Unifits: The Hidden Costs of Payment Clearings and Silos — A Vision for Global Efficiency

Posted on Jan 24, 2025 by Paul Thomalla, Non-Executive Director, Unifits

Paul Thomalla

Introduction

The world of payments has undergone a fascinating evolution — from paper cheques in the 17th century to modern digital solutions like instant payments, peer-to-peer platforms, and potentially central bank digital currencies (CBDCs). While these innovations have transformed how we transact, the underlying clearing and settlement infrastructure has often lagged behind. Over decades, banks and regulators alike have developed siloed systems to accommodate new payment types, creating a complex patchwork of standards, rulebooks, and compliance obligations.

In today’s interconnected economy, the hidden costs of these silos are becoming increasingly apparent. Financial institutions worldwide devote enormous resources to maintain an ever-growing list of system upgrades, functional changes, and compliance checks. This complexity not only drains capital and talent but also hinders innovation, slows down new product launches, and heightens systemic risk.

Given the scale of these challenges, the time is ripe for a coordinated effort to streamline and modernize payment clearings. For central banks and leading policy-makers, addressing these inefficiencies is not just about cost savings; it is about preserving financial stability, fostering innovation, and meeting the evolving demands of businesses and consumers.


The Scale of Legacy Complexity

Every country has, at some point, adapted its payment processes to local regulations, economic conditions, and technological capabilities. The result is a labyrinth of payment mechanisms —cheques, automated clearing house (ACH) transfers, real-time payments, card-based payments, and more — each layered on top of the other. This historically incremental approach leads to two critical forms of complexity:

  1. Functional Complexity
    Different payment types come with unique rulebooks, message standards, and operational timelines. Overlapping functionalities can exist in multiple schemes — for instance, some legacy systems still process batch-based payments parallel to faster or instant payment rails. While these older frameworks have served their purpose, maintaining them alongside modern solutions increases the likelihood of operational errors, disrupts data flow, and inflates costs.
  2. Global Complexity
    On a global scale, there are well over 1,000 distinct clearing systems. Each system undergoes frequent updates as aligned with industry standards. Multiply these updates by thousands of financial institutions, and the maintenance overhead can be staggering. According to some estimates, banks and their partners spend tens of millions of person-days every year on testing and compliance for these legacy rails.

It is no wonder that multinational banks, which must comply with multiple regional payment systems, experience immense resource strain. Even smaller institutions face significant barriers to entry when considering cross-border expansion or new product development.


The Hidden Costs of Silos

What exactly are these “hidden” costs, and why should central banks care?

  1. Operational and Testing Costs
    • Direct Resource Allocation: Banks often have entire teams dedicated to updating, testing, and integrating various payment rails. This ongoing effort diverts staff and budget from strategic initiatives, such as improving customer experience or exploring new product opportunities.
    • Compliance Overload: Each incremental rule change requires additional layers of testing to ensure that systems meet compliance requirements. The slightest oversight can result in regulatory fines, reputational damage, or systemic disruption.
  2. Systemic Risk
    • Legacy Vulnerabilities: Outdated infrastructures can be more prone to outages, cyber-attacks, and transaction errors. A breakdown in a critical payment clearing system can lead to cascading failures affecting liquidity management, consumer confidence, and financial stability.
    • Fragmented Oversight: When multiple payment rails operate in parallel, central banks and regulators must monitor more channels for fraudulent activity, data breaches, or money laundering. This increases the complexity of oversight and may create blind spots if information is not effectively shared.
  3. Inhibited Innovation
    • Slower Time-to-Market: Launching new payment services becomes labor-intensive in a fragmented environment. Each system upgrade or pilot requires extensive cross-compatibility checks and compliance reviews.
    • Missed Opportunities: With fintech innovation accelerating, especially in areas like open banking, blockchain, and CBDCs, a complicated legacy environment can deter collaborative efforts. Banks may be hesitant to engage in new projects if existing resources are already stretched thin.

Central banks have a clear incentive to address these issues. Not only do inefficient systems burden individual financial institutions, but the ripple effect of poor interoperability can impair broader economic activity, impede cross-border trade, and introduce systemic vulnerabilities.


The Promise and Challenge of ISO 20022

Since its introduction in 2004, ISO 20022 has been touted as a unifying framework for payment messaging. It aims to standardize data formats to enable richer, structured messages — facilitating faster, more transparent, and more reliable payments. For central banks, ISO 20022 offers several advantages:

  • Interoperability: A common language enables seamless cross-border payments, reducing the need for translation layers that introduce complexity and potential errors.
  • Enhanced Data: Payments carry richer data fields, which can improve compliance checks (e.g., Know Your Customer, Anti-Money Laundering). Regulators benefit from improved analytics, while banks can leverage additional data to innovate.
  • Scalability: A consistent messaging standard can be extended more easily to emerging technologies, be it digital currencies or real-time gross settlement (RTGS) upgrades.

