BIS Study Finds Lack of API Standards Is Cross Border Payments' Biggest Challenge

The Bank for International Settlements (BIS) published on Friday (July 8) a report highlighting the benefits of interlinking arrangements and application programming interfaces (APIs) to enhance cross-border payments and the challenges that payment operators are facing. 

Both interlinking of payment systems and harmonizing API protocols for data exchange are important elements of the G20 cross-border payments program, the BIS said in the report. This topic is now attracting increased attention due to recent trends in the payment system landscape, especially the introduction of fast payment systems around the world. Interoperability among payment systems is necessary to process and execute cross-border payments from country A to country B without requiring a company in country A to be registered also in country B. 

While payment system interoperability is not strictly dependent on APIs, the use of APIs, and particularly harmonized APIs, can make payment systems more interoperable, the BIS argued. An element that may facilitate the adoption of API and reduce frictions on cross-border payments, according to the BIS, is the continued migration of many payment systems to the ISO 20022 messaging standard. In the coming years, the adoption of the ISO 20022 messaging standard will generate further momentum toward API adoption, given the potential use of a common ISO 20022 data dictionary for APIs. This system has already been adopted by the Bank of England, the European Central Bank and the Federal Reserve to some payment systems like Fedwire and FedNow. Therefore, the increasing adoption of ISO 20022 and APIs may significantly reduce frictions in cross-border payments, according to the BIS. 

See also: The Clearing House Stays on Schedule for ISO 20022 Implementation in Nov. 2023

However, the adoption of APIs, and in particular harmonized APIs may be a challenge for many payment operators. In 2021, the BIS conducted a dedicated survey to understand the planned implementation of APIs by payment system operators around the world. The survey was completed by 55 respondents, from a wide range of payment system types, jurisdictions and levels of economic development. The survey found that a large majority used APIs (65%) or plan to use APIs in the future (20%)  

Yet, a lack of standardization (i.e. protocols, formats, data dictionaries and security features) was cited as the most significant challenge both for payment system operators and for the industry at large contemplating the adoption of APIs (79% of all respondents). This suggests, according to the BIS, that greater international collaboration to prevent fragmentation of standards at the global level is needed. 

The absence of domestic API standards has also been a major reason, with only 38% of payment system operators indicating the existence of domestic standards for APIs. And for the few respondents that did use standards, they cited challenges in adhering to such standards, suggesting a tendency toward fragmentation even with the existence of a standardized API. 

The BIS didn't include recommendations for payments operators or countries to adopt an API or to work on standardized APIs, but the report emphasized the benefits of having standardized APIs and how the recent trends from the main central banks go in this direction.  

Nonetheless, the BIS also warned of the challenges to the harmonization of APIs in a global context, where the technical standards are likely to be more disparate and legal and political challenges more complex. This is particularly the case given that payment systems in different jurisdictions are at different stages of API development and may have legacy systems that have already implemented their own proprietary standards and requirements, the report said. 

European Banking Authority 

The idea of working on a standardized API is not new and EU regulators may be working on one EU standard. The European Banking Authority (EBA) published in June a report about the future of open banking and open finance in Europe and requested  the European Commission “to explore the possibility of having a common application programming interface (API) standard across the EU to be developed by the industry.” 

The EBA acknowledged that introducing a single API standard would bring additional compliance costs, but these would be outweighed by the significant benefits that would accrue as a common API would reduce barriers for new market entrants. 

Read More: EBA Recommends a Standard API for Open Banking in New PSD3