The world of transactional banking has never been more exciting. Banks and regulators are busy calibrating every technology available and are ready to introduce major, game-changing innovations at each stage of the transactional life cycle.
From mobiles and tablets to social networks, the payments initiation space is seeing major investment towards making the payments system fully accessible to anything and everything customers can lay their hands on.
Evolution in the payments processing space is fuelled by the spread of real-time payment systems around the globe, tougher regulatory demands and the changing dynamics of the eurozone among various other market disruptors.
The delivery space within the payments landscape is busy, with demands for reporting newer data, more efficient cash management and real-time alerts and notifications. In general, each of these activities comes within one of the three types of requirements that a technology team typically works on:
Regulatory requirements: As money laundering and terrorist financing take increasingly complex routes, regulators face sleepless nights in devising checks and processes to tackle these types of financial crime. Banks are therefore obliged to deliver any change or requirement from the regulatory authority as any deviation from these standards can lead to heavy fines and loss of reputation.
Production requirements: These are requirements or changes which, if not catered to, can hamper the bank’s day-to-day activities. As they stem from issues faced in the live systems for customers, they typically come with an attaching urgency and compulsion.
Maintenance, upgrade and updating requirements: These activities ensure that the current system continues to meet normal business demands. They include adding new services for the customer or improving the system’s performance so that it can cope with an increasing volume of transactions. While such requirements are not mandatory, banks can hardly ignore them as the changes help their efforts to stay technologically competitive.
What are the challenges in meeting these requirements?
Among the biggest challenges for banks are:
- Today’s payment system is a complex web of multiple interconnected systems, so even a minor change in any one system poses a potential risk to the others.
- Efforts to mitigate this risk are quite significant.
- Many of these interconnected systems were deployed some years ago. General limitations in the systems development life cycle (SDLC) processes of those times mean that they are not supported by very strong user manuals or documentations, so it is becoming increasingly difficult to maintain such systems.
- Based on operating geography, each global bank supports multiple payment types. Each of them typically operates on different messaging infrastructures, using different message formats. This makes it almost impossible to devise a “one-size-fits-all” solution, resulting in a tremendous overhead expenditure in maintaining all the systems.
Table 1: Payment types offered around the world
|Low- value, high volume domestic payments
||Bulk or automated clearing house (ACH) payments, which take time to settle and give no finality. Almost each country has its own ACH system.
||Separate format for each country.
|High- value, low volume payments
||Typically domestic real-time gross settlement (RTGS) payments, where settlement takes place real time and with finality.
|Real-time or near real-time (NRT) payments
||Normally low value domestic payments, where settlement takes place almost real time. These payments can be made 24/7 each day of the year.
||Different formats. Mostly ISO 20022 used.
|Cross border payments and foreign currency (FCY) payments
||Time taken to settle these payments – along with the total charges incurred -depends on the route of the intermediary.
|Single euro payments area (SEPA)
||A special scenario in the eurozone. Multiple countries have come together and replaced their local ACH systems with SEPA- a pan-European ACH system applicable for member countries. So any low-value payments in these countries follow similar standards and there are no separate domestic ACH systems.
||This is again a special scenario for Europe. The member countries can settle their high value payments to each other using Target2.
- Banks are competing not only with other banks but with non-banking payments service providers too. These non-banks, being generally much smaller, are very nimble and turn around much focussed but highly innovative products speedily. By contrast the sheer size of the global banks means conceptualising and delivering such products is not an easy process.
Going forward, is there a solution?
While there is no ‘silver bullet’, banks and regulators are taking steps to make the overall payments landscape much leaner and faster:
- Legacy systems are being replaced by banks and corporates to support various new payments infrastructures.
- SEPA has simplified the payments landscape in Europe considerably, by eliminating different standards and practices for different domestic clearing and settlement mechanisms (CSMs).
- Real-time payments or immediate payments, fast developing in many countries, are providing both banks and regulators with a good opportunity to re-focus their strategies and make efficiencies by standardising messages across payments type and re-using infrastructure.
Yet in the absence of another SEPA-like, multi-country initiative these steps also have the potential to make the payments landscape much more complicated. Each country regulator could end up supporting different messaging formats for its own real time payments system.
One way to tackle this situation is to adopt a message format that may be used for almost all types of payments and which is scalable to any foreseeable future updates. Currently it appears that ISO20022 is the only format satisfying these parameters. Two recent events evidence the seriousness of the banking industry in considering ISO20022 for payment types which until now have been covered mostly by other message formats:
- A collaboration of Payments Market Practice Group (PMPG), global market practitioners and SWIFT standards has presented the first draft guidelines to implement ISO 20022 for high-value payments (RTGS payments).
- The ISO Real Time Payments Group (RTPG) has published the first draft of ISO20022 messages for cross-border real time payments.
What are the benefits of a common standard for ISO 20022?
There are at least six, which may be summarised as follows:
- A single infrastructure for every kind of payment; domestic or cross-border.
- A great opportunity to bring the various payment methods – ACH, RTGS and NRT – to the same messaging standards and infrastructure, thereby reducing maintenance costs.
- Along with reduced costs, a greater efficiency and focus in maintaining the infrastructure.
- This efficiency should assist further innovation in introducing various value-added services.
- The rich transaction data fields available in ISO 20022 standards can help cater to many future requirements.
- Benefits are not limited to banks and regulators; combined with the rich data fields of ISO20022, corporates can use real-time payments for more efficient cash management.
With more than 200 initiatives worldwide in different phases of implementing ISO 20022 as part of their payments, treasury or cash management upgrade, it seems the eXtensible mark-up language (XML)-based messages are finally powering the much-needed traction for payments harmonisation.