Interoperability: The Holy Grail of Modern Payments

Executive Summary

The world of payments is no longer a single, unified system. It has fractured into a series of innovative, powerful, but siloed networks: domestic real-time payment (RTP) systems, SWIFT’s global messaging, emerging Central Bank Digital Currency (CBDC) projects, and private blockchain-based value transfer networks. While this innovation is powerful, it has created a new, fundamental challenge: fragmentation. “Interoperability”—the ability for these distinct networks to communicate and exchange value seamlessly—has become the holy grail of modern finance. Without it, the industry risks creating a more complex, disconnected version of the same problems it’s trying to solve. This report explores the critical need for interoperability and the models emerging to bridge these new digital divides.

1. The Great Fragmentation

For decades, the financial world was built on a “hub-and-spoke” model, with correspondent banking (using SWIFT) at the center. It was slow and expensive, but it was one system.

Today, the landscape is fragmented by design:

• Domestic RTPs: Systems like FedNow (US), UPI (India), and Pix (Brazil) are incredibly fast and efficient within their own borders. But they are “closed loops” that cannot natively speak to each other. A user on Brazil’s Pix cannot pay a user on India’s UPI.
• CBDC Blocs: Central banks are designing their own digital currencies. These will exist on new, separate ledgers, creating “digital islands” of value.
• SWIFT’s Evolution: SWIFT is upgrading its own platform (SWIFT gpi, SWIFT Go) to be faster, but it remains a separate set of “rails” from the new domestic RTPs.
• Private Networks: Fintech and blockchain companies have built their own proprietary networks for value transfer (e.g., Ripple, Circle’s USDC), which operate entirely outside the traditional banking system.

This fragmentation means that a simple cross-border payment might have to “jump” from one rail to another, creating new points of friction, cost, and delay.

2. The Interoperability Challenge: Three Layers

Achieving true interoperability is not just one problem; it’s a series of interconnected challenges:

1. Technical Interoperability (The “Plugs”): How do two systems with different technologies, codebases, and protocols physically connect? This is where Application Programming Interfaces (APIs) are critical, acting as the universal “adapters.”
2. Syntactical Interoperability (The “Language”): Even if connected, can the systems understand each other? This is the problem ISO 20022 is designed to solve. By providing a common data dictionary and message format, it acts as the “universal translator,” ensuring a “purpose code” from FedNow means the same thing to a bank in Europe.
3. Legal & Governance Interoperability (The “Rulebook”): This is the hardest part. If a payment fails, which network’s rules apply? How is settlement finality defined? How are AML/KYC requirements shared across borders without violating data privacy laws?

3. Models for a Connected Future

No single network will “win.” The future is a “network of networks.” Several models are emerging to connect them, building on the foundation of APIs and ISO 20022.

• Model 1: The “Smart-Router” (Orchestration) As discussed in Report 15, a payment orchestration layer acts as an “interoperability hub” for a single corporation. It connects to all the different rails and intelligently routes payments. This solves the problem for one entity but doesn’t connect the networks themselves.
• Model 2: The “Bilateral Bridge” This is when two distinct networks agree to link up. A prime example is the ongoing project to link India’s UPI with Singapore’s PayNow. This creates a powerful, fast, and cheap payment “corridor” between two countries. The challenge is that this model is slow and expensive to scale—creating bridges one by one for 100+ countries is not feasible.
• Model 3: The “Universal Connector” (SWIFT’s Strategy) SWIFT’s entire future strategy is to become this interoperability layer. Their “Transaction Manager” platform is being designed to be a central “connector” that can “talk” to RTP networks, CBDCs, and traditional systems. In this model, a bank sends one instruction to SWIFT, and SWIFT handles the complexity of routing it across multiple networks to its destination.
• Model 4: The “Interledger” (The Blockchain/DLT Vision) This model, proposed by projects like Ripple and the Interledger Protocol (ILP), envisions a “neutral” protocol that sits above all networks. It would act like the internet’s TCP/IP—a common, open standard that any ledger (bank, CBDC, crypto) can use to “packetize” value and send it to any other ledger, without needing a central intermediary.

Conclusion

The creation of new payment rails is the easy part. The hard part—and the most valuable—is making them all work together. Without a robust solution for interoperability, the industry will simply trade one central “black box” (correspondent banking) for dozens of smaller ones. The solutions will likely be a mix of all four models. But one thing is clear: the most valuable financial technology companies of the next decade will be the ones that build the “bridges,” not just the “islands.”