Will ISO 20022 overcome its delays to unlock huge opportunities?

For decades, financial institutions and corporations have sought an easy and standard method of exchanging electronic financial messages. MT standards, X.25 and all the EDI formats were supposed to solve deficits in the data and finance reporting space. In 2004, when the first publication of ISO 20022 was released, payments practitioners and industry professionals all had the same thought: What a great idea!

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At the time, it made absolute sense to introduce data-rich payments to improve automation, enhance reporting and analytics, improve interoperability and decrease risk through accurate reconciliation and regulatory compliance activities.

By 2018, many wondered why the industry hadn’t widely adopted ISO 20022. Although some countries adopted ISO 20022 for payments systems by 2019, most did not realize the potential of the rich data within streams. That same year, when SWIFT mandated an ISO 20022 rollout for 2021, with richer data than its old MT standard, the industry started investing more heavily in the adoption of ISO 20022. Despite this mandate, the roll-out plan was pushed out to 2022, and again more recently, to the first quarter of 2023.

These delays (and what seems like a reluctance to make ISO 20022 happen in some jurisdictions) led me to wonder, “What’s hindering the global adoption of ISO 20022 and the rich data structures it supports?” The answer may lie in the balance of benefits and costs of adoption.

What is the value of adopting ISO 20022?

Numerous publications on the topic have boasted the benefits of adopting ISO 20022. As a community, payments professionals and practitioners were promised numerous benefits from a processing and payments operations perspective, related to the rich and structured data of ISO 20022:

◉ Ability to transfer more complete and accurate information between banks and other FIs

◉ Higher straight-through processing rates using the rich information

◉ Fewer manual validations from a regulatory compliance perspective

◉ Ability for compliance teams to focus on investigating true hits rather than false positives

◉ No truncated information and no data loss

◉ Little to no limitation on the number of characters travelling with the payment messages

◉ Interoperability between interconnecting core banking systems, market infrastructures and end users

◉ Easier development due to the format’s use of XML, a common language

Theoretically, these ISO 20022 benefits are great. But to understand the big picture, we must address the challenges.

What are the challenges of adopting ISO 20022?

The industry has faced multiple challenges with the adoption of ISO 20022. Timelines are aggressive (though the pressure is largely due to inactivity from an ISO 20022 adoption perspective), and many institutions find themselves with a lack of resources to be able to make the roll-out deadlines. Additionally, ISO 20022 regularly updates its message standard and publishes new versions of message types regularly. How do financial institutions and FinTechs keep up with this fast-paced change? It would benefit adopters to implement a system that can adapt to change easily. FinTechs could develop software that’s made for change to stay ahead of the evolving standard.

Many well-established financial institutions and market infrastructures rely on legacy systems running on an aging infrastructure, which is a challenge the industry needs to overcome. Moreover, these legacy systems speak a language that is not easily compatible with ISO 20022, and the message formats are typically far more stringent than even ISO 20022’s predecessor ISO 15022 (with formats for CHIPS, BACS, CPA005 and ACH, to name a few). These systems were originally developed to process low-value payments at very low cost. Meanwhile adopting ISO 20022 can be very costly for the participants of the payments ecosystem—so how can we argue that the value in adopting ISO 20022 for these systems outweighs the cost?

Key advantages come from business value

With little to no limitation in data and a highly structured format, there is more to ISO 20022 than payments advantages. To have a truly impactful conversation, we must consider the business value that ISO 20022 adoption can provide.

◉ Corporate treasurers receive tools required to enhance cash flow forecasting and improve reconciliation processes with richer, comprehensive data.

◉ With increased automation potential, treasurers benefit from faster payments with less friction, allowing quick decision making while meeting payment cut-off deadlines for sweeping and investing activities.

◉ The payments community could consistently send the same structure in payment messages to multiple, geographically distributed entities without having to develop a bank-specific format.

◉ Data required in one jurisdiction, but optional in another, can consistently travel with the payment message whether required or not.