However, the transition to ISO 20022 has not been without hurdles. Many institutions discover that adopting the standard requires more than just an IT upgrade; it calls for a deep understanding of payment flows, regulatory nuances, and how to incorporate richer data fields into existing business processes. Skilled professionals who can blend technological, regulatory, and operational expertise are in short supply. This can slow the rollout and temper initial enthusiasm.

Nonetheless, the long-term benefits of adopting ISO 20022 far outweigh the transition pains. By coordinating standardization efforts at a regional or global level — driven by top-level central bank leadership — the financial ecosystem can avoid patchwork implementations that undermine the standard’s very goal of harmonization.


Key Steps Toward Transformational Change

Bringing about a more efficient global payment ecosystem will require concerted action from central banks, regulators, and the financial industry. Below are four essential steps:

  1. Reduce Redundancies
    • Consolidate Payment Types: Central banks can encourage the financial sector to streamline the variety of payment types offered. For example, phasing out cheques or non-essential legacy ACH systems in favor of faster payment options can simplify the ecosystem.
    • Retire Obsolete Infrastructures: Often, older systems remain in operation purely out of habit or fear of migration costs. While caution is warranted, systematically decommissioning outdated clearing rails can yield substantial long-term savings.
  2. Invest in Automation and Testing
    • Automated Compliance Tools: New software solutions can automate large portions of the testing cycle, from rulebook updates to interoperability checks. This reduces both cost and human error.
    • Evergreen Maintenance: Moving away from batch-style updates to continuous integration can shorten innovation cycles. This allows smaller, incremental updates rather than large, disruptive overhauls every 12 to 18 months.
  3. Accelerate ISO 20022 Adoption
    • Global Mandates and Timelines: Central banks and international bodies like the Bank for International Settlements (BIS) or the International Monetary Fund (IMF) can set clear deadlines for ISO 20022 compliance. Providing supportive guidelines and standardized testing frameworks can mitigate the risks of inconsistent adoption.
    • Collaborative Learning: Institutions that have made significant progress in ISO 20022 — such as those in Australia, the United Kingdom, or the European Union’s SEPA region — can share their lessons learned. These case studies help other regions anticipate challenges and develop best practices.
  4. Strengthen Global Cooperation
    • Formalize Cross-Border Task Forces: Many countries operate in isolation when it comes to updating payment systems. By establishing formal committees and task forces, cross-border collaboration can drive more consistent standards and reduce duplication of effort.
    • Align on Regulatory Objectives: Achieving streamlined payment infrastructures is not just a technical exercise; it involves aligning regulations on fraud prevention, AML, data privacy, and more. Clear, harmonized guidelines enable a smoother transition and reduce friction between jurisdictions.

The Central Bank’s Role: Stewardship and Vision

Because central banks serve as both regulators and key infrastructural providers, they are uniquely positioned to shepherd this transformation. Some pivotal roles they can play include:

  • Championing Standardization: By setting official guidelines for ISO 20022 usage, or by mandating specific timelines for retirement of legacy systems, central banks create a unifying force for market participants.
  • Facilitating Public-Private Collaboration: Many of the costs and challenges associated with payment clearing modernization involve private banks and technology vendors. Central banks can convene these stakeholders in a neutral forum to identify problems, prioritize solutions, and coordinate large-scale pilots.
  • Providing Transitional Support: Smaller institutions may struggle with the costs and technical knowledge required to adopt new systems. Central banks can ease this burden through targeted grants, phased implementation schedules, and shared testing environments.

Conclusion

The payment ecosystem stands at an inflection point. Over centuries, financial institutions have layered new payment instruments and clearing mechanisms on top of older ones, leading to a fragmented, high-maintenance infrastructure. As global commerce grows more digital and real-time, the hidden costs of silos — operational overhead, systemic risk, and impeded innovation — have become too large to ignore.

Central banks and policy makers have a vital role to play. By orchestrating the consolidation of redundant systems, championing automation and ISO 20022 adoption, and fostering international collaboration, they can set the stage for a more streamlined and resilient financial landscape. The upside is significant: reduced costs for member banks, enhanced customer experiences, and improved systemic stability. Moreover, a modernized infrastructure lays the groundwork for future innovations, such as digital currencies and real-time cross-border payments.

This transformation, while challenging, is both necessary and achievable. With resolute leadership from central banks and full engagement from industry stakeholders, the global payment ecosystem can evolve beyond its legacy constraints — unlocking efficiencies, reducing hidden costs, and creating a more connected world of finance.

Join Unifits in Paris during Currency Research Payments Week to hear more from Paul Thomalla during his fireside chat with Currency Research CEO Jens Seidl.

About Unifits

Unifits: ISO 20022 Compliance Across the Financial Ecosystem.

Unifits partners with central banks to ensure ISO 20022 compliance and testing excellence across the financial ecosystem. Our purpose-built solutions incorporate deep business expertise to simplify testing, accelerate project timelines, and enhance operational resilience, fostering sustained regulatory alignment and systemic stability.


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