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Innovation in the payments space is as dynamic as it has ever been. New challenges to the old ways of doing things have led to a boom in fresh payment options, prompting major changes in what users expect from their providers.

For Bottomline and the UK’s Payments Systems Regulator (PSR), integrating this surfeit of new functionality is a process of balancing innovation and inclusivity: how to implement great new features while maintaining interoperability.

This balancing act poses a particular challenge in an industry where players must communicate effectively all along the payment chain to deliver a positive customer experience – given that it is built on a foundational layer of ageing legacy infrastructure.

So, how do organisations pull together diverse and often divergent tech stacks to enable an innovative, dynamic set of solutions that work well for customers? And how can new entrants and established players be encouraged to play nicely together, something their individual success is increasingly dependent on?

Charles de Rougé of Bottomline Technologies and Nicole Coates of the PSR, two organisations pursuing a complementary desire to help the payments space evolve, have powerful insights around market. The ability to communicate from one system to another, the scalability, the ability to onboard more volumes… these are strategically critical for a bank. Today, that makes the difference between a successful banking business or not,” he says.

This commitment to dynamic interoperability is reflected in the PSR mission statement: a five-year commitment to support user choice in payment selection, to properly protect consumers from harm and fraud, to promote payment competition, and to encourage industry innovation.

For Coates, achieving these aims is a matter of making sure different tech stacks can communicate with one another effectively. “There are so many different perspectives, and so many different interests – and a lot of technological problems are in fact political ones,” she explains.

“There’s a real challenge here, for the payments industry to think about how we all get better at moving forward agreements that define how we use these new infrastructures, how we use new types of architecture, to set ideas about how we can work together.”

For Coates, facilitating evolution is about fostering consensus on what to pursue, something she describes as the ‘core philosophies of payments’.

Bottomline’s Charles de Rougé and Nicole Coates from PSR discuss how mutual support is the best way for providers to crack the payments interoperability challenge once and for all

the challenges and opportunities facing payments providers. They each represent a different piece of the payments processing jigsaw: Bottomline is a software-as-a-service provider that helps financial institutions manage modern payments, while PSR, an independent subsidiary of the Financial Conduct Authority, with competition and regulatory powers, helps decide how those payments flow best.

In Bottomline’s report The Future Of Competitive Advantage In Payments Banking, more than 300 banks and FIs globally identified the following as the main issues with their current payments infrastructure: legacy systems (47 per cent), lack of operational efficiency (42 per cent), lack of interoperability between internal systems (40 per cent) and scalability (40 per cent). These results indicate why this is such a sensitive topic for businesses everywhere. Additionally, 55 per cent said that adopting new payment rails was their top priority in the next 12 months, with 64 per cent making digital transformation their biggest focus, despite 36 per cent being sceptical or highly sceptical of their current strategy. For de Rougé, the first step to solving these pain points is to ensure interoperability.

“We’ve new technology, new regulation and new payment rails coming to the

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No market participant functions in a vacuum, and de Rougé believes that some of the most successful tech adoptions have anchored themselves on a consensus-based approach. A four-step path to implementation (with a focus on industry harmonisation) is a strategy he believes serves businesses well.

“I use these four concepts: connect, control, comply, and then compete,” he says. “By this method, new infrastructure must connect to existing payment rails and must prove itself to be firmly under control. From here, these new solutions must comply with regulator directives, after which they are finally able to enter direct competition with other market players.” He believes this represents the total package for constructing a saleable industry product.

“With the right level of operational efficiency, and fraud control and detections, you can compete without being a laggard, while being an innovator and growing your competitive advantage,” he adds.

To make this a reality, Bottomline has generally recommended a hybrid approach to its legacy-heavy clients – how they can fully leverage the best of technology, without throwing everything away.

The ability to communicate from one system to another, the scalability, the ability to onboard more volumes... are strategically critical for a bank. Today, that makes the difference between a successful banking business or not

Charles de Rougé, Bottomline

This hybrid approach poses a problem, though – one company can mix and match legacy and bleeding-edge solutions within one tech stack, but how do you ensure this approach plays nicely with other companies’ systems? For Coates and PSR, an exciting new development sits on the horizon. With Pay UK, PSR is launching the National Payments Association (NPA), an initiative that seeks to encourage innovation without leaving organisations behind. It’s a flexible, progressive approach.

“We don’t have to inherit all of the concepts that were decided in Bacs in 1968; there’s a chance now to consider questions like ‘can we improve reconciliation?’, ‘should there be greater degrees of information flow?’ and ‘what do purpose codes do for a business and its payment models?’,” explains Coates, who says this is organised progress, with an inclusive approach for slow adopters.

“It should allow us not just greater interoperability, but also a degree of greater flexibility, so that we should be able to get around challenges like innovation being dependent on the speed of the slowest pupil in the class. The NPA model gives people that added flexibility.”

Fraud protection is a good example of how this approach can work to the advantage of the industry. As payments get faster and often simpler, and as the infrastructure develops, ensuring the same high standards are applied to all new innovations can be a real headache. Again, there is scope for a rules-based, but essentially hybrid, model to deliver the best solution possible. During the 2010s, for example, accounts payable fraud saw a steady rise, spurred on by faster payments and a lack of user verification.

“It added up to this huge problem,” says Coates. “So, we gave direction to some UK banks that they needed to introduce confirmation of payee back in 2019.”

This system authenticates payment recipient details against their registered names, meaning transfers are less likely to go astray when passed from one person to another. The UK is one of the world’s leading advocates of this kind of system, and it’s one that provides solid regulatory grounding that can be complemented by more detailed innovation.

The new ISO 20022 international payments messaging standard – due to be implemented later this year – ensures common best practice when handling sensitive information. And de Rougé believes it could be transformational for the market.

“ISO 20022 gives you the ability to add much more data into each payment. That data is first a challenge for any chief operating officer, but also an opportunity to reduce fraud, have better control, make sure the reconciliation is happening better and quicker, make sure the payments are in the right direction, with the right information.”

“So, it is OK to stick with the old processes, as long as you also leverage machine learning and artificial intelligence to prevent fraud, and ensure you use the great innovation coming from regulations, too. If you combine those things, then you can confidently tell your clients that they’ve much less risk. I think it’s a great competitive advantage.”

Changing the ways in which people spend was never going to be a smooth path to one pre-defined construct. Upgrading payments architecture is complex and needs a consolidated, planned and scaled approach with interoperability front and centre to any strategy. However, the industry needs to ensure that all participants move at the same time or it doesn’t work.

To best enable this ecosystem to grow, users need a system that facilitates development without leaving participants out in the cold – a set of well-defined, inclusive rules to help industry players build towards what could be the best payment ecosystem ever.

Now it is up to the regulators to ensure that this potential is fully realised.

“ISO 20022 is pretty clearly a good answer to central clearing infrastructure,” agrees Coates. “It gives us interoperability, it means that firms that have already built links to 100 switches elsewhere in the world can more easily connect to the UK’s financial infrastructure. And that’s got to be good for all of us.”

Combined with the latest tech solutions, compliance with standards like these can ensure thorough anti-fraud practice.

“New technologies, like machine learning and artificial intelligence, establish the profile of transactions, or of user behaviour, and flag anything out of the ordinary. That will prevent the fraud and detect unintentional fraud ahead of it happening,” says de Rougé.

There are so many different perspectives, and so many different interests – and a lot of technological problems are in fact political ones

Nicole Coates, PSR