◉ The payments community gives business users the full set of data that can be contained within purchase orders and invoices, rather than a series of truncated or contracted characters.

◉ Individuals could simply click on their payroll deposit in their bank account to see their full paystub, rather than having to get the details from another system.

Perhaps ISO 20022 shouldn’t be perceived as today’s biggest value driver, but rather as the catalyst for innovation that will accelerate value-driven growth tomorrow. In a way, ISO 20022 adoption is paving the way for the next generations of payments professionals to create opportunities for the development of the industry. It allows more players in the FinTech space to collaborate with financial institutions to innovate the payments landscapes and to co-create in a climate of competition.

70 countries have already successfully modernized payments infrastructure and implemented faster payments schemes powered by ISO 20022. Forward-thinking institutions in these countries can start developing value-added services and features like automated receivables tracking and reconciliation, real-time cash balances and forecasting, real-time multibank dashboards and more.

Should institutions and companies wait until there is a more immediate return on investment to adopt ISO 20022?

Ask yourself, “Do I want to wait until I lose a client to someone who can offer services on a real-time basis?” I believe that cross-border payments globalization will remain one of the trends that drives payments modernization. Standardization, consistency and rich data are key elements of this globalization initiative. Similarly to the telecommunications industry implementing the 5G network despite no obvious immediate business value or widespread end-user use cases, achieving complete interoperability in payments may take longer than we initially anticipated. However, as a part of the payments community, I challenge us to invest in a vision that goes beyond an imminent ROI and see the potential of data-rich, structured payments to create an inclusive, collaborative future for the payments industry. Let’s give ourselves the opportunity to accelerate payments innovation and make ISO 20022 table stakes.

Source: ibm.com

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How can we learn from Mother Nature?

Nothing in nature operates individually. Nature works in a connected, circular ecosystem where everything is leveraged, shared and repurposed. Did you know that a grain of sand from the Saharan desert affects the fertility of the Amazon Forest? Or that seaweed in the ocean can produce around 70% of the oxygen in the atmosphere?

In nature, everything is perfectly orchestrated in harmony. Why can’t our future economy be the same? Specifically, how can we enhance our banking and payments ecosystem to make it thrive?

As we contemplate nature’s ecosystem, we realize that a good foundation is vital for survival. Just as a sterile flower won’t attract a bee, we cannot operate in an ecosystem if the foundation has defects. The base element must be functional and productive before enhancing the following operation chain.

As the base element of our economy, our existing banking and payment applications must undergo an in-depth review to see if they must be recreated before they can be part of the future economy fabric. This transformation would include the entire framework of people skills, operational processes and technology infrastructure, in addition to the core functions of the product.

Target three key areas to mimic nature

First, we must align and reinforce our banking and payment platforms on a global level. The base element must be fully functional and productive.

Some examples to enhance the functionalities and achieve higher productivity:

◉ Provide timely visibility into all global transactions.

◉ Eliminate time-consuming manual payment generation.

◉ Protect against fraud.

◉ Keep pace with industry changes (formats and technologies, particularly in the payment process).

◉ Start to adopt digital banking and provide a seamless wireless experience for both employees and customers.

◉ Embed advanced security, like Security Service Edge (SSE) and Zero Trust.

Second, we must optimize the load to share and leverage our base elements. This is how we create a common infrastructure for our resources to work together.

Some examples to achieve such optimization:

◉ Adopt a flexible cloud strategy.

◉ Optimize infrastructure load across the cloud. This helps to distribute server workloads more efficiently, speeding up application performance and reducing latency.

◉ Share cloud standard services, like security framework, certificate management, identity management, licensing services, metering and monitoring services.

Third, we must interconnect and open our systems, which is how we bring life to the entire ecosystem and make it function as one body.

Some examples to achieve such interaction:

◉ Leverage cloud interconnectivity and adopt a hybrid cloud strategy.

◉ Adopt an API and microservices strategy.

