This episode on the Payments Podcast focuses on payment transformation and the industry’s progress towards building a digital payments ecosystem.

Marcus Hughes reviews a wide range of topics, such as:

[1.13] COVID’s impact on the world of payments

[8.26] ISO 20022 including timetables and main advantages

[18.17] Real-time & Cross-border payments

[29.20] Emerging payment initiatives

[32.02] Open Banking & PSD2

[39.17] APIs

[44.16] Future of Open Banking

[46.56] Request to Pay

[1.00.37] E-invoicing

As changes are made in the payment landscape, these are designed to make payments faster, more transparent and easier to manage. Making it easier than ever for businesses to pay and get paid. 

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Zhenya Winter: Hello, and welcome to this Bottomline podcast. Today, we’re going to talk about payments modernisation and the industry’s progress towards building a digital payment ecosystem. I’m Zhenya Winter and I’m delighted to be joined by Marcus Hughes, Head of Strategic Business Development. Marcus has a wealth of experience in banking and payments and he’s going to share with us his insights on exciting innovations coming our way. As well as reviewing what’s going well and what’s going not so well. Welcome Marcus and thank you very much for joining us.

Marcus Hughes: Hi Zhenya and thank you for inviting me. It’s always a great pleasure to share a few thoughts on a subject about which I’m really passionate.

Zhenya Winter: Fantastic. So, Marcus, given the extraordinary times we’re all going through during COVID-19, what impact do you think this is having on the world of payments?

Marcus Hughes: Well that’s an important question and a highly topical one. I think we’d all agree that the primary impact of COVID-19 is that it is accelerating the process of digitalisation. So, real time information, digital payments, API driven exchange of data, electronic documents, such as, the invoicing. All these have been adopted at a faster pace than ever before. The increasing acceptance that working from home is now the new norm is definitely bringing radical changes to the working lives of financial decisionmakers and their teams. So, we’re all affected by this change whether we work in banks, Fintechs, corporate treasury, accounts payable or accounts receivable.
Technology is a key enabler to making this new way of working easier and more secure. I think this changing world fits perfectly with the growing importance of mobile and easy access to cloud-based technology. Given the new home office environment in which most of us now find ourselves, signing paper cheques and physically circulating paper invoices around the office for approval are simply no longer practical or desirable. The adoption of electronic payments and data exchange for e invoices is now even more compelling, especially for personal safety and hygiene reasons and that’s in addition to the well-established benefits of lower cost, faster processing and reduced fraud. Digital signatures, multifactor authentication, biometrics and configurable workflow for the preparation, distribution and approval of payments and electronic purchase orders and so on will become more important as many decisionmakers are now getting used to no longer working in the same physical location as their colleagues.

Zhenya Winter: What do you see as the number one priority for treasurers, during these uncertain times?

Marcus Hughes: I think that any treasury team’s number one focus has to be maintaining liquidity and that’s in order to meet the business’s ongoing financial obligations as they fall due. That means important activities such as servicing debt, managing investments, settling expenses and paying employees and suppliers, of course. The well-known expression ‘Cash is king’ is proving more important during COVID-19 than at any other time in the last 30 years, even during the global financial crisis of 2008 and 2009. That’s a big reason why banks have seen their large corporates drawing down hundreds of billions of dollars of committed revolving credit facilities, even though some of them don’t actually need the cash right now, they just want to play safe. Business continuity is another major factor and an important focus for organisations to ensure that mission critical systems continue to function smoothly, even in lockdown, with IT personnel actually working from home and supporting systems remotely. Adoption of cloud-based technology is therefore set to accelerate in the post COVID-19 world. An important advantage of cloud is, of course, that solution providers don’t need to visit the customer’s offices or the data centres to install software on premise. So, cloud has proved itself to be really well suited to today’s extreme circumstances.

Zhenya Winter: How have corporate supply chains been affected and what will they learn from the experience of COVID-19?

Marcus Hughes: In the early days of COVID-19, some industry supply chains practically ground to a halt. So, for example, the automotive industry. On the other hand, supply chains for essential goods, including, you know, medical equipment, and food, they’ve been under intense pressure to keep going and deliver more. The crisis has underlined the importance of cashflow to businesses of all sizes and especially small and medium size businesses many of which are experiencing severe delays in getting paid by their customers.
So, COVID-19 has reinforced the need for efficient working capital management tools, accounts payable and accounts receivable co-ordination is more important than ever in managing key metrics like day sales outstanding or DSO for short and day payables outstanding. Or DPO bringing in, in cash, as soon as possible, is essential, perhaps by offering customers incentives, like, early payment discounts. The extreme circumstances of COVID-19 have been a valuable reminder of the need to put in place practical measures for helping suppliers to get paid in a timely manner. Regulatory requirements like the duty to report on payment practices and performance and the prompt payment code are not doing enough to resolve these cashflow issues which are faced by small and medium sized businesses.
These organisations would benefit from greater legal protection, efficient invoicing, and easier access to supply chain finance. This is really a great opportunity for banks to get involved more in their customers’ supply chains. I think we’ll also see many businesses review their supply chain arrangements and take steps to make them more robust and resilient. They’re going to try to reduce the risks which they’ve been exposed to during the pandemic. So, just in time, supply chains, may, to some extent, be replaced or at least complemented by a greater degree of stockpiling of essential supplies. We may also see, I think, some onshoring or at least nearshoring and a greater contingency planning. These are all valid ways of reducing the risk of being let down by a vital supplier in a country which suddenly goes into lockdown again or suffers from some other crisis which stops production and the delivery of important merchandise.

Zhenya Winter: So, moving on from COVID-19, what are the big trends that you see in payments?

Marcus Hughes: There’s a whole range of exciting changes going on across the payments landscape and they all help us to move in the direction of digital transformation. The global migration to richer data, known as ISO 20022 has great potential to transform the way we pay and get paid, bringing greater intra operability and more information which, in turn, will enable more granular analytics and greater insights. This will also improve compliance with anti money laundering requirements and it will make it easier to reconcile incoming payments. Another big trend is the rise of real time payments which have been adopted around the world. Thirdly, there are a number of important innovations in cross border payments which are making it easier and faster to manage international trade. Of course, we have a lot of activity in open banking and the development of APIs for exchanging data more efficiently. These are just a few of the most important trends but there are many more, I assure you.

