, a payer’s provider may need to rely on a third party to access the settlement mechanism of the payee’s provider. These layers may increase the volume and complexity of payment information being transmitted and processed, which in turn increases the time to settle and creates extra points of failure. A common direct settlement mechanism is not technically required for interoperability, but it could address these operational risks posed by additional settlement layers. Furthermore, these challenges are more complex when it comes to cross–border payments. As a result, ubiquity in cross–border payments may take longer to come to fruition compared with faster payments for domestic use cases.
In addition to addressing challenges related to operational risk, wider direct access to common settlement mechanisms could enable broader participation in the faster payments system, including for many smaller depository institutions.[2] Direct access to central bank settlement mechanisms for nonbanks, moreover, could enable them to gain efficiencies by acting as both faster payments solution operators and service providers without a need for intermediaries. However, entities must be eligible and approved for access to Federal Reserve settlement services.[2] Use of existing or enhanced central bank settlement mechanisms by faster payments solutions could enable broader participation by smaller depository institutions, versus solutions that require access to commercial bank settlement mechanisms.
Enabling wider direct access to central and commercial bank settlement mechanisms, however, faces several challenges. For example, modifying the eligibility requirements for access to central bank settlement accounts may require statutory changes. Potential changes would have to consider the integrity of the payment system as a whole and prevent risk from being introduced into what is currently a highly trusted settlement mechanism. While nonbank providers are subject to both federal and state laws, regulations, and supervision, they typically offer a more limited set of financial products and services and may have a different risk profile than eligible depository institutions. In addition, broader depository institution access to commercial bank settlement arrangements could face challenges related to the willingness of the settlement arrangements to manage the participation of potentially thousands of organizations.
In summary, facilitating interoperability requires that several concerns be addressed, including: how the industry will implement message format and business process standards in a way that allows payments to cross faster payments solutions while meeting the needs of individual solutions and leaving the door open for differentiation and competition; how the industry will address the challenges associated with the existence of multiple proprietary directories that perform different functions; and how the industry will achieve fast inter-provider settlement in a way that is fair, safe, and efficient.