In February 2024, the government of India held a joint virtual ceremony announcing the launch of India’s real-time digital payment services, the Unified Payment Interface (UPI), in the island nations of Sri Lanka and Mauritius.1 The announcement emphasized how the combination of the three countries’ digital payment systems would improve financial integration in their respective regions. The focus on ensuring such an integration was to ease the administrative burden on citizens, lower transaction costs, and increase productivity in the economy. This vision to strengthen digital connectivity and financial cooperation with other nations has led to initiatives focusing on easing cross-border payments.
While technology-sharing initiatives between countries signal a diplomatic win, they also have the ability to contribute to the achievement of broader developmental goals in partner countries. International financial technology sharing has the opportunity to employ digital currency to improve financial access and inclusion. It is here that the concept of interoperability between digital payment systems of countries kicks in. While many countries have developed their own in-house, nation-wide digital payments ecosystems, they all currently operate in silos within their respective countries. Linking these systems can help unlock economic growth potential, especially in regions with a large share of developing economies. The positive net effects range from increased market access to improvements in trade and investments, and friendlier bilateral relationships between countries.
Why the Focus on Interoperability?
In the 21st century globalized world, consumers and businesses are continuously engaged in cross-border transactions. However, the current financial system still has barriers to achieving efficiency and seamlessness in cross-border commerce. Delays in payments, high currency conversion charges, and very few available payment options discourage the growth of modern-day cross-border commerce.
It is not easy to create and develop a single digital payment system for the world, considering the complexity and variety of international exchange rate systems. A number of countries have fixed their exchange rates by pegging their currencies to others or to a basket of goods. Others have a floating exchange rate system which is determined by the markets. Therefore, with the current exchange rate regime, a single digital payment system can be extremely ambitious and difficult to achieve. The next best option would be to ensure seamless integration of national-level digital payment systems. Some countries have created a thriving digital economy with many others having a growing digital economy which are less dependent on cash as before. Ensuring the interoperability of nationwide digital payment systems can enable businesses and individuals to accept payments from anywhere. It also helps consumers in the digital economy access any market and make purchases with ease.
Tackling the Developmental Agenda
Internationally integrated nationwide payment services affect the digital economy in various ways, including increased efficiency, accessibility, and innovation. These changes contribute to the growth of smaller developing economies by providing greater financial inclusion, facilitating cross-border transactions, and stimulating economic activity.
Firstly, cross-border interoperability of digital payment systems can lower the expenses of doing business internationally by eliminating the necessity of currency conversions, banks acting as financial intermediaries, and simplifying the entire flow of money. As a result, cross-border payments can become more accessible and affordable, thereby helping businesses and consumers save money on additional transaction fees and currency conversion costs.
With lower costs and expenses, interoperable cross-border digital payment systems also streamline the entire payment process and reduce transaction times. Most of the current digital payment systems are real-time payment systems, and when integrated with each other, the efficiency in cross-border transactions can be greatly enhanced. Eventually, individuals and consumers will access goods and services while businesses receive funds in a faster manner, helping improve productivity in the digital economy.
Secondly, as more businesses digitize and more consumers get access to the internet, there are more opportunities for small and medium enterprises in developing economies to become part of the formal economy. This would mean it becomes easier for the government to track, monitor, and regulate such businesses as well. The digital economy is still growing at a rapid pace. According to the World Bank, the digital economy makes up more than 15% of the global GDP and has grown 2.5 times faster over the previous ten years than the GDP of the physical world.2 Interoperability of national payment systems can improve small businesses’ market access due to lower entry barriers. Current regulatory barriers such as export registration costs, and taxes for outward or inward remittances can be reduced or even eliminated by ensuring the integration of national digital payment systems. This can lead to the overall growth of the country’s digital economy while also formalising the economy.
Thirdly, many developing countries rely on remittances (transfer of money by foreign workers or members of the diaspora for use in their home country) as a major contribution to the country’s economy.3 These remittances from family members who work overseas are a source of income for many people. National digital payment systems that are interoperable across borders allow for quicker, less expensive, and safer remittance transfers. This helps recipients access funds promptly and easily, which eventually helps to promote economic growth in their home countries.
Finally, some industries also stand to gain more than others from cross-border interoperability. For example, the tourism sector will become a major beneficiary of such interoperable national digital payment systems. Currently, tourists rely on foreign exchange cards and other credit cards, which charge high exchange rates. Access to home-based financial institutions remains limited for tourists and can lead to unpleasant currency exchanges at local unregulated businesses. If national digital payment systems are integrated, a huge barrier to tourism can be removed, and trust in foreign nationals coming into the country can be instilled.
The Road Forward
While the developmental opportunities are aplenty, a multilateral agreement on this topic has considerable challenges and hurdles to cross. Apart from the geopolitical tensions and contestations, the road to building consensus on a topic like this may be long. There are structural differences in how each country manages its own digital payment systems. There are instances like India where the Reserve Bank has regulatory oversight, while the United States has private companies like PayPal that operate as separate entities. There are also instances where a country might have multiple digital payment systems that are not interoperable nationally.
However, the benefits offered by integrating such national digital payment systems have a huge potential for the growth of the global digital economy. Ensuring this requires collaborative efforts among governments, regulatory bodies, financial institutions, payment service providers, and technology companies.
The first step towards this would be the process of technical standardisation of specific protocols, which can drive seamless integration. Such standards set by international standards-setting bodies and industry consortia can ensure fast and efficient cross-border payments. The Bank of International Settlements (BIS), which is a consortium made up of the reserve banks of all countries, has explicitly argued for easing cross-border payments using digital currencies such as the Central Bank Digital Currency (CBDC).4 As an international institution, the BIS can take the lead in developing baseline technical standards and promote the interlinking of national digital payment systems as a starting point.
Governments and regulatory organizations working together to create uniform and transparent regulatory frameworks governing the usage of cross-border digital payments can be the next step. These frameworks should address concerns, including licensing requirements, compliance standards, consumer protection, and data privacy rules to ensure interoperability while upholding financial integrity and security.
Ultimately, enhanced coordination and cooperation between governments, financial regulatory bodies, central banks, and other industry stakeholders is needed to implement the vision of integrating national digital payment systems. The dialogue, knowledge exchange, and required policy coordination to promote interoperability in cross-border digital payments has already kickstarted. It is now the responsibility of multilateral forums and bilateral country partnerships to take the idea forward and implement this grand strategy for the global digital economy.
- “India Launches UPI, Rupay Card Services in Sri Lanka and Mauritius,” The Economic Times, February 12, 2024, https://economictimes.indiatimes.com/nri/invest/india-launches-upi-rupay-card-services-in-sri-lanka-and-mauritius/articleshow/107621729.cms?from=mdr. ↩︎
- Zia Hayat, “Digital Trust: How to Unleash the Trillion-Dollar Opportunity for our Global Economy,” World Economic Forum, August 17, 2022, https://www.weforum.org/agenda/2022/08/digital-trust-how-to-unleash-the-trillion-dollar-opportunity-for-our-global-economy/. ↩︎
- “How Remittances Affect a Country’s Development,” The Economist, March 20, 2023, https://www.economist.com/the-economist-explains/2023/03/20/how-remittances-affect-a-countrys-development. ↩︎
- “Project mBridge: experimenting with a multi-CBDC platform for cross-border payments,” Bank for International Settlements, October 31, 2023, https://www.bis.org/about/bisih/topics/cbdc/mcbdc_bridge.htm. ↩︎