Zhenya Winter: Yes, yes. Okay, plenty of hot topics there to explore during this podcast. Can you tell us more about ISO 20022 please?

Marcus Hughes: So, this is a really important programme, across multiple market infrastructures. The good news is that this message schemer, known as ISO 20022 is now globally accepted as the best way to standardise and modernise payments and financial messaging. Global adoption of a network independent standard will make intra-operability so much easier. The bad news though is that migration from SWIFT MT FIN to ISO 20022 requires intensive preparation and deadlines are getting closer by the day. One major obstacle is the difference between ISO and FIN messaging. The migration programme means banks need to carry out significant alignment work and they’ll even need to implement temporary solutions which will be used until the multiphase migration is finally completed in a few years’ time. Ultimately, it’s going to lead to more flexible and richer messaging which is therefore highly valuable for banks and businesses and even for consumers, of course.

Zhenya Winter: Yes, no, agreed. What challenges do you foresee with the migration?

Marcus Hughes: Well, systems will need to be able to process more data and at faster speeds to cope with instant payments and messages. We need to remember that the ISO 20022 format contains substantially more data, in fact, two or three times more data than typical legacy payment formats today. During the transition period of co-existence, there’s a major risk of data being truncated. This means there’s a risk that some of the useful data will be cut off and lost because old systems and formats are unable to carry such data. The natural tendency for different flavours to emerge is also a challenge. That’s because one market infrastructure will require certain fields to be populated whereas another market infrastructure will not require these fields Some market infrastructures will adopt a big bang approach to migration but others will adopt, probably, a multistep migration. So, it will be highly challenging for banks to keep pace with all these nuances, variations and different timings. So, in summary, many banks will face large, costly. projects, touching many parts of each bank and their systems.

Zhenya Winter: So, with that in mind, what’s the timetable for migration?

Marcus Hughes: Looking further out, the plan is that by 2025, ISO 20022 will be adopted globally for all payment messaging. In the near term, major changes are being planned for several important European market infrastructures. The European Central Bank’s euro system and EBA clearing are both modernising their infrastructures by migrating TARGET2 and EURO1 from the legacy FIN MT message type to ISO 20022’s MX standard.
TARGET2 and EURO1 are both systemically important high value payment systems and the deadline for all this migration is the new date of November 2022. The US Fedwire and CHIPS payment systems will also migrate in 2022 and next, in the UK, our CHAPS real time gross payment settlement system will migrate to ISO 20022 in 2023 with the rest of the world following by 2025. So, in March this year, SWIFT announced plans for a one-year delay before starting the ISO 20022 migration of cross border payments and reporting. This important part of global migrations was originally due to start in November 2021 but banks have been struggling with preparations for the transition to these new data rich formats. So, the start date is now end of 2022 but it’s important to note that the proposed end date of 2025 has not been modified. So, there is now a smaller window to become compliant with this new format. On this basis, by the end of 2025, ISO 20022 will support a predicted 80% of volume and 90% of the value for all high value payments around the world. On this big topic of ISO 20022 migration, it’s worth noting that major countries like China, India, Japan and Switzerland have all made the move to ISO 20022 in recent years. In fact, there are over 70 countries which already use ISO 20022 in one or more of their payment systems, especially their new real time payments systems.

Zhenya Winter: What are the main advantages of ISO 20022 compared to traditional MT FIN messages?

Marcus Hughes: Well the switch to ISO 20022 MX standard is going to allow payments to carry a great deal more structured data as well as standardising payment formats that were previously inconsistent. A major reason why regulators are keen to see widespread adoption of ISO 20022 is that it will make it easier to ensure compliance with anti money laundering requirements. This will help in the fight on fraud and financial crime. ISO 20022 has many structured fields which can be made mandatory for including important details such as the name and address of the ultimate beneficiary, the originator and the intermediary bank. This means payments using ISO 20022 can include all the information necessary to comply with FATF 16 requirements and EU wire transfer regulations. Another important advantage is that ISO 20022 messaging will increase efficiency so, it results in lower costs and higher straight through processing rates. The increase in information provided can also be used to make it easier to track payments in real time across multiple banks and payment systems. It will also reduce the risk of errors as users will be able to include additional payment details and references. Using richer data in a structured way will make it easier for parties receiving payments to achieve higher levels of automated reconciliation and it will enable a much richer level of data analytics and insights. ISO 20022 actually even carries non-Latin character sets. So, names and other details in languages such as Mandarin and Arabic can also be accommodated.
Another important advantage of adopting ISO 20022 is a greater level of intra-operability between different payment systems. This avoids the need to do data transformation on payments which were originally intended to go into one payment system, for example, UK Faster Payments which today uses the ISO 8583 format which was designed for card processing but then for whatever reason now that payment needs to be sent into a different payment system, for example, CHAPS, which currently uses the well-known SWIFT FIN messages. The good news is that there are now plans in the UK to create a common credit message using ISO 20022 and this will be adopted by CHAPS as well as Faster Payments service. So, for the first time, there will be strong intra-operability between these two payment systems which will provide a better contingency arrangement than ever before. This change was originally due to happen next year but I think it may be later due to slippage in a number of payment infrastructure initiatives, in particular, the new payments architecture in the UK. In the same way, global payments markets, around the world, are going to achieve greater intra operability not only domestically but also internationally.

Zhenya Winter: What will happen to the old legacy SWIFT formats?

