Don’t rebuild your SWIFT connectivity on cloud

Banks and businesses worldwide have embarked on a modernization journey, trying to re-imagine their systems and get ready for the world of tomorrow. While each institution faces different challenges, all are seeking common goals: new and improved channel experiences, integrated new technologies, cost management and cost takeout, improved risk management and security, reduced down-time, and operational efficiency. These goals are aimed to set the foundation for growth and agility and ultimately a better client experience.

To support this journey, most banks and businesses have announced a cloud adoption strategy. They see that the success of their transformation strategies is inextricably linked to moving to a cloud model for the flexibility, agility, resilience and time-to-market acceleration it offers. As the race to cloud adoption continues, now is the time to stop and evaluate the many options available to achieve your goals. Can you securely interoperate with ecosystem partners and networks? Can you automate to mitigate compliance risk? Are your systems designed with zero trust in mind? Are your in-house resources optimized for high-value work or burdened by increasing operational demands?

Cloud adoption has become mainstream. With its proven benefits, executives in every industry are investing and demanding that their physical infrastructure is moved to cloud, pressuring their teams to deliver mass migration to cloud while losing sight of their real objectives. Increasingly, we see businesses “lift and shift” their systems, recreating the same issues in a new environment and gaining nothing but the bragging rights of a “cloud infrastructure.”

Cloud adoption is a tool to achieve your goals, it should never be the goal. 

Should you rebuild your SWIFT connectivity on public cloud?

Of the critical components in banking and payments infrastructure, SWIFT provides the key core network for domestic and international financial messaging. It is the backbone on which the global economy is built. Maintaining connectivity to SWIFT is critical and any unplanned downtime of exclusion from the network harsh economic impacts. Recently, SWIFT has broadened access to its 11,000 member bank and corporate network with public cloud connectivity provided they comply with SWIFT Customer Security Program (CSP) requirements and abide by the application installation and configuration guidelines. SWIFT hardware components need to continue to be deployed on-premises or in colocation facilities to establish and maintain connectivity.

Modernize your payments with the IBM Payments Center

This sure smells like a “rebuild your SWIFT connectivity ’as-is’ on public cloud.” So what do you gain? You still have to build and configure your infrastructure. You’re still responsible to maintain the infrastructure and apply upgrades. You still have a physical footprint to manage. You still have to build or retain the skills and resources to support a SWIFT infrastructure and the responsibility to comply with mandatory controls. This is not cheaper, better or faster. Instead, consider shifting from a “build and maintain” model to a “subscribe and accelerate” model that integrates a value-added, SWIFT-certified service bureau and a purpose-built cloud for financial services.

Imagine a model where your SWIFT infrastructure is hosted on a public cloud specifically designed to comply with financial services standards, fully maintained and managed by a team of SWIFT experts you can leverage at any time. You could connect to a worldwide network of fully redundant SWIFT gateways, guaranteeing the availability of your connectivity while completely eliminating the hassle of managing it. Sound too good to be true? This is achievable, but it requires a partner with the end-to-end capabilities and expertise to meet the complexities of the challenge.

So what’s the primary consideration if you are moving your SWIFT infrastructure to cloud? It all boils down to one question: “What value am I looking to gain from this initiative?”

The reality of a SWIFT infrastructure is that it requires a physical footprint to host hardware components. A migration to cloud will likely require you to maintain some components on premises or deploy them in a new colocation facility, thereby increasing operational complexity. Leveraging managed services, at least for key components of the infrastructure, will drastically reduce cost and risk.

Furthermore, although hyperscalers have accelerators and tools to help build the infrastructure, you are still responsible to deploy, configure, integrate, maintain and update your infrastructure. This requires you to develop and maintain highly sought-after skills and resources. Finding the right partner who can manage your SWIFT infrastructure will allow you to leverage a pool of specialized resources available on demand. These resources will support you through the implementation and run phases of your deployment. This team will also be available to recommend innovations and support you in future initiatives to adopt new SWIFT capabilities (gpi features, APIs, other messaging options, etc.) or to comply with future mandates.

Finally, complying with SWIFT Customer Security Program (CSP) controls is mandatory, and SWIFT’s multiple architecture models provide you options and flexibility to minimize the number and complexity of in-scope components. Leveraging API integrations or outsourcing certain components to a SWIFT Certified Service Bureau will enable you to simplify your annual assessment and transfer much of the responsibility to your partner.

Selecting the right cloud provider should enable you to go beyond the SWIFT mandates. When a cloud is designed for financial services, it addresses the complex operational, cyber, regulatory and technical risks that are unique to the industry. Only a cloud that addresses these risks can truly meet the needs for cyber resiliency, operational resiliency and operational efficiency.

For a cloud provider to stay abreast of complex regulations governing financial services industry adoption of cloud, it must join forces with leading financial institutions and industry regulatory partners to define and establish a security controls framework. It must then integrate these controls comprehensively into its IaaS and PaaS services and offer industry leading security capabilities and best-in-class encryptions to protect the most sensitive financial data. Such a cloud dedicated for financial services is designed to accelerate migration of most sensitive workloads in a highly regulated industry while reducing the risk, cost and time required for such transformation.

The migration of your SWIFT infrastructure to cloud may seem like a complex program to undertake. Fortunately, it doesn’t have to be an all-or-nothing approach. There are great gains to be made through a phased and strategic approach.

Think of the options that allow you to address your biggest pain points while minimizing the amount of investment: You can simply migrate your DR and keep your production environments intact. You can keep your messaging interface on prem while outsourcing your gateways and connectivity. You can maintain your environment as-is but deploy a third redundancy site on cloud. There are many other options you can consider that will drive value without a large cloud migration.

