For banks and wealth management organisations, discover how to deliver innovative services and experiences to customers in today's open and real-time world.
Jaqueline Powell: Greetings and welcome to our latest Payments Podcast. My name is Jaqueline Powell, Head of Corporate Marketing at Bottomline.
The topic for today’s episode centres around the key trends and takeaways from this year’s Sibos, which was held in Amsterdam recently.
My guest, Zhenya, spent four intense days listening to the most influential people in payments advise on how banks and FIs can help juggle busy roadmaps and overcome hurdles in adopting new payment innovation, which is causing the most pain I think.
Before we start though I just want to put the timing of Sibos into context. We’ve just started to recover from the COVID-19 pandemic and manage the extra traffic resulting from all consumers and businesses going digital. Let’s add in the drama around hitting the SWIFT CBPR+ and ISO 20022 deadlines as well as challenges in cross-border payments and disruptions to the correspondent banking model because of Russian sanctions from the Ukrainian conflict.
Add in the latest fraud prevention practices being mandated such as Confirmation of Payee (CoP), and it’s clear we have a true melting pot for lots of discussions and agreements and planning ahead of 2023.
In this respect, I really believe that the show did not disappointment.
Now let me introduce my guest, Zhenya Winter, Global Head of Marketing for Financial Messaging at Bottomline. Zhenya has more than 23 years of experience in the financial services sector specialising in payments over the last 10 years.
Her key areas of specialisation and connectivity and messaging include real time domestic and cross-border payments and ISO 20022. Welcome, Zhenya.
Zhenya Winter: Thanks very much Jacqui, I’m delighted to be here.
Jaqueline Powell: Zhenya, as I mentioned in my intro, a great deal of sessions and conversations revolved around ISO 20022. Was it just focused on the benefits of ISO 20022 across the whole ecosystem or was there also a certain amount of anxiety expressed around the deadlines for having to receive ISO 20022 messaging?
Zhenya Winter: Yeah Jacqui, well, it was a bit of both. Now SWIFT has announced an extension of the CBPR+ deadline to March 2023, the European Central Bank has pushed the date for TARGET2 to April 2023, and it looks like the Bank of England will follow suit for the UK.
This is happening due to pressure from the banks who are worried about juggling this deadline within an already busy roadmap. And also concerns about how this extra data could lead to truncation.
The beauty of ISO 20022 lies in the global standard providing interoperability. And clearly this doesn’t work if some banks have it and some don’t. It doesn’t make sense for banks to all move at different speeds.
I want to express that these deadlines that I’ve mentioned, they only represent the start of the journey for ISO 20022, which is basic connectivity. So to be able to receive the messages for SWIFT in the ISO format, that’s a connectivity. And as far as I’m aware, there’s no suggestion that this will impact the deadline for the end of the coexistence period of 2025.
However, the view of Sibos, and also held by Bottomline, is that the sooner you can fully leverage the advantages of ISO the better. That means essentially looking to be ISO native as soon as possible and not waiting until 2025. There is the compromise of ‘market ready’ where banks can send and receive but they will need translation. Whereas ISO native is when ISO 20022 is integrated across the whole payments’ ecosystem with no need for translation.
We aren’t fully aware of all the use cases for ISO and we won’t find out until we’ve integrated ISO fully and started brainstorming and having a play around. The sooner you start exploring these new use cases the sooner you can get in that competitive advantage over other banks which is really driving conversations, not just at Sibos but across the industry. However, the wider benefits that we do know for ISO include high levels of transparency, better customer service and of course, improved operational efficiency.
After all ISO 20022 provides the standardisation needed for interoperability between traditional and new cross-border channels. And the abundant availability of rich data and related or artificial intelligence, allows us to route payments intelligently and to choose the right channel for each transaction whether that to drive new coverage in markets or currencies or to optimise the execution in existing markets.
In my opinion, the impact that the rich data will have on fraud monitoring and compliance, cashflow management and of course data and analytics, provides justification enough for the immediate transition to being ISO native and having ISO front and centre of any bank’s roadmap.
Jacqueline Powell: I was also surprised and impressed by SWIFT’s clear positioning at Sibos as a more cooperative rather than dominant entity for cross-border payments. Now, do you think this new positioning was as a result of competitive pressure or does it play more into the strong drive across the industry towards coexistence, collaboration and interoperability of schemes?