Marcus Hughes: Well that’s a good question, of course, and MT FIN and ISO 20022 messages will co-exist for several years until 2025 but it’s important to note that at that time in 2025, SWIFT will cease to support the MT100, 200 and 900 series message types. At this stage, no end date has been set for security messages as MT500 series which are used in the funds and investment industry, nor for the MT700 series messages used for TRE’s Finance.
At Bottomline, we’ve already worked extensively with ISO 20022 formats. So, for example, separate transactions and the 2016 migration to ISO 20022 in Switzerland. We’ve developed ways to make this multiphase transition, easier for our clients around the world. We can provide access to our cloud based centralised data store and this enables transformation, enrichment and validation of legacy messaging which can then be transposed into and out of ISO 20022. Most important, the service also stores any truncated data and the original message, keeping it available for investigation. It’s also vital to enhance the data which needs to be included in enriched ISO 20022 outbound messages and this can happen in two different ways. The first is for the client’s own applications to produce full ISO 20022 and the second way is to maintain current outputs and integrate secondary data sources to build a complete compliant ISO 20022 messages before then sending them out into the payment network.

Zhenya Winter: Thank you Marcus. So, customers need to start talking to the experts, like Bottomline, for instance? Continuing the important theme of ISO 20022, what do you see as the most important developments in real time payments?

Marcus Hughes: I think it’s fair to say that real time payments lie at the very heart of payment innovation today and, yes, Zhenya, you are, of course, correct that most real time payments systems do use ISO 20022. The UK’s Faster Payments service is one of the exceptions, because it was an early adopter of real time payments. As mentioned earlier, we’re going to migrate Faster Payments to ISO 20022.
Globally there are more than 60 countries already live with real time payments schemes or, at least, due to launch these systems imminently. There’s an expectation to process half a trillion real time payments transactions over the next five years with a predicted growth rate of 40% globally between 2020 and 2024. Today, the speed, and agility, that real time payments offer can provide a genuine alternative to traditional digital payments like ACH, real time gross settlement or, of course, cards. This is especially relevant in the UK which now has 32 entities, mainly banks and a few regulated eMoney institutions which participate in the Faster Payments service. The scheme was launched back in 2008 and processed as many as 2.4bn transactions last year. These volumes are an impressive increase from 2bn transactions in 2018 for a value of £1.7tn.
We can expect these numbers to continue climbing further as a growing number of smaller regulated Fintechs and challenger banks choose to connect with Faster Payments using the so-called New Access Model. Being cloud based, this model is faster to implement and more cost effective than the conventional on-premise approach and the system has advanced APIs to ensure real time transactions and reporting. At Bottomline we offer this cloud-based access to Faster Payments to banks and regulated Fintechs, whether they decide to become directly connected settling participants or directly connected non settling participants. We’ve even developed an innovative real time payments solution which enables indirect participants to access faster payments under the sponsorship of our partner banks which are already using our platform. This enables a really rapid go live and avoids the delays, the costs and the bureaucracy of becoming a full member of the scheme. Most real time payments systems today are domestic payment systems that’s with the exception of SEPA, their instant credit transfer scheme which is a pan European scheme for instant payments denominated in euros. EBA’s scheme which is called RT1 has been leading the way for euro payments across Europe.
RT1 has now achieved a significant European ramp up with critical mass now in countries like France, Austria, the Baltics, Finland, Germany, Italy and also Spain. In May last year the European Central Bank launched a separate real time payments platform known as TIPSS which stands for Target Instant Payment Settlement Service. So, there’s plenty of choice for people making payments, instant payments, across Europe. The any place, any time, nature of real time payments, and their ease of use, is really fundamental to providing customers with an improved user experience. This is a core requirement in the new digital and connected economy. This is why real time payments adoption is accelerating in many countries, primarily by consumer customers but also by businesses who are beginning to recognise the benefits of real time payments. I think adoption by businesses is being helped by the increase in transaction limits that a number of countries have introduced in recent times as they open up more use cases. For example, Singapore’s real time payments system known as FAST, recently increased its transaction limit from Singapore $50,000 to Singapore $100,000. Meanwhile, in the US, the clearing houses real time payments system recently quadrupled its transaction limit to US $100,000. These changes are all positive steps for real time payments systems if they wish to attract the kind of B2B payments which generally require higher transaction limits than consumer payments. Interestingly, Australia’s new payment platform has no transaction limit in place and has processed individual payments worth tens of millions of dollars.
Curiously, in June 2019, the UK’s payment system regulator announced it was considering increasing Faster Payments Scheme’s transaction limit to £20m from the current £250,000 limit though no final decision or date appears to have been published, as far as I am aware. So, real time payments are the key enabler for open banking and PSD2, in particular, its payment initiation services which run on real time payment rails. That’s Faster Payments in the UK and the SEPA Instant Scheme across the Eurozone. There are still gaps in terms of the reachability of European banks with some banks still preferring the slower SEPA credit transfer scheme which was only available five days a week during banking hours and doesn’t arrive until the next business day. So, the reason why real time payments are so central to open banking is that the payments use cases for open banking and the digital economy, require transactions to be instant, simple and secure, with a frictionless and intuitive user experience.

Zhenya Winter: So, what’s happening in cross border payments which, historically, have been regarded as less efficient and slower than domestic payments?

Marcus Hughes: So, what you say is absolutely correct but the situation is changing and quite quickly, I’d say. Swift, which manages the global financial messaging network for banks and financial institutions and some large corporate members, of course, they’ve been making exciting progress with their excellent initiative called GBI. This stands for Global Payment Innovation. Just three years since its launch, GPI has already proven to be the new norm in cross border payments. So, many cross-border payments are now being settled, literally, within minutes and, certainly, within a few hours. Banks can track their payment flows end to end in real time. 78% of SWIFT cross border payments are now sent via GPI with an impressive $77tn in value processed in 2019 under this scheme.
I’d actually go so far as to suggest that the continuing expansion of GPI is acting as a break on the possible adoption of cross border block chain payment initiatives. It's true that GPI is old technology, relying on old message formats, but it does show what can be done when the pressure is on. I think we can also say that GPI’s success has proved wrong than our rather out of date criticisms made by some of the Cryptocurrency payment firms that SWIFT cross border payments take five to six days and often get lost. For me that same old stories now begin to sound a little jaded and well past its use by date.
As regards genuine cross border real time payments, SWIFT is also making some encouraging process in enabling a global instant payments service which will ensure high levels of security, anti-fraud measures and full transparency. This new GPI instant is already operational and can be used by any two GPI members which choose to adopt the GPI instant payments service for their own bilateral cross border payments. In future, the large-scale adoption of GPI instant is really going to depend on how soon domestic real time payments systems can support the additional processing requirements for cross border transactions. SWIFT has already had some successful trials on this subject with Australia’s new payment platform, Singapore’s FAST and Europe’s TIPS real time payments system.

