Global cashless payment volumes are expected to increase by more than 80 per cent from 2020 to 2025, with the Asia-Pacific region leading this growth with its cashless transaction volume projected to grow by 109 per cent until 2025, as per the PwC Payments 2025 & Beyond report.
However, cashless transactions aren’t the only kind of transactions that have seen a boom. Despite the steep rise in adoption of digital payment platforms, cash in circulation was up by 9.2 per cent and hit an all-time high of ₹31-lakh crore in March 2022. So, while digital payments are growing, cash is nowhere near becoming obsolete.
With rising adoption of digital payments, it is no surprise that innumerable payment platforms have come into existence. These platforms have made payments extremely convenient, allowing users to undertake a wide variety of monetary transactions with anybody, at any time and from anywhere. This is where interoperability enters the scenario and very much deserves attention.
What is interoperability?
Interoperability is the technical compatibility that enables a payment system to be used in conjunction with other payment systems. For example, interoperability allows card / Prepaid Payment Instrument (PPI) Issuers, Payment System Providers and Payment System Participants in different systems to undertake, clear and settle payment transactions across systems without participating in multiple systems. It creates a scenario where regardless of who issues the e-wallet or card, the user can be sure that payments made through these instruments will be valid across payment networks.
Why is interoperability in payments a significant innovation?
Unified Payments Interface (UPI) notched up a new record in April 2022, with the payments interface recording over 5 billion transactions amounting to a total value of 9.83 trillion. By allowing users of other payment apps to make and accept payments through UPI, interoperability has not only accelerated its adoption, but also led to a healthy and competitive environment among payment providers.
With interoperable QR codes becoming mainstream, digital wallet and payment app users will no longer need to worry about making payments to merchants who only accept certain wallets and apps. Regardless of the digital wallet/app one uses, an interoperable QR code will allow them to make inter-wallet/app or cross-wallet/app payments, in turn further increasing the adoption of digital payment platforms.
Add to this the ability to withdraw cash from one’s e-wallet and interoperability leads to a scenario where an e-wallet or an account on a payment app functions much the same way as a bank account. However, digital wallet users aren’t the only beneficiaries of interoperability.
ATMs are an intrinsic part of the payments ecosystem, and have been hailed as one of the most crucial innovations in terms of monetary transactions. While cash withdrawals have been interoperable driving convenience for customers, with cash deposit interoperability entering into this mix, it will be a definite game-changer – meaning customers of one bank can deposit cash in a Cash Recycler Machine /Cash Deposit Machine operated by another bank
With interoperability, White label ATMs (WLAs) have been allowing users to deposit and withdraw cash at their ATM sites. These services are bank-agnostic, meaning WLAs provide these services to everyone regardless of the bank in which they hold an account. Also, recently the Reserve Bank of India directed banks and ATM operators to make the card-less cash withdrawal facility, or the ICCW (interoperable card-less cash withdrawal), available at all the ATMs across banks.
The ease of payments and monetary transactions that come with interoperability is not limited to payments made by users and very much extends to the B2B (business to business) payments space. Creating an interoperable network for payments help businesses receive their payments faster, as these payments can be processed on the day they are initiated. Since buyers do not need to create their account on a different payment platform or make any changes to their payment preferences, interoperability also enables a smoother and more comfortable environment for everyone involved.
The scope of interoperability is not just limited to making life easy for those that are in the payments ecosystem. It also seeks to ensure and increase the levels of financial inclusion. A lot of people in rural and remote areas often do not have access to digital payments and might even lack access to an ATM. In such a situation, allowing them to make all sorts of payments through micro ATMs, e-wallets and even allowing cash withdrawals, can go a long way in making them a part of the financial and banking ecosystem.
The benefits of interoperability extend to small business owners in rural and urban areas. Some interoperable digital wallets make it possible for these businesses and individuals to make cross-border payments that are a lot faster and easier. In the long run, such provisions can make it easier to conduct business and encourage more people to follow their entrepreneurial dreams.
Also, considering it is easier for people to access smartphones, enabling an e-wallet or UPI transaction could be instrumental in bringing a massive section of the population into the banking ecosystem, furthering the cause of financial inclusion.
Undoubtedly, interoperability is a key step towards making payments more seamless and pervasive, and will also go a long way in ensuring improved financial access and a more inclusive banking ecosystem. It has the potential to permanently and phenomenally transform the way in which banking and payments function.
The author is Managing Director at Hitachi Payment Services