Accessible Version
Fit-for-Purpose Payment System Interoperability: A Framework, Accessible Data
Figure 1. Simplified view of elements of a payment system
Figure 1 shows initiation of a payment message by a payment instrument, the exchange of the message across components, and the interpretation by a settlement system resulting in the transfer of funds. First, a payment instrument initiates the creation of a payment message. Then a payment message contains the information necessary to transfer units of value (“funds”) from payer to payee. Then the settlement systems receive and interpret the payment message resulting in the transfer of funds.
Figure 2. Example of levels of interoperation between components in a payment system
Figure 2 shows an up arrow identifying increasing degrees of interoperation from Level 0 to Level 4.
Level 0: No Technical Interoperability. Components share no technical commonality. No technical interoperation may result in interim settlement processes required to complete a payment (for example: some correspondent banking models).
Level 1: Common Communication Protocols. Components share network connectivity, a payment message can be sent and received across a common network (for example: TCP/IP).
Level 2: Common data structures and formats. Components use the same or compatible technical standards for information exchange and reference data to create, transfer or operate on a payment message (for example: ISO 20022, ISO 8583, X9.37i for messaging).
Level 3: Common reference models and harmonized implementation frameworks. Components share a common meaning of payment message information such that custom mapping or translation of the information is not required for message processing (for example: Nacha rules for ACH origination and processing).
Level 4: Common conceptual models and business integration. Components share a native context, designed with common architectural elements and business principles; where sub-components may be shared or interchangeable (for example: closed-loop systems and platforms).
Source: Authors’ adaptation of Wang, Tolk and Wang (2009) Levels of Conceptual Interoperability Model
Figure 3. An approach for mapping the extent and degree of interoperation within payment systems.
Figure 3 shows three boxes representing three distinct stages of a payment flow and questions that may pertain to each. These stages are Initiation and Acceptance, Authorization and Clearing, and Settlement and Reconciliation.
Initiation and Acceptance
• What payment instruments are compatible with which devices? To what degree is interoperation required to initiate a payment?
• If an incompatible payment instrument is introduced, what new configurations, software, hardware, and/or protocols are required to enable acceptance?
• To what degree are components, such as payment terminals interchangeable?
Authorization and Clearing
• Is the format of these instructions and the data within the message standardized and sufficiently harmonized to enable efficient, automated processing for all parties?
• What role do intermediaries play?
• How is payment information exchanged in the payment flow (for example, manual components, software translations, mapping activities or intermediaries)?
• Does sufficient interoperability exist to enable a payment instrument to reach its destination through components operated by different firms?
Settlement and Reconciliation
• Do both payers and payees participate in the banking system and have access to the same services for settling obligations?
• Are intermediaries a party to the payment such that an additional payment in an incompatible system must be initiated following the initial settlement of the first leg of the transaction to complete the intended transaction (Faster Payments Council, 2020)?
• Are reconciliation, or other payment-related files, provided to the parties in a transaction in a standard format harmonized across payment instruments of the same type (for example, can all credit card issuers receive a standard reconciliation file or is customizations necessary)?