Payment Interoperability: Pipe Dream or Inevitable Future?

October 2024

Fintech & Payments

Nick Maynard

VP of Research

The world of payments has been highly complex and fragmented for many years. Across different types of payments, sectors and countries, interoperability has been a challenge; making consumer and business payments a challenge. However, over time, we are seeing interoperability come to the fore. There are many different ways in which interoperability seems to be increasing; making payment journeys easier in many ways. The question however remains – will we ever reach a fully interoperable payments market?

There are four major interoperability initiatives, all of which are moving payment interoperability closer to being a reality:

Source: Juniper Research

Open Loop Contactless Payments

Contactless payments have seen strong growth in most developed markets, with our latest report in this area finding that the value of contactless payment transactions will grow by 113% over the next five years, from $7.4 trillion in 2024.

Contactless payments are replacing closed loop solutions with open loop ones, particularly in the realm of consumer payments – for example, the shift from closed loop gift cards to open loop prepaid cards, and the introduction of contactless payment acceptance at electric vehicle chargers; replacing app-specific payment systems. However, it must be noted that while these do represent more open loop systems, they are still reliant on cards, with acceptance not being universal for different brands across geographies. As such, while the general shift is promising, there is still work to do.

ISO 20022 Standardisation

Many payment systems have already been, or are in the process of being updated to offer real-time functionality; for instance, UPI in India and Pix in Brazil.

As part of this process, real-time payment systems are typically based on the international ISO 20022 standard, which standardises the way in which systems work. This means that in principle at least, real-time payments should be relatively straightforward to harmonise across borders. This is already ongoing in places, with Project Nexus aiming to connect several schemes in Asia. However, while ISO 20022 simplifies standardisation, this is not the default, and it requires bilateral and multilateral agreements to obtain full interoperability.

Stablecoins

Stablecoins have been increasingly high profile within the payments ecosystem. By using cryptocurrency technology but pegging values to fiat currencies, stablecoins provide the best of both worlds – they are digitally native, but also lack the volatility of cryptocurrency. This has seen stablecoins become an important channel, with brands such as PayPal developing their own stablecoins. Stablecoins ignore borders in the traditional sense, but are still linked to specific currencies. Therefore, while stablecoins are technically interoperable, or at least can be used across borders seamlessly, there are still challenges in using these in certain markets, as well as there being uncertain regulations.

Domestic Scheme Exports

A popular trend we have seen in the export of domestic instant payment schemes. For example, NPCI International Payments has been highly active in exporting the technology underpinning UPI in India, with UPI-based solutions being under development in Trinidad & Tobago, Peru and Qatar. NPCI has also partnered with Google Pay to accelerate global expansion. Pix in Brazil is also making international moves, as are digital wallets such as Alipay, with Alipay+.

However, these schemes are also fragmented, so while boosting interoperability in certain cases, it will take a lot of time to standardise payments in this way. 

Major Challenges

While great strides are being made towards interoperability, these initiatives all have their limitations. There are also some major challenges to interoperability:

• CBDCs: CBDCs are a form of central bank-issued digital currency, which many countries are in the process of exploring and piloting. CBDCs are digitally native, and are intended in many cases to replace cards; moving payment sovereignty back to individual governments. However, this has the effect of migrating traffic from an open loop system back to a closed loop one.
• Missing A2A Interoperability: A2A payments are growing in popularity, with our latest forecasts predicting that A2A payment transactions will rise from 60 billion in 2024 to 186 billion by 2029; an increase of 209%. However, while these schemes are rising in popularity, they are not by default interoperable, with this needing to be added in a multilateral or bilateral way. As such, this will likely remain highly fragmented for the foreseeable future.
• Closed-loop Digital Wallets: Digital wallets are increasingly becoming the default choice for consumer payments, with apps such as Apple Pay, Google Pay, Alipay and WeChat Pay being increasingly popular. While these are more convenient, digital wallets are typically not interoperable – balances typically cannot be transferred between different wallet brands, and payment buttons are linked to specific wallets on eCommerce checkouts. While interoperability is a requirement in certain emerging markets, it is still uncommon in developed markets. As such, wallets are not generally improving interoperability. 

What Path is the Payments Industry On?

As we have seen, interoperability is a mixed picture. However, we believe that the general trend is towards increasing openness. This is primarily because fragmentation is harming payments – cross-border in particular is a challenge for both consumers and businesses. We expect that interoperability will become a key part of payment system design and regulatory requirements. However, some fragmentation is inevitable – a fully interoperable future is still a distant prospect.

Nick Maynard is Juniper Research's VP of Fintech Market Research, and enjoys helping clients to size new market opportunities, set priorities for future growth, and understand their customers through survey projects. He has been interviewed by major news outlets such as CNBC, Coindesk, and the BBC, and has spoken at key industry events including Money 20/20 Europe.