The global payments landscape is rapidly evolving, marked by an explosion of new payment methods, from real-time transfers to central bank digital currencies. While innovation brings opportunities, the coexistence of multiple parallel payment rails has led to increased fragmentation, creating inefficiencies for banks, fintechs, merchants and end users.
Many countries worldwide are discovering how fragmented payment rails complicate the adoption and efficiency of emerging financial technologies.
Fragmentation in practice
In Nigeria, 21 mobile money operators compete alongside traditional bank transfers and the central bank’s eNaira. This crowded, though diverse market is dominated by operators like Paga, which holds a 51% market share but has resulted in high interoperability costs. Despite launching eNaira to promote digital finance, adoption remains disappointingly low – less than 1% of bank customers regularly use it. A fragmented mobile money landscape significantly undermines the CBDC’s value.
Meanwhile, Europe’s SEPA Instant Credit Transfer (SCT Inst), introduced in 2017, set out to enable instant payments across the continent. However, the scheme achieved limited initial uptake due to voluntary bank participation. By 2021, only about 10% of euro credit transfers were processed instantly. Recognising the inefficiencies caused by the lack of integration, the European Union mandated universal participation by 2024, emphasising the need for unified solutions to achieve greater adoption and scale.
Long accustomed to fragmentation, the US payments system includes legacy methods – such as cheques, Automated Clearing House payments and card networks – alongside new instant payment solutions like The Clearing House’s RTP and the Federal Reserve System’s FedNow Service. With neither instant system achieving ubiquity – RTP covers approximately 70% of deposit accounts, FedNow about 35% – banks face extra costs connecting to multiple rails. Moreover, popular payment apps such as PayPal, Venmo and Zelle further split user experiences into isolated silos, complicating transactions for consumers.
In many Middle Eastern countries, the reliance on cheques, including post-dated cheques, remains prevalent due largely to historical criminal laws associated with bouncing cheques. These laws provided businesses and individuals with confidence in navigating payments. Consequently, transitioning to digital payment methods like direct debits represents not just a technical but also a significant behavioural shift. Another barrier to digital adoption in the region is economic; cheques are often priced at little to no cost to end users, offering no direct financial incentive for shifting towards digital alternatives that can be comparatively expensive.
Challenges of new payment rails
Ushering in new systems – CBDCs, real-time payments, ISO 20022 messaging and mobile wallets – brings considerable integration challenges.
The integration of CBDCs with legacy systems, such as bank applications, ATMs and mobile money platforms is critical. Without interoperability, CBDCs risk becoming isolated, low-adoption silos, as seen with Nigeria’s eNaira. Effective integration strategies, such as linking digital wallets to traditional payment channels, will be essential.
While RTPs deliver speed and convenience, the costs of upgrading legacy batch-processing systems and ensuring interoperability among multiple RTP networks can be substantial. For instance, Brazil’s Pix successfully mitigated these issues with standardised QR codes and governance rules, resulting in over 140m active users within 2.5 years.
Transitioning to the data-rich ISO 20022 messaging standard enhances interoperability but requires coordinated migration. If banks adopt the new standard asynchronously, it can create fragmented messaging formats, hindering smooth cross-system communication.
In emerging markets, mobile wallets initially operated as isolated ecosystems. Regulators in countries like Tanzania, Ghana and Indonesia have since pushed interoperability between wallets and bank accounts, significantly improving user experience and adoption.
End-user preferences and pain points
Consumers and businesses prioritise simplicity, speed, security and universal acceptance in payment methods. However, a fragmented payments landscape complicates transactions and confuses users. Studies highlight significant user frustration from managing multiple payment apps and fragmented experiences. For instance, nearly one-third of UK consumers admitted confusion over the various payment options available to them.
Moreover, merchants struggle with the complexity and costs of accepting multiple payment methods. Where too many options at checkout can even erode consumer trust, a simplified payment experience can aid in sustained adoption.
Central banks’ strategies for modernisation
To counter fragmentation, central banks and policy-makers must focus on clear strategic initiatives, such as phasing out legacy methods, improving public education and marketing, and architecting designs for universal utility in mind.
Roadmaps to phase out legacy payment instruments and gradually reducing reliance on cash, help consolidate payment volumes onto modern rails. The Bahamas and Australia have pledged to wind down the use of paper cheques, with the latter phasing them out by no later than 2030.
Initiatives promoting new payments systems, like India’s United Payments Interface and Brazil’s Pix, educate users, address adoption barriers and establish widespread familiarity and trust. Unified branding and extensive outreach have significantly boosted usage.
Payment infrastructure should not only serve broad use-cases but ensure broad participation through open access standards and fair pricing structures. Initiatives like the Bank for International Settlements’ Project Nexus aim at cross-border interoperability, further reducing fragmentation.
A unified vision
While innovation in payments brings immense benefits, unmanaged fragmentation can dilute these gains. Successful stories, such as in Brazil and India, demonstrate that unified systems achieve higher adoption, efficiency and user satisfaction.
Reducing fragmentation involves collaborative efforts between regulators, banks, fintechs and merchants. The end goal: an instant and universally accessible payments system that feel as effortless as sending a text message.
Ultimately, a cohesive payments ecosystem – free from unnecessary complexity – benefits all stakeholders, boosts economic efficiency, enhances financial inclusion and increases public confidence in digital financial services.
Fernando Pacheco is a global financial services executive.
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