Share multiple resources for a richer ecosystem

As a banking and payment industry leader, IBM can help ignite banking and payments businesses in every country to enhance performance. Aside from technological shifts, IBM identifies the core business needs and what’s expected from those systems, applying the latest industry standards both from a business and technologies standpoint and reimagining and rearchitecting those systems to withstand the viral shifts in business requirements and technology.

Our banking, payments, business process workflows, development, infrastructure, architecture and security experts can reimagine and design systems to address future ecosystem challenges. Leveraging more than 100 years of experience, we are paving the way for the world’s future business and technology demands. This new era will change the face of this industry in terms of speed, agility, interoperability and performance.

Nature cannot depend on a single resource; nor can our financial systems. For example, enterprises face pressure and challenges to move beyond a single cloud provider. The hybrid cloud tackles those challenges by connecting and sharing multiple resources to produce an effective ecosystem with improved performance. The hybrid cloud can connect systems around the world with speed and efficiency, allowing the use of widely spread infrastructure to accelerate offerings worldwide.

That’s what the IBM Payments Center™ (IPC) is doing with the IBM Service Bureau for SWIFT as we leverage IBM financial cloud offerings with on-prem and other public cloud offerings. We set the stage to deliver a SWIFT solution that fits any client’s need in terms of cost, speed, regulations and cloud performance, without the need to tie to one provider or a single technology. Our vision for our clients allows them to consume SWIFT as a service regardless of where the platform runs.

In addition, a hybrid cloud brings many additional benefits, including the following:

◉ Modernizing at a pace that makes sense for the business

◉ Maintaining regulatory compliance as many industries require systems (or data) to sit in a specific location (such as SWIFT data)

◉ Running applications at a remote edge location, as some industries require edge hybrid computing for low latency and better user experience.

COVID has forced the acceleration of digital transformation in banking and payments. We offer contactless experiences for clients and automate more processes. Very few applications today can accomplish goals on their own without connecting to other systems within the technology stack to share data. For this reason, developers must build “open” systems with connectivity to other systems in mind. APIs can bring that fabric to life; open APIs can accelerate growth and allow the application to communicate at its core. APIs enable integration with emerging technologies at scale, exchanging information, leveraging existing systems to produce a scalable business model and allowing integration of new financial technologies.

As a leader in emerging technologies and payment solutions, IPC has adopted a strategy to mimic a natural flow. As we reinforce the fabric of payments worldwide, design future-proof solutions, adopt in-depth hybrid cloud offerings and open API to interconnect our solutions around the globe, we are creating a living financial system.

Source: ibm.com

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Banks are losing money on new payment systems

Payments modernization reminds me of bathing toddlers. It could sometimes be quite a project at our house, when our boys were toddlers, with splashing, shouting, and arguments over bath toys. So why bathe both at once? Because the alternative is even more work, especially if you are the only parent available. The challenge of bathing two toddlers together is nothing next to the challenge of bathing one toddler while chasing the other around the house — twice.

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Many financial institutions (FIs) are in the throes of modernizing their own payments infrastructures individually, and they are each figuring out how to develop and deploy systems that all do essentially the same thing. This is like trying to bathe two children separately, using the same resources each time, and missing the efficiency of accomplishing both jobs at once.

Where banks lose money on payment modernization

In some jurisdictions, FIs have collaborated to establish a common set of standards and processes for payment market infrastructures, such as NPP in Australia, Lynx in Canada, or TCH RTP in the United States, to name a few. Helping establish a new payments market infrastructure is only one aspect. For every new market infrastructure or change in payment message format, each FI still needs to build their own capabilities to connect to those new systems. As the entry points and gatekeepers for their end users into those new market infrastructures, does it really make sense for each FI to tackle the same problem separately in their own shops using essentially the same tools?