Zhenya Winter: What other players are making inroads in cross border payments?

Marcus Hughes: A major player moving into business to business cross border payments is Visa which has launched its new solution B2B Connect. This is an innovative way of helping businesses to pay and get paid cross border. VisaNet is one of the largest clearing and settlement systems in the world with massive global reach. So, that’s 14,000 bank members, multiple currencies, processing, I think, $13tn annually. So, they have an existing advantage of scale. Visa’s new B2B Connect product also has an integrated foreign exchange settlement. So, this offers competitive rates and a revenue share for participating banks which is another differentiator. Any banks joining B2B Connect have the choice of using Visa’s FX rates or their own foreign currency liquidity.
This is different to SWIFT, of course, which is a secure and global financial messaging network which handles messages relating to payments but SWIFT does not manage FX conversion and nor does it provide settlements. For me, one of the biggest advantages of B2B Connect is that it enables banks to reduce the amount of liquidity which they normally have to hold in Nostro accounts at their correspondent banks which help them execute their cross-border payments. So, Visa’s innovative approach allows banks to reduce the trapped liquidity held at correspondent banks and potentially reduce the actual number of Nostro accounts held around the world. The solution also allows participant banks to use incoming settlements as liquidity for outbound payments on the network. It’s important to note that a participant bank can send payments to businesses whose banks are not yet using B2B Connect. This valuable type of payment is known as an out of network settlement. So, Visa B2B Connect does look to have some great potential as an alternative and, dare I say, complement to SWIFT messaging in cross border payments.

Zhenya Winter: Okay, great. Are there any other exciting payment initiatives that you see emerging in the next few years?

Marcus Hughes: Yes, and here’s another really innovative project. As you know, the Nordics is highly digitised and, for example, they’re experts at invoicing and digital payments. Right now, banks and tech companies in the Nordics are working on an exciting payments programme which is due to go live next year. Their ambitious objective is to build the world’s first real time domestic and cross border payments system processing multiple currencies across the region.
The programme is called P27 because it’s intended to improve payments for the 27 million inhabitants in the Nordics. Although there’s a slight twist here in that only three of the four Nordic countries will actually participate in the first phase, that’s Denmark, Sweden, and Finland, while Norway will probably join the programme at a later date. It was good to hear recently that the P27 Chief Executive Officer confirmed they remain on target to go live next year despite COVID-19. So, P27 will cover the Nordic currencies as well as the euro and has developed common Nordic standards for payments. Their vision is to establish the first integrated region for domestic, bulk and real time payments and cross border payments in multiple currencies using richer data formats, that’s ISO 20022 of course. Secondly, by aligning its standards with those of SEPA which is already used for euro payments across the European Union, P27 will actually harmonise the European payments landscape and will be intra-operable with SEPA. The national central banks of the Nordics will actually perform the settlement process for all those P27 payments.
Probably the most innovative aspect of P27 is that it will process cross border, cross currency, payments in real time. The payments will instantly transform from one Nordic currency into the other currency and the foreign transaction settlements and the anti money laundering screening will all be completed in real time. Today, Nordic banks actually use SWIFT to clear their regional cross border payments but the plan is to move these payments onto the P27 platform which will not actually run on SWIFT. Just in finishing off on the Nordics, it’s worth mentioning that the open banking adoption rates among Nordic banks and their level of maturity in terms of APIs is significantly higher than the rest of the European Union.

Zhenya Winter: So, you mentioned real time payments are key to open banking? What’s your thinking on the progress made by open banking and PSD2 since they came into force?

Marcus Hughes: Well, in recent times, I think when asked about the next big innovation which is going to disrupt the payments market, many payment professionals would answer APIs and open banking. From its modest beginnings in the UK, open banking has certainly become something of a global phenomenon. Open banking is also proving an expensive exercise for banks and Fintechs. I saw research by the AP aggregator Tink that European banks are spending between €50m to €100m on open banking initiatives with budgets exceeding €100m for almost half of those 290 banks which were surveyed. There’s much work still to be done and, also, it appears that banks are quite optimistic now about their return on investment from open banking and PSD2 with 50% of banks projecting a payback in less than four years. This does suggest that in the minds of bank executives, open banking has at least moved from being considered as merely a compliance challenge to now becoming a commercial opportunity. So, this is a very encouraging transition, of course.

Zhenya Winter: Yes? How well has the actual implementation of open banking and PSD2 lived up to the high expectations for this ambitious programme?

