The evolution of payments has spanned the dawn of humanity. From the barter system to the use of coins and paper money, humans have always found means to swap value to ensure survival and prosperity.

The last five years have seen unprecedented changes to the methods and speed of how we pay each other.  Most of us now use digital payment systems using cards and mobile wallets, but until now this has largely occurred in a closed loop without interoperability. For example, if a person used a wallet like Venmo they wouldn’t be able to send money to a PayPal wallet, or at a broader level, non-bank players.

In the past, local payment schemes often did not allow non-financial institutions to participate in them. This made moving money slow and expensive, particularly if it was to another country. This is all about to change. Instant, frictionless, interoperable, cross-border payments are coming.

India and Brazil moving ahead

Nowhere can payment advancements be seen more than in the world’s fastest-growing emerging market economies of India and Brazil. Both countries have used digital payments as a huge part of their efforts to enhance financial inclusion.

In India, the United Payments Interface (UPI) scheme has been critical for the country’s financial inclusion efforts and helping people escape poverty.

The UPI is a platform that allows free and fast account-to-account transfers using fintech apps such as PhonePe or Google Pay. This has helped allow for the interoperability of instant payments across bank, card, mobile money and ATM rails.

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Through this innovation, India has been able to achieve 80% financial inclusion in just six years, instead of the 47 years it might have taken in its normal course.

This initiative then helped inspire the Pix payment system in Brazil, which launched in November 2020 and facilitates instant bank-to-bank payments with a small fee.

50 million people across Brazil used this system in 2023. This is a staggering amount considering that many had not even made any account-to-account transfers the year before Pix was launched.

Through the UPI in India and Pix in Brazil, hundreds of millions of people have been able to contribute economically and benefit. The transformation we are watching can ripple across the world and open the doors of finance.

We have also seen pockets where exciting developments are taking place such as in Southeast Asia. In Singapore and Indonesia, cross-border payments have become more interoperable and are fully embedded in the customer journey for example using QR codes for instant payments.

However, much of the rest of the world, and particularly the US, still needs to catch up in pulling all the strands of instant payments together.

US lagging behind

For many financial institutions in the US, there is still so much that needs to be done to get the ball rolling to adapt to the requirements of instant payments, but this will not be easy to achieve.

Many have had to delay ISO20022 programmes, which would create a flexible standard for financial messages enabling interoperability between financial institutions, market infrastructures and the banks’ customers.

First, they need to get across the lines with tactical ISO20022 solutions that rely on the MT to MX payment messages and local scheme fixes. These efforts are rife with the risk of data truncation, money laundering issues and almost no use of the data to drive customer and product innovation.

As soon as these solutions cross the line in 2025, a longer transformation process will begin. This will take these translation services to the XML native platforms that will truly allow the banks to play in the instant payment world.

This could potentially take years, making it harder for these institutions to embed the instant payment rails in an optimal, digital-first experience.

Some recognise the challenge that this will be for banks. Former Barclays CEO, Anthony Jenkins, described banks as “museums of technology with every generation of software and hardware, much of it now off support and towards end of life.”

Unfortunately for banks, many are already shedding huge numbers of customers to nimbler tech-first rivals.

Innovation equals inclusion

While banks have always been convenient one-stop shops for businesses and consumers, the lack of evolution in their product set stands out when compared with the tech-driven pace of change in other industries.

The inability of banks particularly in the US to provide the necessary useful and affordable products hampers the ability for the nation to have an inclusive economy.

Financial inclusion in the US has been stagnating, dropping from second to fourth last year in global rankings.

According to the Federal Reserve, in 2021, 4.5% of Americans currently did not have a bank account. This amounts to 5.9 million people not having a checking or savings account with a bank or a credit union.

As we have seen from the UPI in India and Pix in Brazil, innovation drives financial inclusion. These countries have taught us that there is a strong customer preference for interoperable and instant payments.

A faster payment can help struggling consumers better manage their cash flows, giving them access to their funds sooner and more time to make a payment. The opportunity to receive funds immediately can encourage unbanked households to get bank accounts.

By pulling all strands of instant payments together into an ecosystem of cash, card, wallet, enhancing accessibility for payments to all, this will ultimately boost the economies of each country and help society.

Financial institutions within the US and other developed countries need to adapt to this new reality to remain competitive. If they can’t, they risk irrelevance.

How innovators can benefit

The idea of instant, interoperable, frictionless payments is a reality. The time is now, and many are keen to get involved in the action.

In the US, several retailers such as Target, Kroger and Walmart are jockeying with wallet providers such as Venmo, PayPal and CashApp to compete with banks and their services.

Point of service providers like Clover, Square and Stripe are now processing bank, wallet and card payments and Visa is looking to provide common rails between these players.

Google and Apple have further blurred the boundaries between payment processors, wallets, and banks. A perfect example of this was when Apple’s new savings account drew nearly $1bn in deposits within its first five days.

But it will take more than one company to be able to help Google, Walmart, Target, JPMorgan, PNC, the Fed, The Clearing House, Fiserv, FIS, PayPal, and Western Union integrate their rails to create a virtual eco-system.

Change will come faster with more market entrants and more digital solutions. There are huge opportunities for those who innovate the fastest and who can create the greatest network effect in payments.

There are also far more opportunities to do good. Whether that be the creation of similar schemes to UPI in India in other countries or by helping banks with their journey to instant payments.

Digital payments have already enabled financial inclusion and credit availability at a global scale never seen before in human history. However, there is still much which can be done for the good of society and innovators will be there to capitalise.

Frederic Barbaix is Global Head of Payments at RedCompass Labs