The right partner can help you not only assess options but think through and execute against the right combination of operating model, technology and skills needed to realize results in this dynamic environment.

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.

Read More: C1000-059: IBM AI Enterprise Workflow V1 Data Science Specialist

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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Why ISO modernization is so important for financial institutions

With the migration to ISO 20022 financial messaging standard, the world is moving toward a standardized system of payment messaging. ISO 20022, which SWIFT will enable for cross-border payments beginning August 2022, will significantly benefit financial institutions (FIs). But these institutions’ journey to adoption may prove quite challenging. To successfully implement the new standard, FIs will need a comprehensive solution for translation between legacy message formats and ISO 20022.

Opportunities in ISO 20022 adoption

This transition offers a golden opportunity to enhance how payments operate. In a world of instant payments and escalating payments fraud in the digital payments space, we must take this opportunity to reduce fraud, enhance compliance and build a better, more robust payment infrastructure. Ideally, a solution will offer ongoing interoperability across the different ISO-compliant payment networks.

Since the standard, and its adoption, continues to evolve, the solution must be future-proofed for ISO 20022 changes as they occur. An ISO-native solution will make it easy to adopt new requirements as they are published. Businesses will have the option to integrate payments into their complete order-to-pay business processes, instead of having to use separate business processes to invoice, receive a payment and ultimately reconcile that payment. The integration simplifies the process from start to finish.

ISO-native messages can contain more data than under previous standards. By leveraging this additional data, FIs can reach a higher standard of protection against financial crime, AML and sanctions. Businesses can better manage cash and liquidity risk through faster cash application, and both corporations and FIs can predict cash flows.

With easier access to standardized data sets, FIs can get data analytics faster and use payment stream data to provide business intelligence not previously available in other payment streams.

Developing an ISO API-enabled Transformation layer helps FIs create a business strategy that clearly defines the differentiated experiences and products the firm offers. And with an ongoing focus on the ISO APIs, FIs can connect to their ecosystems to deliver on their differentiated experiences and products.

With an ISO 20022 message-based API transformation layer solution, an FI can transform its legacy payment system messages into an ISO 20022-specific message format for the downstream system. This is almost a prerequisite for many FIs to bridge the gap until they have native ISO 20022 capability in their systems.

Accommodating legacy payment formats

Legacy proprietary formats such as SWIFT MT are already well-known and widely used in the industry, so it will take time to get used to ISO 20022. There is a strategic opportunity to allow for a few years of coexistence between legacy and ISO standards. But it is important to provide end-users with an interface that shows original and converted messages clearly and unambiguously, while providing functionalities that realize the value of ISO’s rich message fields.

A successful adoption of ISO 20022 should meet several objectives: reduce IT complexity, enable agility, enable partners, integrate seamlessly, and comply with regulatory requirements. These objectives may sound familiar: they are objectives for most FI IT systems generally. But they take on heightened importance when prioritizing ISO 20022-enabled systems.

This is especially true for the first objective, reducing IT complexity. Simply adding in an ISO 20022 layer to an existing complex system as a tactic to address the immediate gap may solve the immediate issue, but it does not address the longer term strategic objective of reducing complexity. In fact, as one moves to ISO 20022-native architectures and processing, a tactical solution may be throwaway or even a barrier to meeting that objective.

The future of financial messaging is still being written with respect to ISO 20022. But long-term strategic planning can’t wait. Institutions that adapt now will be better prepared for future changes.

Source: ibm.com

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Three mega-trends shaping the data economy

Data Economy - A European Perspective

I recently had the pleasure of chatting with Vilmos Lorincz, Managing Director of Data and Digital Products for Lloyds Banking Group in the United Kingdom. Data is a fundamental currency in financial services, and so developing new approaches for banking protocols is critical to formulating progressive solutions for both clients and industry colleagues.

In response to a demand by the U.K. government for more transparency in financial services, the Open Banking Implementation Entity (OBIE) was set up in 2017 to deliver architectures that give customers more control of their data within a secure framework.

Lloyds Bank undertook a decisive transformation by moving their big data to the cloud and advancing data literacy for its employees, upgrading their capacity to provide benefit to clients. “We had to design the new agile operating model for more than a thousand colleagues,” said Vilmos, “helping them land in their newly defined roles, making the right technology investment choices, while engaging with more than 20,000 people.”

Vilmos emphasized that ethical behavior is absolutely critical to gaining and maintaining client trust, establishing a company’s brand as honest and responsible partners.

When asked about mega trends that are shaping the data-driven economy, Vilmos suggested three fundamentals.

1. Customer awareness: As citizens become more digitally sophisticated, they are keenly attuned to privacy and security issues. They rightfully want control of their data, expanding their ability to explore and select personal options.

2. Maturing corporations: The corporate world is advancing its ability to adopt new processes that keep pace with emergent technologies to add value to their business models and to benefit their customers.

3. Regulatory bodies: Regulators and governments are playing active roles in adjusting to new market realities, both protecting individual rights and positioning their nation to take full advantage of the opportunities of the rising data economy.

“Organizations are realizing that data is a mission-critical competitive factor and a must-have to meet and exceed customer expectations,” Vilmos explained. “They are becoming much better at deploying machine-learning and artificial-intelligence capabilities as an increasing part of their data estate.”

Vilmos advises business executives to prepare for a fast-evolving future by establishing frameworks that can accommodate the growth of the data economy and by planning how to deliver their products within the data-driven landscape.

Source: ibm.com

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