Marcus Hughes: Well we’ve been talking about open banking for years and there’s definitely a lot of hype. It’s a complex and ambitious undertaking. To be honest, I think, actual progress has been quite slow. Although open banking was officially launched in January 2018, that’s two and a half years ago, I think, there’s still a significant gap between the promise of what open banking and PSD2 could potentially deliver and the current low level of awareness and the actual amount of open banking products being used across Europe.
I definitely share the excitement about PSD2 and open banking’s potential but it’s still important to have a realistic sense of the current state of play. The UK’s migration to open banking and PSD2 has not exactly been a smooth path but it has been significantly more orderly than some other countries across Europe. Having had a good head start with a more controlled approach, the UK has really led the way in the development of APIs and open banking, with a few exceptions, like, the Nordics, of course. Over the last 12 to 18 months, a number of UK Fintechs and banks have taken their first tentative steps into open banking and have launched apps providing multibank aggregation. These allow customers to view accounts at other banks. This includes both incumbent banks, such as, HSBC, NatWest, Lloyds and Santander as well as UK challenger banks and Fintechs like Revolut, Monzo, Starling and Tandem.
To give an idea of the scale of open banking, it’s estimated that open banking usage in the UK now exceeds one million customers. These are about… and there are also about 250 regulated third-party providers which is up from the 100 third party providers at the end of 2018. These entities are processing about 300 million API calls per month. To be clear, most of these API calls relate to credit checks which is by far the most successful use case at this stage. By that I mean online lenders are using account information services to access bank balance and transaction information on people or small businesses that are applying for loans. Those lenders can then make better and faster credit decisions with their information. So, the reality is that open banking doesn’t yet have very much at all to do with payments. On the whole, that opportunity still lies ahead of us. In fact, despite the hype around open banking changing the world of payments and data sharing, it’s only recently that banks and Fintechs are just beginning to offer payment initiation services. So, in March, more than two years after the launch of open banking, Barclays was one of the first UK banks to enable customers to make payments from their current accounts held at other banks using a Barclays app. They were followed by NatWest which launched a new online payments service also, and this allows customers buying things online to make real time account to account payments to participating merchants.
Importantly, this payment is without using a debit or credit card which is the more conventional way of paying online. There are other recent examples, like Monzo which has launched a payment initiation service to allow customers to move money to Monzo from accounts held at other banks. Of course, it’s not just banks which are launching payments services based on open banking rails. So, for example, Worldpay has announced an open banking solution for merchants, enabling those consumer customers to pay for online purchases direct from their bank account. So, although the European Union is generally behind the UK in the rollout of PSD2, a number of the leading banks in Europe have also already launched account aggregator apps which are- they enable customers to see all of their current accounts, including those held at other banks. So, for example, Santander, ING, UniCredit. Meanwhile, banks like Danske, DNB and Deutsche Bank, they’ve recently launched payment initiation services too. So, there is some progress being made but it has taken a long time.

Zhenya Winter: So, where is the open banking market going next?

Marcus Hughes: I think the market is now evolving into another significant phase where differentiation between service providers is already shifting from pure connectivity using APIs, that’s to connect with multiple banks, of course, and to capture accounts data or initiator payments, they’re now evolving to a new phase where value add applications do something really useful for the customer, solving a pain point and delivering value.
This might relate to better personal financial management or AI driven cashflow forecasting solutions using data from accounting ledgers and real time bank statements or invoice finance which uses machine learning and predictive analytics to assess the likelihood of sales invoices being paid on time or late or even never. So, instead of mere cash visibility, and payment initiation, a solution provider’s next generation of open banking products will need to do more to help customers manage their business better in areas like optimised working capital management, getting paid faster, with automated cash allocation. The kind of solutions traditionally demanded by large corporates are increasingly going to be expected by small and medium sized businesses such as automated sweeping of accounts to maximise investment income and minimise borrowing costs.

Zhenya Winter: So, what’s happening with APIs? Everyone is talking about APIs as the new way to connect but what are your thoughts?

Marcus Hughes: Well APIs are already well established as a secure means of communicating between systems and they’re widely used in many day to day business activities such as aggregating information on hotel and travel booking websites. APIs are still relatively new in financial services and in payments. The term API stands for Application Programming Interface and they are basically a way in which systems can connect with each other to request and exchange data. One of the biggest challenges which PSD2 adoption in Europe has faced is that the European Commission decided not to impose a standard API across the European Union. This decision was based on the Commission’s thinking that having standard APIs would be anti-competitive, but, as a result, there has been fragmentation of APIs across Europe and this situation has frankly become a barrier to adoption.
The financial services industry is still experiencing a proliferation of APIs, data models, ID and security schemes. This is creating a spaghetti of non-standardised links for exchanging data between banks and third-party providers and Fintechs and businesses. This inefficient situation is slowing down onboarding and is increasing costs for all parties. The lack of common API standards is one of the main reasons quoted by Fintechs to explain the slow evolution of PSD2 and open banking across Europe and there’s strong evidence that the quality of bank API documentation and the performance of some bank APIs is still patchy at best. Most banks are able to receive API calls but performance drops drastically when actually recording the successful response rate of these API channels throughout the European Union.
Curiously, this situation has given rise to a niche requirement for API aggregators and, as a result, there are growing number of these API aggregators. For example, TrueLayer, Yolt, Tink, Bud, Plaid, Salt Edge and Yodlee, to name but a few. The role of API aggregators is to make it easy for Fintechs and banks to use a single API provided by that API aggregator to access multiple account holding banks. Actually, it’s striking how competitive this API aggregation space is quickly becoming and it’s attracting card giants like Mastercard and Visa which have each announced major acquisitions, in this field. So, with hindsight, it’s a shame that in introducing PSD2, the European Commission was not more prescriptive about API rules and standards. The UK’s Competition & Market Authority sensibly imposed a single common API standard from the outset.
It’s quite encouraging that a number of initiatives for open banking in Asia Pacific are tending to base their APIs on the UK standard. So, for example, Australia, Singapore, Hong Kong, South Korea and Japan have all followed the UK approach to API standards. These programmes, as they evolve, they will almost certainly develop their own flavours of API. What I will also add was API aggregation is becoming even more important as open banking ramps up, it’s likely to become highly commoditised and the marketplace for API aggregators may well consolidate.

Zhenya Winter: Is there a role for SWIFT in introducing standards into this labyrinth of disparate APIs?

Marcus Hughes: Yes, I do believe there is. SWIFT which runs a global financial messaging network for banks is, of course, an expert in standard and they’re already the registration authority for ISO 20022 and they maintain the content and integrity of this important messaging format. So, it’s entirely logical that they extend their expertise into the emerging API ecosystem. For the last year or two, SWIFT’s strategy has been evolving but it’s now clear that SWIFT aspire to co-ordinate the development of API standards globally and become an API platform and aggregator for their many customers. So, SWIFT are engineering a role for themselves to help standardise a whole range of API related activity. So, identification, authentication, authorisation, open API specifications, data models, as well as security and non-repudiation.
This big to do list really does represent a whole series of important and essential plumbing tools. Personally, I really welcome SWIFT’s approach to API standardisation and they’re really well positioned to co-ordinate the development of open API standards and they’ve definitely got strong credentials for this, kind of, work. So, hopefully they can bring some order and standardisation to this really fragmented world of APIs in payments and financial services.