Zhenya Winter: Well, there’s certainly a lot of competition in the payment space and that’s a good thing. We need to be able to provide choice for banks and FIs and ultimately their end customers, which is the corporates and the consumers. But, yeah, agreed. It was made clear by SWIFT and the whole community that the best recipe for cross-border payment success is that cooperation, collaboration and coexistence.
And oh, what an opportunity it is. As global businesses continue to expand so does the volume of cross-border payments. The value of worldwide cross-border payments is estimated to increase from $150 trillion in 2017 to over 250 trillion by 2027. So that’s equating to a rise of over 100 trillion in just 10 years, and that’s according to the Bank of England those stats.
Also we’ve got the combined research of Aite-Noverica Group and McKinsey & Company who predict that revenue for cross-border payments based on transaction and FX fees will rise to an estimated $261 billion by 2025. And then finally another report from McKinsey has said that Asian’s cross-border revenues have been a key contributor to the region’s ongoing payments growth, increasing by an average of 6% annually from 2011 to 2019 and are predicted to make a steady recovery after the initial COVID-19 decline. So those are some pretty telling stats, Jacqui.
The main banking channels used to make international payments are still leveraging legacy methods that can be both clunky and expensive. For instance, the latest Banking Circle FX and Cross-Border report says that 25% of companies surveyed reported experiencing poor value in the FX rates offered by their banking partner, while 42% said their bank fees for cross-border transactions were too expensive, with more than one in three complaining that sending money between countries also took too long.
In the worst cases the Nordic markets and the Netherlands, this complaint about slow transaction times rose to almost two in five of those surveyed. This in turn led to 49, or actually closer to 50%, of those surveyed beginning to use Fintechs and other non-banking financial institutions to fulfil their international currency and payment needs, rising to almost three in five in the Nordic markets.
So, yes, that clearly shows that there is competition out there. But it is of paramount importance that innovative banking players start exploring new strategies to improve efficiency and maximise on that revenue potential that McKinsey talked about.
The potential new revenue streams by developing a new and growing fee-based pricing structure, cross-selling other products in your armoury and also access to coveted deposits, can’t be ignored. It's a very brave bank decision-maker that says to its board of directors and shareholders that they don’t want to take advantage of this.
Now we come back to your original question about SWIFT’s positioning as a co-operator and not a dominant dictator. The key solution comes in the form of being able to leverage multilateral platforms that enable global payment through a single connection. For transactions between participating banks it offers an enhanced customer experience at a reduced cost and with security and efficiency through tokenisation, governance and rich data.
Optional foreign exchange and same or next day settlement in multiple currencies allows for true innovation and more choice. So, an example of this would be intelligent routing where a rail can be chosen based off key requirements; speed, cost, FX rates, transparency, whether it’s an exotic currency or not.
Either way, the business case for updating your cross-border strategy is clear and comes highly recommended by the Bank of International Settlement and other key players such as SWIFT, Visa, market infrastructures and Central Banks. After all, no bank is so busy or indeed asset-rich that they don’t need to be more cost-effective and turn the opportunity to create new revenue streams via transaction fees, FX rates and cross-sale. As for the wider payments modernisation piece, 86% of financial institutions agree that it’s a very strong or extremely strong priority.
Jacqueline Powell: Okay. Let’s move over to instant payments, another big issue at Sibos. The general consensus was that it is ‘table-stakes’ and a clear dealbreaker for corporates when deciding to remain or switch banks. However, as we discussed in the Bottomline Lunch and Learn session at Sibos which was based on our latest benchmarking survey of over 300 banks and financial institutions, 34% have only just started planning their instant payment strategy and 15% haven’t even started.
In the survey, which is titled ‘Digital Payment Transformation, the Future of Competitive Advantage in Banking and Payments,’ we asked respondents, ‘What is your company’s greatest barriers to adoption of instant payments?’
So we saw 33.5% top the list with legacy infrastructure, another 33.5% said the lack of IT resource and prioritisation with an already busy roadmap. We then had the cost and hassle of implementing a new payment rail at 17% and the lack of business case for internal buy in at 16%.
So based on these results, how can banks and financial institutions overcome these barriers according to the feedback at Sibos? And what would be your recommendation on the best approach?
