Innovative payment services such as Patm in India and Transfiya in Columbia would not have seen the light of day if their respective financial ecosystems hadn’t been open for new players. It’s difficult for anyone to be able to foresee what the market will demand in terms of financial services five years from now, and what will be possible thanks to rapid advancements in technology. But one thing is clear: if central banks and nations want to encourage healthy competition, partnerships, and foster innovation in payments, they need to design a future-proof central financial infrastructure.
So what is the most efficient way to transform a central infrastructure into an innovation-driven ecosystem?
Here are some best practices from nations that have successfully implemented open ecosystems:
1. Establish common playing rules and standards for all market participants
Creating a well-connected and open ecosystem starts with establishing a set of common standards and guidelines. If the standards, formats and principles are different for the individual participants, it makes creating those valuable, well-integrated services highly complex for everyone. Once standards have been set and communicated to all participants in the financial ecosystem, building and integrating new value-added services will always be more frictionless and less costly.
Bankart in Slovenia, for example, championed this strategy before successfully deploying SEPA Instant Credit Transfer (SCT Inst) in 2019, the pan-European instant payment scheme that focuses on services being available 24/7/365. Shortly after launch and based on the standards, Bankart and participating banks were able to launch a number of new payments use cases in the market. One such service, the instant payments powered service FLIK, enables merchants in Slovenia to accept account-based payments from consumers using QR codes. The merchant will receive funds from transactions in real-time, enabled by the new central infrastructure. Rather than being dependent on the often transaction fee-heavy card options, it now offers both consumers and merchants an instant option to settle the bills at the point of sale.
2. Power it with an API-first strategy
Developing and operating payment solutions and services is an increasingly shared responsibility, where different parties need to come together to deliver individual parts of the payment user experience. Central infrastructure application architecture has traditionally been closed, making new integration and further development complex and time-consuming. But with the recent push in the market for new and easier ways to access and send money, central infrastructure providers have had to revisit their architecture strategy. New market entrants are now increasingly challenging monolithic legacy structures. They have moved from the closed and batch-oriented systems of yesterday to API-based modern applications, with an emphasis on connecting and enabling different parties in their respective ecosystems. When central infrastructure providers offer this kind of architecture, it makes it much easier to expose payment APIs to banks, new fintech players, and non-bank challenger startups – which will further spur growth and new innovation.
One of the best examples in recent years is United Payments Interface (UPI) , the instant payment system developed by the National Payments Corporation of India to facilitate inter-bank transactions. UPI was launched in 2016 and separates customer experience from account ownership, so that consumers are free to initiate payments by using any banking or non-banking app they want, and these providers can easily integrate with the central infrastructure to look up account information and initiate payments.
UPI has designed the infrastructure in such a way that trusted applications – even those that don’t directly participate in the UPI scheme – can access the infrastructure through partner participants, so innovative new payments use cases can come from different parties using the same foundational infrastructure – all while still being regulated by the same processes.
3. Ensure data transparency
One of the key elements in creating a transparent and fair financial ecosystem is to make data insights easily accessible to everyone. This helps establish confidence in the health of the financial ecosystem, while ensuring that fintech players can create services that have a real market need.
While several countries have put a lot of effort into making aggregation data portals, few have been as successful as Pakistan, with its newly redesigned Karendaaz Data Portal, which aggregates data on the country’s financial services, from banking infrastructure to transactions, housing finance and mobile money, as well as selected socioeconomic indicators. Based on a highly user-friendly interface, data points like transaction volume across a number of different payment railways and number of users is easily available.
Having a clear data strategy and roadmap when acquiring or refreshing central infrastructure provides valuable insights for all relevant stakeholders – both domestically and abroad, helping to foster new competition and growth.
4. Design your central infrastructure with openness in mind
When designing and requesting new central infrastructure, it is vital to have a firm view on which services and components should be part of the centralized offer and infrastructure – and which ones should be part of the competitive landscape, with fintechs and banks utilizing the central components to create differentiating and new services. For example, central components can include an alias or proxy service, which identifies a recipient and their payment account (IBAN) with an alternative, like a unique phone number or email address.
If the central infrastructure hasn’t been designed with openness and transparency in mind from the start, it will be a much heavier undertaking to create such openness at a later stage – both from a technical perspective since designing and launching the relevant central components on top of a non-API driven infrastructure is complex – and to ensure that the central infrastructure hasn’t been locked into one specific vendor who owns all the integration layers and opportunities for creating value-added services in the central infrastructure.
One of the key design principles of P27, the cross-border instant payments platform that will enable real-time payments between people and businesses in Denmark, Finland and Sweden, has been to split the different layers into separate RFPs. Hence, a vendor won’t by default own both the central infrastructure as well as the the value-added services layer exclusively. This spurs innovation and competition among different fintech players.
5. Understand that instant payments and open banking regulation are complimentary innovation trends
There has been a lot of regulation across financial ecosystems in the last few years which has put an emphasis on openness, from giving data rights back to end-users with GDPR, to PSD2 and related open banking trends in countries within and outside the EEA. To create successful and highly connected financial ecosystems, nations should look at these trends as complimentary processes to establishing an innovative central infrastructure, rather than as separate and purely regulatory processes.
Instead of asking fintech companies to integrate with all the open APIs of individual banks in a market, having central and open registries for account information, and central access to payment initiation APIs enables financial and non-financial stakeholders to design and build great services and products on top of the new infrastructure.
Since its inception in 2020, PIX, Banco Central do Brasil’s new instant payment system, has seen massive adoption in the market – both in terms of volume, but also in the number of available use cases that rely on the new payments infrastructure. To further drive adoption and inclusion for non-bank participants, Banco Central do Brasil has also proposed to mandate the introduction of open banking to compliment the new PIX solution. Once in place, it will require banks to share customers’ banking data with non-banks too – as well as for non-banks to be able to directly initiate payments on behalf of their customers.
6. Drive implementation in phases to ensure relevancy
While it can be tempting to implement and launch a wide range of overlay-services and advanced central infrastructure from Day 1, history shows that every market has its own specific characteristics. Services which may see great adoption in one country, may see underwhelming usage in other countries. Based on our experience with implementing the RealNet Central technology – FIS’ instant payments solution – we’ve seen that deploying central infrastructure in a phased manner always leads to the most successful launches, while reducing costs and risks related to the implementation project and timeframe.
RealNet Central is built using a modular architecture, meaning that all the components required to run an instant payments scheme can be deployed within nine months. The platform and ecosystem can then be further scaled with additional services and overlay services once the actual market need for such services and more advanced functionality has been verified in the specific region.
When planning a central infrastructure implementation, it makes great sense to split up the deliverables into specific phases. This agile approach allows time to assess which functionality will be required in the market, and for participants – both banks and non-banks – to develop and integrate their innovative services with the new central infrastructure.
In the last few years, we have witnessed highly successful launches of instant payments-powered innovative financial ecosystems across the globe, which have transformed these nations and provided them with the foundation for a future of innovation, inclusion and transparency.
More than 50 countries globally already have a central infrastructure open API in place, or are planning to include such an API going forward. This trend will surely grow in the coming years as the push to also include non-bank financial institutions to the mix continues to grow.
Fredrik Andersen, Client Director, FIS RealNet Central, contributed to this article.