Zhenya Winter: So, with all that in mind, what do you think the future of open banking looks like?

Marcus Hughes: I think one way of answering your good question is to say that if we want to understand what the future of open banking can achieve in digital payment terms, it can be really enlightening to look at what has happened in India and in a very short space of time. The country’s new unified payments interface, typically known as UPI, is India’s single mobile app for accessing multiple bank accounts and making payments to any other bank account in the country in real time 24/7.
So, although the UPI programme is not specifically called an open banking initiative, it does have many parallels with the various forms of open banking which have been launched around the world. UPIs are going to be streets ahead of the rest of us. It runs on the country’s Immediate Payment Service known as IMPS and it was developed by the National Payments Corporation of India which is an umbrella organisation for operating retail payment systems in India. Impressively, UPI was only launched in April 2016 and yet 150 banks are already live, processing over a billion transactions a month and for a value of more than $30bn. UPI’s user base has grown really rapidly to more than 100m, achieving the fastest adoption rates of any new payment system anywhere in the world and that user base is expected to grow to 500m within about three years.
I think a key element of UPI’s success is India’s biometric system which enables 1.2bn to have a digital identity. This makes it the world’s largest biometric programme which has become ubiquitous since it was launched in 2010. This means that UPI has an easy to use, single click, two factor authentication procedure. If only other countries had such a system for biometric digital ID, I think the rest of our work would be much easier. It’s probably helpful to distinguish between India’s UPI and China’s mobile payment giants Alipay and WeChat Pay. These two Chinese big techs each provide closed loop eWallet payments which are now accepted in over 30 countries and growing extremely fast too. On the other hand, UPI works with any bank account in India and uses the country’s real time payment systems. So, the Indian system is really more bank friendly whereas the Chinese system is more closed loop eWallet system.

Zhenya Winter: Okay, understood. There’s great expectation in the market about the potential of new communication instruments known as Request to Pay or Request for Pay but this appears to come in, in many flavours, what’s your view on that?

Marcus Hughes: So, it’s true that Request to Pay is an exciting new overlay service for which a range of variations are being developed right now in the UK, in Europe and in a number of other countries. Request to Pay is a flexible instrument which makes it easier to pay and get paid. It’s actually a hybrid instrument which combines two complementary features. First, it’s an explanation to the party wanting to get paid of why the payment is being requested. In a business to consumer context, this typically takes the form of an electronic bill. Second, the Request to Pay offers the payer a number of payment options in terms of timing. So, in other words, it can be an instant payment or a deferred payment. There are also options in terms of the amount to be paid. That means a choice between a single payment, several instalments, or even a refusal to pay anything at all.

Zhenya Winter: Can you explain the benefits and differences between the main versions of Request to Pay?

Marcus Hughes: Yes. Benefits include greater control and flexibility for the payer, a reduction in processing costs, faster settlement, less fraud and fewer chargebacks for merchants than by using cards. So, Request to Pay will also enable the transmission of richer transaction data which, in turn, is going to lead to easier reconciliation. Importantly, Request to Pay is also expected to drive up the volume of instant payments. So, in contrast to direct debits, Request to Pay is usually, in many countries, a real time 24/7 instrument. So, it’s suitable for single or ad hoc payments and they don’t require an upfront mandate approved by the payer. Request to Pay is therefore a logical extension of an account to account push payment such as UK Faster Payments.
Although Europe and the UK both have Request to Pay as solutions scheduled to go live this year, their use cases are fundamentally different. Pay.UK describes Request to Pay as a communication tool which is overlayed on top of the existing Faster Payments infrastructure and it gives billers the ability to request payment for a bill rather than just sending an invoice. Probably the greatest challenge for the European Union’s Request to Pay initiative is there is no single standard API for the 5,000 banks in the region. So, this is a big reason why it has not been practical to progress the European Request to Pay under the umbrella of PSD2. That’s unlike the UK which has developed one API standard and makes the whole process simpler. So, the UK Request to Pay can be used on open banking rails, initiated by accredited third party providers. Pay.UK and the open banking implementation entity are actually responsible for the central administration of Request to Pay and its framework. However, the competitive space for Request to Pay means that services delivered in the user front end and the repository layers are open for banks and Fintechs and utilities and retailers to develop and offer unique products to their consumer customers. Although there have been some delays in launch dates, we should see the new Request to Pay initiatives in the market in the coming months. Recently Pay.UK issued the message standards and the rules and an accreditation process for organisations that want to provide a Request to Pay service. Other organisations such as utilities or retailers can then contract with one of these accredited third-party providers and offer Request to Pay to their customers.
To respond to requests or to send their own requests, customers sign up to a Request to Pay app which can be made available to customers through their bank or accredited third party provider and to manage Request to Pay and end user accesses to services via an app on their Smartphone. So, although Pay.UK anticipate the first iterations of Request to Pay will actually be primarily online, they do want to develop the rules and standards to ensure this solution is widely available using other channels. So, in due course, there should be other ways to use Request to Pay, like physical point of sale terminals in store or even at ATMs. Adoption of the UK Request to Pay does rely heavily on the level of confidence which consumers feel towards the open banking model and, as mentioned earlier, this approach means a payment is initiated by a third party. This potentially means a new or different customer experience with each new Request to Pay and this is instead of having a consistent, familiar, interaction with a single institution such as the consumer’s own bank.
So, consumers may be a little nervous or take time to get used to the Request to Pay from different parties, all looking completely different on their Smartphone. Although reach is achieved at the outset by using the UK open banking model, what is lacking is a universality of experience. The big advantage of Request to Pay for the party getting paid, especially for a business handling high volumes of inbound payments, is that they will be able to achieve automatic reconciliation of inbound funds. This is because full details of the payment, and the payer, are included in the payment. This flexible Request to Pay tool therefore has compelling use cases in the person to person, business to consumer and business to business spaces. So, for example, an individual can use Request to Pay to ask friends to reimburse him or her for their share of a dinner which he or she has paid in full.
Alternatively, a utility can send a Request to Pay to a customer who prefers not to use direct debits. That might be because this particular customer wants more flexibility. Likewise, in a business to business scenario, an organisation can use Request to Pay to present an electronic invoice for payment. I think this will mainly appeal to smaller businesses that are making payments but less so for large payers. This is because large corporates have specialist accounts payable units and ERP systems and they might be more used to using those systems for processing e-invoices which is another way which has experienced a lot of change and growth. For me, Request to Pay shouldn’t really be regarded as a threat to, or a replacement for, direct debits, in fact, it would complement direct debits.
Rather than reduce direct debit volumes, it’s more likely to become an attractive alternative to payment service users who require greater flexibility regarding the dates and the amounts of their recurring payments. So, a business collecting large volumes of recurring payments is likely to find the Request to Pay will become a valuable addition to their direct debit arrangements for getting paid by customers and perhaps by small businesses.