More specifically, the challenge is true for the payment technologies each FI uses in their middle and back-end layers for validating, processing, clearing, and settling payments. The costs involved in these developments, for a new rail or even just a new messaging standard such as the SWIFT MX standard, can be quite high. For many there is simply no business case that supports the necessary changes. There is little new, incremental revenue to be gained from developing a new payment system that will simply see existing volumes shift from one rail or format to another. The incentive for most financial institutions is that if they don’t modernize and their competitors do, they may lose customers to the competition, thus losing both fee revenue and the deposit balances that support those customers’ payments. Those deposit balances are what banks chase for their fundamental business of lending.

In some cases, when customers adopt a new payment rail, an FI may see lower revenue from fees than what they earned with an older payment method. Consider a business accepting real-time or near-real-time payments such as Interac e-Transfer, TCH RTP, Zelle, Faster Payments, etc. Those payments may have previously been made by credit card, a more lucrative form of payment for issuing FIs. In many jurisdictions, the FIs have offered these newer payment types for low or no fees, due to competitive pressures. The FI pays a high cost to build and maintain systems just to keep the client business they already have. It may even lose revenue, while tying up resources in the deployment process with essentially no return on the investment. The FI also faces the ongoing cost of maintaining and upgrading those systems over time. To invest in new systems at a high cost while forgoing revenue is a lose-lose proposition.

How banks can save costs and retain customers through payment modernization

The differentiating benefits of modernized payment systems for FIs and their customers are not found in the “back-office” processing, clearing, and settlement systems. They are found in the front-end features and functions provided to the customers, including retail, business and government clients, who initiate and receive payments. Those are what attract and retain customers. It simply makes economic sense to turn to a cloud-based payments-as-a-service, pay-as-you-go model to fulfill an FI’s back-end processing and operational needs, while spending more time and money on the front-end: delivering value-added services to their customers. Since some cloud-based payment services already exist, and are, in some cases, used by more than one FI, what’s left for the FI is the front-end and integration costs for the new system – costs they would have had anyway.

In a recent survey of 300 financial institution IT and operations executives from around the world, 84% said that their IT environment has changed more in the last 12 months than in the company’s lifespan. Moreover, 88% of those surveyed stated that short-term thinking has IT and operations teams choosing options of lower quality, partly hampered by inadequate budgets, resulting in poor system resiliency.

It’s becoming clear that financial institutions need to actively consider new models for payments that don’t extend or exacerbate their existing IT challenges — or introduce new ones — due to short-term thinking. Many other industries have shifted to cloud-based, as-a-service models that have helped them advance their interests and provide better value to their investors and customers. These models are used by multiple organizations, allowing them to share the same resources at a lower cost. It’s time financial institutions did the same with their payment systems.

Source: ibm.com

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The next era in banking starts with reframing trust

In a world where 76% of Americans are choosing mobile apps over teller windows and digital wallets are fast replacing cash in pockets, banks are changing rapidly. But it’s more than just expanding digital services. Financial institutions are faced with a culture shift that requires redefining and earning customer trust.

Trust has always mattered in banking. But it has been a particularly thorny issue since the 2008 financial crisis when it became clear that banking practices did not always serve the best interest of customers. “The industry did try to claw back a good 10 years after that to say, ‘We are rebuilding trust with customers,’” says Anthony Lipp, IBM Global Head of Strategy for Banking and Financial Markets.

An Investment in Trust

When COVID-19 hit, an opportunity inadvertently presented itself: the chance to build trust around customers’ unexpected needs. As branches abruptly shuttered around the world, banks had to find new ways to engage with customers. In the case of helping customers apply for loans or open new accounts, financial institutions had to deftly swap face-to-face and other human interactions for more digitally-powered solutions. For instance, when call center volume shot up as much as 400%, banks leaned more on automated chatbots to handle the enormous volume increases.

This accelerated digital transformation ushered in a heightened and different focus on customer centricity.

Regulated versus unregulated trust

From the establishment of the First Bank in 1791, to the 1929 stock market crash, to the sub-prime mortgage crisis, U.S. banking regulations are constantly changing to mitigate risks (such as financial instability) and to protect customers. Banks are entrusted with personal and confidential customer information that they are obligated to protect.

