Taking On Technical Fragmentation in Cross-Border B2B Payments

In a payments industry obsessed with connectivity, it’s incredible how partitioned things are.

For example, “technical fragmentation” in payments refers to the disparate systems and checkpoints in multiple countries that funds must clear before finally being released. It’s long been a bane of B2B payments, and particularly the cross-border variety.

The ISO 20022 effort, among others, is meant to remedy this situation by mandating a common language for payments that enables highly secure straight-through processing (STP). That’s the dream, in any case. It’s far from a reality today, although the need is urgent.

"Technical fragmentation is the absence of end-to-end information exchange,” says Frederic Viard, Head of Strategic Product Management – Financial Messaging at Bottomline. “When you need to move money from one country to another, you want a seamless flow.”

Fragmentation occurs where there is a lack of common standards, service level agreements (SLAs), and interoperability between different payment systems. Without consistent rules for message standards and information exchange, transactions (especially those moving cross-border) become complicated and costly.

"In domestic payments, you have fewer issues because there’s one standard, one SLA, one set of rules,” he says. “When you cross borders, you need a common language for payments." The lack of a ‘common language’ allows inefficiencies to loiter and creates increasing costs for banks and businesses at every step of a payment’s journey.

The Impact on Payment Efficiency

Reducing the cost of payments is a serious mission for some of the largest multinationals in banking and finance. In that kind of climate, fragmentation stands out like a neon sign. There are a few reasons why.

Payments face additional processing challenges as they move through various systems with different standards. Viard explains that translating between these standards introduces more steps and increases the risk of exceptions, requiring more human intervention. Without the detailed financial messaging of ISO 20022, payments incur higher costs due to translation issues, complex sanction screening, and delays. Essentially, Viard states, "The more processing steps you have, the more exceptions you have, the higher the cost and the lower the efficiency."

Part of the task is regulatory. According to the report ‘Growth at a Crossroads: Measuring the Cost of Financial Fragmentation,’ from Economist Impact and commissioned by Swift, “Regulators should mandate or incentivise interoperability between different digital financial service providers, establish technical standards for seamless integration and promote the development of shared financial infrastructure.”

ISO 20022 Meets STP

ISO 20022 takes a giant step towards that interoperability by reducing friction, particularly in cross-border payments. This global standard provides the ‘common language’ that links financial institutions worldwide, enabling detailed, seamless messaging.

"ISO 20022 is a richer standard and more structured, which means more seamless cross-border exchanges," Viard says. Its structured format limits the risk of misleading entries and payment processing errors.

By implementing ISO 20022, financial institutions worldwide can not only reduce exceptions and interventions, but improve the accuracy of payment information, enable faster payment delivery, and enhance straight-through processing (STP) rates.

PSPs as ‘Integration Hubs’

Payment partners play a crucial role in defeating technical fragmentation by acting as integration hubs between different payment systems.

Viard describes the function as follows: "Payment partners need to comply with multiple SLAs, multiple connectivity types, and multiple standards. We are a hub for all these requirements."

Payment Service Providers provide essential services, including translation capabilities between different standards, sanction screening across multiple jurisdictions, connectivity to various payment schemes, and interoperability solutions in a single platform or portal.

As for Bottomline specifically, Viard says, “We provide interoperability in a box.” That approach simplifies the complexity of cross-border payments for corporates and banks.

Technology and Interoperability

Given the advances in technology and interoperability happening now, Viard is optimistic about overcoming technical fragmentation. He highlights how structured information in ISO 20022 can prevent errors and improve accuracy: "With ISO 20022, you have structured information. For example, if you put a wrong international bank account number (IBAN), the system will tell you it's wrong before you send the payment."

Future developments in payment technology will likely focus on enhanced API connectivity between payment systems, AI-driven exception handling and routing optimisation, improved regional interlinking of instant payment systems, and standardised service-level agreements for cross-border payments.

By addressing technical fragmentation through these solutions, the payments industry can create more efficient, cost-effective, and dependable cross-border payment systems that better serve businesses with clients in far-flung markets.