Zhenya Winter: So, how does that UK model differ from what’s going on in Europe?

Marcus Hughes: The Euro payment system EBA Clearing, which is owned by 40 of the major payments banks in Europe is developing a pan European Request to Pay in euros. This new system is designed for their 200 user banks but it’s not for third party providers such as Fintechs. EBA Clearing plans a thin layer infrastructure solution that’s based on real time messaging and separated both from the services solutions and the payment infrastructure layers.
The solution will therefore allow both approved now and approved later responses from the payer. They see this initiative as a key step in unlocking the great potential of instant payments both for consumers and businesses. For their type of Request to Pay, EBA Clearing highlight benefits as being the combination of its ability to share data and initiate a payment from a bank account instead of using a card payment which is, of course, slower and more expensive. EBA Clearing’s approach also makes full use of the SEPA4 corner model. This allows the bank of the payer and the bank of the payee to each develop their own customer front end user interfaces for a range of scenarios. So, for example, one bank may focus on creating the best user experience and the other bank may focus on reconciliation or providing credit and hence allowing some transactions to be paid later. In a four-corner model, both the payee and the payer can be properly authenticated by their respective bank without there being a need for a central database storing information for authentication. So, in this way, it’s very different from the UK and EBA’s Request to Pay has an immediate advantage in terms of consumer trust. This is because it’s the payer’s own bank who will contact the payer to ask whether they do or do not wish to approve the payment request.
So, this means customers do not need to interact with third party providers or share details with anyone other than their own bank. By separating the Request to Pay layer from the payments infrastructure, payments can be made either via the standard SEPA credit transfer, T+1 settlement or using SEPA instant credit transfers, their real time payment system. This flexibility should encourage the widest possible adoption of Request to Pay as some European banks, as we saw earlier, are not yet fully compliant with SEPA instant credit transfers. The specification phase and the development of the Request to Pay infrastructure solution started in 2019 and the go live date of the EBA’s clearing solution is November this year with a fuller rollout next year.
The present initiative is actually backed by 27 major banks from 11 countries. So, it’s clear that the EBA clearing’s initiative will need many more banks to join the programme to ensure it actually achieves the pan European reach which will be necessary to make this a success story. Finally, Request to Pay solutions may complement PSD2 payment initiation services but they’re also going to compete against them. So, customers will have plenty of choice about how they pay and how they get paid.

Zhenya Winter: What other Request to Pay initiatives would you highlight?

Marcus Hughes: A major challenge for businesses is trading internationally and there’s actually no standard electronic cross border collection instrument. Even though many countries do, of course, offer their own domestic collection instruments like direct debits. So, in response to this demand for easier cross border collections, SWIFT have been developing a cross border Request to Pay which is aimed mainly at business to business users.
This new instrument based, of course, on ISO 20022 is going to reduce friction and deliver more value for banks, payment institutions and, of course, corporates. SWIFT are planning to run a prototype later this year. Their Request to Pay will help corporates reduce the risk of fraudulent invoices and will also offer improved credit management as well as a better and faster reconciliation. In the US, the clearing house already has a request for payment in its real time payment system and a number of US banks have launched request for payment solutions over the last 18 months or so. Meanwhile, it’s India which has developed the largest and fastest growing Request to Pay solution and its highly successful universal payment interface real time payment scheme which we looked at earlier.
So, there are a number of Request to Pay schemes being developed which suggest, yet again, there’s a risk of fragmentation. As always, the success of any Request to Pay initiative will depend on education and the degree to which banks and Fintechs are able to communicate the value proposition to their business and consumer customers. One thing is for certain to me, with the introduction of Request to Pay, at last, payments, and invoicing, will be more fully integrated within the payment system. This, in turn, creates an ideal environment for improving visibility, mitigating risk and making it easier for a business to access finance at a more competitive cost. So, as Request to Pay becomes more sophisticated over time, it’s being suggested by some that B2B use cases will eventually incorporate aspects of supply chain finance.
So, in this way, if a supplier wants to get paid early, it can offer a discount and if a customer seeks deferred payment terms then an interest calculation will be added to the amount to reflect the time value of money for paying at a later date. Well, although Request to Pay does have potential for streamlining this order to cash and purchase to pay cycles, I think it will primarily help the small business end of the spectrum. Larger corporates already have quite complex accounts payable and accounts receivable processes as well as growing adoption of e-invoicing. A big challenge which lies ahead is therefore integrating payments with e-invoicing and potentially too with Request to Pay, all of which can complement each other and work very nicely together.

Zhenya Winter: Can you explain more about what you mean by this integration of payments and e-invoicing?