At the same time, banks need to work toward what Lipp calls “unregulated trust,” building trust beyond what is required by regulation. Is the financial institution operating in the best interest of the customer? Or is it creating friction that often results in hidden charges or a fee?

According to the Consumer Financial Protection Bureau, in 2019 alone, credit card companies charged $14 billion in “punitive” late fees, and banks charged $15 billion in overdraft and non-sufficient-funds fees.

“Unregulated trust requires creating a banking relationship that is more transparent,” says Lipp. “Customers want visibility of the entire product process.”

This is a challenge in an industry where business processes have historically been opaque. Take home mortgages, which typically involve a 12-step process. The customer is faced with the laborious task of filling out the application, which then goes into the dark, mysterious void of “processing.” Banks increasingly offer digital platforms where customers can log in and track the progress. That’s a big step in the right direction. When the customer has more visibility — when they can view outstanding requirements, the schedule of fees, and other parts of the process — they gain a sense of control and an experience they can trust. 

Technical Debt of Legacy Banks

While the pandemic pushed banks to transform their operations to meet customer needs, the industry still lags behind other business sectors in embracing new digital operating models.

“Banks have traditionally been very monolithic,” says Lipp. “It’s hard because the industry is dragging 50 years of layered legacy versus building something new. Companies that were built more recently, like Amazon and Google, didn’t start with this legacy complexity.”

To catch up, banks are seeking to deliver a more transparent, easy and efficient experience enabled by exponential technologies such blockchain and AI delivered on the hybrid cloud. They are modernizing their legacy systems and business processes in place within a structurally lower operational cost envelope.

Startups, fintechs and other disruptors

In recent years, mortgage volumes went through the roof as new homeowners migrated out of dense city centers and took advantage of low interest rates. The fintech players in this space were more than ready to meet this surge in demand. They showed home buyers the entire process, from application to closing, through digital end-to-end platforms. Through that transparency, they started to earn trust from a customer base that had historically relied on incumbent banks.

“It was harder for many incumbent players,” says Lipp. “How do non-digital incumbents double the size of their workforce to deal with these volumes? Newer nontraditional players could just add another server.” This rapid, scalable growth has seen companies like Square reach market caps comparable to the 209-year-old Citibank.

Disruptors are also seeing stunning success in the small business space. When traditional banks onboarded a small business customer, they charged a sizeable onboarding fee to cover traditionally inefficient processes, then leave customers waiting for weeks on end. They charged even more for additional services. Digital payment companies, on the other hand, allowed small business owners to onboard for free in minutes.

For the digital payment company who poaches that new customer, says Lipp, “they are not just getting the payments business, they’re getting point-of-sale, finance and accounting, inventory management, and much more functionality within that small business ecosystem,” says Lipp. “But more importantly, they’re extracting value tied up in the friction between the individual value chains supporting small business.”

The emergence of embedded finance

In recent years, emerging platform-enabled, customer-centric business models have made it simpler for customers to go about their lives and conduct business by tapping into value chains within and across industries. Financial services are an integral enabler for many, if not all, of these ecosystems. Take a moment to think about all the interconnected elements of commerce happening in the background of your day. To reduce the friction in these complex customer interactions, platform companies are increasingly embedding financial services into their value propositions, especially in payments.

“The real challenge banks have had in this new operating environment is determining how best to embed their products and services, without accelerating the commoditization of their business,” says Lipp. Financial institutions can rebuild that customer trust by becoming truly customer-centric and showing up where their customers expect and need them to be.

Innovative financial service leaders are embedding and integrating their capabilities into platforms throughout the expanding, cross-industry ecosystem. With these new integrations, they can engage customers differently, and in the process, gather new insights to improve their own platform by developing targeted products and services.

Ultimately, it’s a win for the customer, a win for the ecosystem platforms and a win for the financial institution, all with trust at the core.

“People don’t wake up in the morning thinking about doing banking,” said Lipp. “But they want to make sure that banking is there when they need it, that it’s embedded in the right part of the experience, and that it can be trusted.”

Source: ibm.com

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