Zhenya Winter: Yeah, thanks Jacqui. I mean to be honest, I think we would have been surprised if legacy and lack of IT resource and busy roadmaps weren’t listed as key issues. However, the catch-all is operational efficiency and scalability.
So in order to address the issue of lack of business case for internal buy in, the need for top-down support essentially has meant that many banks and FIs have chosen the route of a minimal viable proposition or MVP. Which is all about scaling at pace with budgets, time resources and business case.
Also with increasing numbers of industry mandates and regulations, which I’m going to talk to you about in a minute, it’s a mistake not to have scalability to meet these tight deadlines.
I also think that in a competitive world there is a danger that not being able to scale to meet customer demands and achieve best practice will cause issues. And it’s hardly likely to result in customer switching and also having an impact on overall customer retention.
Finally, we all saw the huge acceleration of adoption of digital payments resulting off the back of the COVID pandemic as well as the situation which you mentioned in Ukraine meaning that in a changing world it’s vital to respond quickly to any crisis. And real-time is a key and necessary tool for this.
The key point to make is that instant real-time, faster payments, it’s table-stakes. The pace of change in payments globally has never been so dramatic and exciting. Europe, Switzerland, and the UK are no exceptions especially when it comes to instant payments.
So for instance, the new EU legislation that’s come out a couple of days ago makes it clear that instant payments need to be available in Euros to all citizens and businesses holding a bank account in the EU and in the EEA countries. They need to have the ability to receive within 6 months and send within 12 months.
Additionally, the UK market is transforming with the New Payments Architecture (or NPA) deadlines for changing CHAPS format, the fact they increase faster payment limits. It used to be £250,000 GBP, it’s now risen to £1 million and that happened in early 2022.
And there’s also regulated tools for fighting fraud such as Confirmation of Payee (or CoP), and the introduction of digital payment overlays like Request to Pay.
So it is all about that competitive advantage. Firstly, now the EU Commission has issued their mandatory regulation for instant payments in Euros this week, you don’t want to be in a situation in the rest of the world where you’re playing catch up. That alone should move instant payments up the priority ladder.
Secondly, instant payments represent a revenue opportunity that will only grow as banks find new ways to leverage it. Instant payments are a springboard for what we call digital payment transformation, and it is quite simply table-stakes.
So if you don’t offer it to your end customers and corporates then they are more likely to rethink their relationship with you and potentially switch to a competitor.
Jacqueline Powell: Yes, that’s understandable. How much do you agree that it isn’t only about the high-speed rails that will carry instant payments but the services built on top of it?
Zhenya Winter: Yeah, well I mean real-time and speed it’s all about liquidity. However, not all transactions need to arrive between zero to five seconds or ten seconds. The fact is, do I care that I get paid my salary by instant payments or is it better that I know with certainty that it arrives on the last Monday of every month? So you’re right, there’s more to real-time than just this speed. It is important, don’t get me wrong, particularly if you want to use real time and that liquidity and that access to money faster. So you can use it as a bargaining tool. I’ll give you an example, so you could pay a reduced price for goods if you pay now rather than in 30 days, so £100 rather than £150 for instance and that’s a use case for request to pay in particular.
But rather I would say real-time payments is really about innovation, creating new revenue streams via digital overlays such as Request to Pay as well as reducing the cost of payment processing and speeding up liquidity. Those are the services that will actually make a difference to our Bottomline customers and their end customers, which in this case is corporates.
And forgive me but I’m going to talk about ISO again, I can’t help myself! It’s relevant though I promise, and it relates to data.
So all real-time instant faster payment rails use the new ISO 20022 standardised format. Yes, this means richer data as we’ve already explained, which helps with transparency in reducing false positives for fraud and encourages more automated straight through processing. But it also leverages structured data which helps corporates have an end-to-end view of all the transactions.
That structured data is equally important is what I’m trying to communicate.
Jacqueline Powell: Okay, now let’s go to Switzerland. Here’s a country that still loves cash but is starting to embrace instant payments. Switzerland is part of SEPA but not part of the EU. It seems on the surface to carry a lot of contradictions. What were your discussions like with your Swiss customers and how would you characterise the state of play in the country right now regarding payments modernisation?
Zhenya Winter: Yeah, thanks, Jacqui, and you’re right, we have a lot of customers. We’ve got a big presence in Switzerland and it’s a key market for us, so we did have a lot of discussions with our customers at Sibos. And most of those really centred around SIC instant payment. So, Switzerland as you’ve said, is a diverse financial ecosystem and it’s open to and ready for changes in global payments.