Marcus Hughes: So, Request to Pay and e-invoicing come from two different directions but both aim to make it easier to buy and sell and to pay and get paid. Request to Pay is effectively an eBilling mechanism mainly for business to consumer scenarios as well as peer to peer situations and potentially small businesses paying and getting paid by each other. In addition to Request to Pay, we have well established business to business e invoicing markets involving the secure exchange of large quantities of data.
The important thing about e-invoicing today is that there are a growing number of countries mandating the use of e-invoicing. It’s these new government mandated rules which are driving much of the growth in e-invoicing at about 20% a year. It’s also worth bearing in mind that unlike the new Request to Pay, today payments are generally not integrated in most e invoicing networks, despite having accounts payable and accounts receivable automation features. So, I think, bringing payments and e-invoicing networks together offers a great opportunity for improved efficiency and better cashflow management. Some of the obvious benefits of e invoicing include greater processing speed, lower cost, improved visibility and control as well as a reduced risk of fraud. This only explains, in part, why a growing number of countries have introduced mandatory e-invoicing, including a number of EU states, of course.
Some of the early examples of e-invoicing success stories are actually in Latin America. So, Brazil, Chile, Mexico and other countries in the region have all mandated B2B e-invoicing a number of years ago. It’s important to note that these countries actually adopted e-invoicing primarily because of the need to close the unpaid tax gap through better VAT reporting. In other words, tax authorities wanted to capture more tax from businesses which was going unpaid and it’s the richer data in an invoice which provides the most complete information for tax authorities seeking to establish how much tax is payable. So, anyone doubting how well e-invoicing can work in capturing more revenue for the tax authorities should have a look at Mexico which improved its tax yields by more than a third since it introduced e-invoicing. This tax related e-invoicing model is known as clearance because all B2B invoices have to be submitted electronically via a government approved platform.
This allows the tax authorities to perform real time validation and to audit all e-invoices before they reach the end customer. So, this sharing of data enables the tax authorities to accurately calculate and charge the tax due on each invoice. The successful implementation of clearance e-invoicing models has encouraged a wide number of countries to mandate e-invoicing for all business to business transactions, especially where significant tax revenues are going unpaid. So, a report by the European Union’s Directorate General for Taxations & Customs Union found that a massive €137.5bn of expected VAT revenues went uncollected across the region in 2017. Italy was by far the worst performer with around €33bn of uncollected tax in that year. Italy therefore introduced mandatory clearance of e-invoices a couple of years ago and has already increased their tax receipts by €4bn thanks to the new system.
In 2019, 11 new business to business e-invoicing mandates were introduced by governments around the world with a further 17 mandates to come into force in 2020. The majority of these will be in Europe and also Asia, for example, India, Taiwan and Vietnam. France has also mandated B2B invoicing from 2023 while Spain, Portugal and Greece are also making their preparations. So, there’s a clear shift towards adopting a clearance model for many countries and this creates an abundance of opportunity for providers of compliant e-invoicing solutions.

Zhenya Winter: I also understand some governments are also imposing e invoicing on suppliers that are doing business with public sector organisations, you know, in order to improve efficiency? Can you tell us anything about these initiatives?

Marcus Hughes: Yes, that’s absolutely right. In some countries as a preliminary step towards mandatory full B2B invoicing, governments are introducing business to consumer or B2G e invoicing mandates. Governments across the world are working hard to create streamlined government and public sector administrations that are paperless, data driven and data focused. In Europe, we’ve seen this trend grow significantly in recent years that the shift was initially driven by an EU directive which set out to build a pan European standard for e-invoicing. It also required that the mandatory use of the technology had to be in place across all EU member states by the end of 2018 to drive adoption of B2B e-invoicing in that way. More than 100,000 public administrations and agencies across Europe have been affected by this directive and it has also forced many companies trading with those government and public sector agencies to implement their own solutions to meet these new regulations. In the last couple of years, a large number of EU member states have actually introduced mandatory B2G e-invoicing.
So, for example, the Netherlands, Italy, France, Spain, Portugal and Belgium. These mandates are now gaining traction and in Germany and Poland these new business to government invoicing mandates are due to be effective from November this year. For some years now, the European Union has promoted a protocol and a common standard known as OpenPEPPOL. This stands for Pan European Public Procurement Online. Looking beyond Europe, there are a growing number of countries adopting OpenPEPPOL initiatives. So, for example, Australia, New Zealand and Singapore.

Zhenya Winter: What’s happening about B2G invoicing or e-invoicing in the UK?

Marcus Hughes: That’s a good question. So, the UK has been much slower than other countries in Europe to enforce e-invoicing either for business to business or for business to government. Our National Health Service is the first area of the UK’s public sector to trial the invoicing. They use PEPPOL for the electronic exchange of purchase orders, invoices and dispatch advice messages. In 2015, the Small Business Enterprise & Employment Act was passed and UK ministers were given power to regulate the use of e-invoicing for public procurement in the UK. Surprisingly, no specific regulations have been introduced under that Act. I think it’s only a matter of time before the UK recognise the strong business case which is very compelling as other countries capture the benefits of e-invoicing.
This process could well be re-energised as a result of the hard lessons we’re learning about the need for faster digital transformation during COVID-19. It’s worth emphasising that the combination of payment and compliant e-invoicing capabilities contain so much more data than pure payments alone. This is really especially true using older payment formats such as UK BACS Standard 18 format which carries minimal information. In contrast, invoicing data holds a wealth of data points on prices, quantity, products, dates, tax, customers and suppliers and the opportunity to provide data analytics is richer and deeper when aggregating payables and receivables data with bank statement data in order to drive better decision making and greater efficiency. This provides valuable insights relating to procurement, working capital, customers and suppliers’ performance and the behaviour of all parties in those supply chains.
So, I think, this combination of payments and e-invoicing will enable us to create a network where buyers, suppliers, banks and other parties like logistics firms can connect and transact and grow their businesses and improve their cashflow and be more efficient.

Zhenya Winter: Well, thank you Marcus, that’s very comprehensive. As we draw this podcast to a close, do you have any concluding remarks?

Marcus Hughes: Yes. I’d summarise by emphasising that there’s a whole series of changes going on in the payment landscape, all aimed at making payments faster, more transparent, easier to manage and with an enhanced user experience. So, although these initiatives do take time, sometimes way longer than initially planned, there’s a mass of innovation coming around the corner which is going to make it easier for businesses to pay and get paid.

Zhenya Winter: Thank you Marcus. That’s all for today but the Bottomline podcast will be back soon with more insights into the fast-changing world of business payments. We hope you found this session useful? It just remains for me to thank Marcus very much for your helpful insights and to wish you good day.

Marcus Hughes: My pleasure, and thank you Zhenya. See you again soon, of course.

Zhenya Winter: Thank you.

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