DMI ANNUAL 2024
Interoperable solutions: Benefits and blocks
Ensuring interoperability in financial technologies will enable personalised, accessible and frictionless user experiences for all, writes James Wallis, vice president, central bank engagements and central bank digital currencies at Ripple.
Interoperability is fast becoming an important cornerstone in the world of financial technologies. The seamless exchange of data and functionality between different systems is a key factor in determining how innovation in fintech develops. Ultimately, ensuring interoperability as an element in financial technologies will enable a golden age of personalised, accessible and frictionless experiences for all.
Traditionally, financial data resides in walled gardens (silos), with this information being siloed within individual banks and institutions. This method of data isolation stifles competition, limits consumer choice and hampers the development of truly user-centric financial solutions. These are just some of the challenges that central bank digital currencies and other distributed ledger technology use cases aim to solve – thereby enabling increased financial access, better efficiency and higher levels of innovation.
According to the World Economic Forum’s ‘Central bank digital currency global interoperability principles’ report, to achieve true interoperability, public and private sectors must come together to develop testing via CBDC sandboxes and pilots, while also addressing the standardisation of messaging formats and interoperability between financial infrastructures for clearing and settling transactions. Making this interoperability work successful will involve rigorous testing of both existing and future financial systems and technologies.
The benefits of interoperability are various. First, achieving interoperability means unlocking increased financial access. Individuals can easily send funds across different cross-border financial systems or seamlessly manage their finances through a single, personalised application that aggregates data from all their accounts. As a result, consumers are empowered to take control of their financial lives to make informed decisions, fostering financial inclusion and literacy.
Second, increased efficiency is another highlight interoperability allows, with the ability of CBDCs and DLTs to enable near-instantaneous verification of funds, reducing friction that is commonly seen in cross-border transactions. Increased efficiency can also go towards helping decrease redundant financial data storage systems while streamlining transactions of all kinds. This process enables an even more effective fintech ecosystem.
Lastly, achieving interoperability can, in turn, warrant the financial modernisation of existing processes. From automated investment management to credit scoring based on alternative data sources, interoperability will enable organisations – like financial institutions and governments – to better cater to niche needs and unlock previously untapped markets.
However, this is not to say that the very idea of interoperability is without its own set of challenges – chief among them being competing global and national regulatory frameworks, standardisation hurdles as well as security and privacy concerns. For one, differing government regulations on how interoperability can be achieved makes scalable development of fintech solutions difficult. Regions like Hong Kong and Singapore are leading the charge in regulatory adaptation to emerging technologies like CBDCs, stablecoins and DLTs.
Additionally, standardisation hurdles in the quest to achieve true interoperability must be noted. Differing technological infrastructures across changing data formats and protocols in an already-fragmented market make interoperability challenging. But ultimately, the sensitivity of financial data must never be understated. Fintech innovators need to balance innovation with stringent data protection regulations.
Sharing the outcomes of existing pilot projects is one way to help accelerate the process of interoperability. The Palau Stablecoin report details the benefits of digitally viable, secure and innovative digital currency payments being interoperable with traditional financial infrastructure. But to be an increasingly digital space, the ever-changing fintech landscape will need to continue to evolve.
Based on current use cases, innovation is being driven by a distinct desire for interoperability by financial institutions and consumers alike. The ability to have more financial inclusion, better efficiency and higher transaction rates at lower costs will help enable a future where financial services are tailored, accessible and an empowering factor for all.