Can Payments Ever Measure Up to the Internet's Expectations?

If people can send e-mails and other data instantly to others, the ability to do the same with payments shouldn’t be far behind.

After all, digital money really is nothing more than data that someone has entered into a computer somewhere, said Stefan Thomas, chief technology officer for Ripple, a real-time currency exchange and settlement provider. "So, how can it be that much slower to send money than it is to send an e-mail?"

The answer to that question comes down to interoperability and how the Internet transformed into a universal tool that uses common standards to move data, Thomas said during a presentation at the annual Chicago Payments Symposium. Ripple currently operates its Ripple Transaction Protocol through a distributed open source Internet protocol.

"The world has changed a lot and we can see globally that there is much adoption for mobile phone and Internet technology designed to provide faster access to information, but not necessarily faster access to financial information," Thomas added. "The payments and financial systems have not kept up with this pace."

Ripple helped trigger an industry effort last year called Interledger to provide banks with faster payment acceptance and settlement, and an improved method for paying transaction fees in local currency. At its core, Interledger seeks to harness the type of technology that transformed the Internet and apply it to financial services.

In its early stages, the Internet operated on separate infrastructures, but its developers "have all found a way to connect and overlay other technologies on top of a common interface underneath it," Thomas said. "Payments are not set up like that."

To get to a common system, it will first take a better understanding of how interoperability works in a payments infrastructure and, more importantly, what it really means to use such an ecosystem.

"Interoperability does not require everyone to do the same thing," said Rich Urban, president of IFX Forum, Inc., a financial messaging standards provider. "But it does require everyone to understand what everyone else does in the process."

Creation of common standards reflects that type of understanding, and adoption of those standards generates the ability for payments to operate within various networks globally, Urban said.

The global movement to accept the ISO 20022 standard for cross-border payments is a prime example. The standard carries the proper coding for banks to accept payments, while also including vital information such as an address for invoicing, the transaction's purpose and instructions for tax withholdings.

But ISO 20022 didn't happen overnight, Urban said. It was a process that began in 2003 and it has taken this long to fine-tune it and get more interest in its benefits and adoption by banks worldwide.

The Federal Reserve Bank task force in charge of the faster payments initiative understands that interoperability is likely the major challenge facing the launch of such a network.

It's understandable, considering the U.S. has never had a prime example of what payments interoperability should look and feel like.

In the U.S., the major card schemes like Visa and Mastercard, or the Automated Clearing House, are incorrectly looked upon as examples of payments interoperability, said Carol Coye Benson, founding partner for Glenbrook North Partners.

"Within a system, we don't think too much about interoperability because we expect all things to work within a separate network," Benson said. "But schemes don't generally interoperate with each other."

The U.S. payments networks operate fine under the current setup, but many within the payments and financial services industries are increasingly thinking about what would happen if they wanted those systems to interoperate, Benson added.

A general consensus is that efforts to bring faster and more secure payments to the forefront will go only as far as their ability to operate on all networks.

The ATM network is an example of a system that ultimately was transformed into a global operation, but had the advantage of ATM transactions mostly being the same no matter where they took place, Benson said.

The U.S. payments industry is also constrained by who is allowed to operate within the industry, and that's mostly just the payments schemes and financial institutions, she added.

"It is awkward at best" that so many non-bank players are active in the U.S. payments market, but have trouble getting technology in place or presenting proposals to banks, Benson said.

That sort of landscape results in hundreds of mobile wallet providers, most of them licensed non-bank providers, trying to advance technology and in the meantime making interoperability an even more difficult task.

"Of those more than 270 wallet providers, many of those don't even interoperate," Benson added.