Jenna Lomax talks to the industry’s payments experts to analyse why established banks and vendors — who manage to keep up with the pace of change in the modern payments environment — will be the most fortuitous in the years to come
With the US and EU set to mark their five-year anniversaries for real-time payments and SEPA Instant Credit Transfer Scheme respectively this year, it would be an understatement to say that the possibilities for the payments industry have developed significantly in recent years.
The technology used to enhance payment speed and velocity has catapulted and influenced international interest — by its nature, increasing cross-border initiatives. Gone are the days of exclusivity to European and US markets, with Asia now providing countless new payment possibilities, which has helped to level out, but certainly by no means lessened, western effort or interest.
However, as international interest levels up, the obstacles that banks, vendors and fintech companies are facing at the present time are doing anything but levelling out — on the contrary, they are escalating.
Regulatory and settlement time compressions — such as the move to T+1 — affect the payments sector just as much as any other major asset servicing area, even though the world of payments is sometimes considered a topic on asset servicing’s periphery.
Payments can also be considered to be a victim of their own success, with the real-time pressures that come from the nature of increasing instant and cross-border payments — particularly in the last five to 10 years.
More broadly, with industry barriers posed by the need for real-time fraud intervention, anti-money laundering screening, or struggles associated with new versions of ISO 20022-compliant payments, the hurdles are many, but the clear answers to overcome them are often but a few.
What is clear is that artificial intelligence (AI) will play its part in payments in the future, with The Payments Association predicting that the AI market will hit US$360 billion by the year 2028. The forecast, which was published in November 2021, outlined how AI is being used in the payments sector. But does this prediction just create one more pressure on an already toppling pile of others? The addition of more AI initiatives reflects the need for added security in payments. The Payments Association’s forecast found that 92 per cent of consumers expect a fast, frictionless experience, while also getting one that is as trustworthy and secure as possible.
Though well-placed investment in modern AI systems will, in the majority of cases, see any financial service thrive, it goes without saying that the financial industry has never started on an even keel. Insert here the sociological question of cultural and environmental factors.
Essentially, the big established banks that have the funds will have the luxury to outsource and invest in AI and the cloud, while sparing no costs on research and development in any other areas that may need the funding for efficiency and improvement.
Small to mid-sized banks, vendors or fintechs may not be able to afford the same luxuries — or more accurately put, the same necessities — creating a myriad of problems.
The modern way: ISO 20022
In a recent Volante survey, 50 per cent of small European businesses said they now make cross-border payments, and about 85 per cent across segments of all businesses, as globalisation continues to drive a higher volume of cross-border payments.
In the global survey, conducted in collaboration with Aite Novarica Group, Volante attributed the increased levels of cross-border payments over the last five to 10 years to expectations of a better payments experience; the significant revenue to be gained by providing cross-border capabilities, and the utilisation of the ISO 20022 messaging format.
As the revenue potential from cross-border payments continues to rise, and the options available to make those payments evolve, banks need to be aware of the competitive landscape, available technology options, and how to provide a robust offering that captures the growing market of businesses that must make cross-border payments, Volante outlined when the survey was published in March 2022.
In that same month, Volante Technologies launched the Volante ISO 20022 Service in an effort to simplify the complexity of ISO 20022 modernisation for financial service firms involved in the processing of payment messages.
The Volante ISO 20022 Service contains microservices-based application programming interfaces (APIs) for initiation, transformation, and translation of ISO 20022 messages to and from legacy formats to help organisations tackle the challenges of ISO 20022 upgrades.
Giving a wider view of the state of affairs for instant payments and how he sees them developing, Ainsley Ward, vice president of payments solutions at CGI, outlines: “With many in our industry still struggling with the changes required for supporting ISO 20022 payments, the further upheaval required to add the required capabilities [needed for instant payments] is likely a step too far at this point.
“Consequently we will likely see either increased levels of outsourcing for payment systems and related platforms, or banks pushing participation into the future,” he adds.
Clare Rhodes, head of sales and marketing at Identitii, indicates instant payments will not be streamlined, or indeed refined, until the industry has access to “instant know-your-customer (KYC) and instant information sharing along the payment chain”.
“There needs to be a level of trust across borders and between institutions,” she affirms. “What would really change the game for instant payments is an internationally recognised beneficiary store, which is ‘trusted’ by all parties on the chain. It is an idea that has been thrown around for a while but has not got off the ground.”
The benefits of the cloud
Until a quasi-utopian beneficiary store exists for KYC purposes, outsourcing has alleviated some other payment-related burdens in recent years, and will for the foreseeable future continue to be the point of call for both established and start-up institutions.