So the Swiss banks and other financial institutions have been changing and they will continue to do so as payment methods, messaging and regulations evolve. This is really basically necessary in order to keep an efficient marketplace for any investment. All of the major global payment changes currently in motion, so instant payments, clearing systems renewal, new cross-border rails are being fully embraced by the Swiss financial institutions. And that was really clear from everything that they said.
Examples of this change that I suppose stand out as the most impactful range from quite technical changes to reduced cost and improved efficiency. So an example of that would be the new SSFN protocol and also RTGS Version 5 upgrades, to more user-driven changes like instant payments.
Amongst the technical evolution that is aimed at improving efficiency, security and reduction of cost, the Swiss marketplace will also make evolving the connectivity to its real time gross settlement system throughout its SIC-5 version as a priority.
So as a reminder, some major changes occurring globally such as the usage of the rich ISO 20022 format don’t have the same impact in Switzerland. They’ve already had this in place for several years, I think 2015 actually.
But throughout the course of the journey for the SIC-5 upgrade, the Swiss National Bank and SIX have teamed up to create a completely different payment rail that will enable the marketplace to process instant payments.
So RTGS will be operational in 2022 and instant payments in August 2024. That will continue until 2026. But SIC-5 represents a transition from the existing SIC network and will accommodate more demanding environments such as business to business payments.
In the context of instant payments, it’s been described by SIX in the following way, and I’m going to quote them here. So, “SIC-5 is to payments, transactions in Switzerland what 5G is to mobile communications – speed”.
The new SIC payment rail will allow more banks to extend instant payment use cases beyond today’s very low thresholds. So, in their words they’re describing what they think the potential is there, Jacqui.
Jacqueline Powell: Zhenya, before we close up what are the three snippy takeaways from the event or is there anything additional you’d like to cover?
Zhenya Winter: Yeah, thanks Jacqui. I’m going to be cheeky and do five but I’ll make them brief.
So I think the key takeaways or the pearls of wisdom would be yes, there have been delays to the ISO deadlines but that doesn’t mean you shouldn’t get cracking on implementing ISO as soon as possible and connectivity only isn’t going to do it.
It’s the start of the journey but you really want to transition as quickly as possible to ISO native so you can take the full advantages of it. Don’t wait until the coexistence period ends in 2025.
Then I want to talk about the importance of multilateral platforms for cross-border payments, that is the way forward. You’ve got to be able to offer your customers as much choice as possible in terms of how they want to send their payment and leveraging intelligent routing.
Instant payment is table-stakes, the European Union or, sorry, the European Commission have really made that clear in the fact that they are saying that all EU residents are entitled to it and should receive it. And I suspect that there will be similar things that happen across the globe, so get in front of that and start your real-time planning now.
I also think that we should view regulation as a friend and not as a foe. It is there to help us, it’s there to make sure that the payments industry is very innovative, it is competitive and that we follow best practice, that’s what the regulation’s there for.
And finally, I want to say yes, there’s a busy roadmap, there’s lots of things for banks and for financial institutions to do themselves. But you don’t need to do it all at once, look at scaling your integration of various different new solutions and schemes.
And also, you don’t need to do it yourself. Concentrate on what you’re good at and then leverage the education and the expertise from people like SWIFT, from market infrastructures like EBA Clearing, and also vendors and service providers like Bottomline. We’re there to help and we will make things easier for you in the long run so please don’t be intimidated. It’s exciting and I hope you agree.
Jacqueline Powell: Thank you Zhenya, your insights and this update will be hugely valuable to our podcast followers but unfortunately, that’s all we have time for right now.
Zhenya Winter: No problem, I’ve really enjoyed myself Jacqui, and please invite me back again.
Jacqueline Powell: Right, so that’s a wrap on our latest Payments Podcast episode ‘Sibos 22: facing a brave new world of payments’.
Please remember to subscribe to the Payments Podcast on SoundCloud, Apple or Spotify for future topical episodes. Thank you for joining us and we’ll catch you next time.
Bottomline commissioned a report from Aite Novarica to examine the payments landscape in the UK & Europe leveraging their expertise and, also incorporating input from reliable public sources
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