“Technology providers who have a focus in one area, are going to be able to fix things faster and are likely to be more proficient at that one thing than internal technology teams who have a broad remit and where every project must get in line according to priority,” affirms Rhodes. “Best of breed is a term for a reason.”
Though 2022 has not long reached the end of its first quarter, a considerable amount of mandates have already been signed this year to help in-house staff or clients with ISO 20022 compliance. There has also been a significant increase in the digitalisation of payments processes, with countless cloud-as-a-service models on offer — but, again, to those with the resources to afford it.
In February, FV Bank, the US bank for digital asset banking and custody services, introduced its first API to advance bank automation and integration for its clients’ operations, enabling firms to scale their operations through automating data flows and payments systems. The following month, Volante Technologies and KPMG partnered to offer financial institutions ISO 20022 and real-time payments readiness diagnostics.
The strategic partnership offers banks cloud-native payment solutions and related advisory services, enabling banks to modernise and speed up their payments processes and operations. However, Vinay Prabhakar, vice president of global marketing at Volante, outlines that payments, though becoming more international by their own design, are still part of a regional and strategic game.
He says: “Any time we witness disruptive or transformative change in an industry it creates hurdles for some participants but clean runways for others. In some regions there is concern about regulatory compliance with regard to cloud and that can hold banks back. There are parts of the Middle East and Asia that are still in the evaluation phase, but it is clear that it is a matter of “when” rather than “if” those restrictions are lifted. When those gates open, institutions that have been thinking in terms of agility and innovation and have already moved to architect their payments infrastructures in a cloud-ready way, are the ones that will take immediate advantage,” Prabhakar adds.
Real-time data and regulation
As cloud-as-a-service is being used as an advantageous asset in itself, so is data — particularly real-time data. Many countries are developing real-time payment instant schemes in response to customer expectations for the same seamless, real-time experience for payments.
This has been a move heavily encouraged by the logistics necessitated by the COVID-19 pandemic, as financial institutions have had to turn themselves into remote organisations with a focus on straight-through processing.
Roberto Catanzaro, chief transformation and strategy officer at Italian payments company Nexi, outlines: “Real-time data is at the very basis of the evolution of payments’ players from mere technology providers to trusted business partners. Indeed, nowadays, merchants are increasingly relying on data-driven services provided by their acquirers and point of sale providers to manage customer relations and business operations.”
Real-time data enhances and creates a pathway for real-time payment schemes. Volante’s research with Aite Novarica Group shows that in 2014, there were only 14 local real-time payment schemes globally, whereas, currently, that number is just over 60, with 20 of those networks launching in the last 18 to 24 months.
Volante highlights that along with speed of payment settlement, these networks have “spawned innovation in improved data”.
However, by their very nature payments are at risk to financial crime and on an ever-present, magnificent scale, even more so with the external pressure of real-time expectancy, cutting the times for necessary checks and balances.
Rhodes indicates: “Until there is a way to create a single global KYC regulatory framework, or there is enough trust around financial crime compliance processes between countries and organisations, there will always be payments that get held up.”
She adds: “To be comfortable with instant payments, payment processors need to be able to assess the level of risk they are comfortable with and decide whether a certain transaction, between certain parties and certain currencies or jurisdictions, is within their risk tolerance. The real-time nature of ‘instant’ makes this incredibly difficult.
“While not a regulation, ISO 20022 will be a game-changer here because of the ability to include more information in each message. From a regulatory point of view though, ISO 20022 does impact how financial crime reporting is done.”
All change
Another area that attracts financial crime is unregulated crypto assets. Due to their having little to no regulation in the traditional market because of their newness, it has been well documented they are a keen target for criminals — but how does this affect payments directly?
According to the UK Financial Conduct Authority chair, Charles Randell, “there are no assets or real-world cash flows underpinning the price of speculative digital tokens”, he warned in a published speech last year. “Even the better-known ones like Bitcoin, and many cannot even boast a scarcity value,” he added.
In a similar vein, but with more power at his disposal, US President Joe Biden signed an executive order on 10 March 2022, which highlighted the US Government’s commitment to ensuring that virtual assets and cryptocurrencies will be subject to further compliance measures with appropriate regulations and supervision.
Such changes to policy like Biden’s are, Rhodes says, “indicative of the fact new payment flows are coming at us hard and fast and regulators are doing their best to ensure we continue to do what we can to prevent financial crime”.
Volante’s Prabhakar expands: “With the volume of cryptocurrency trading being currently tilted in the direction of speculative trading, eventually the percentage of volume used for payments will rise and banks will be required to consider them as another payment type.”
As with most things in asset servicing, nothing comes in a vacuum — the back-office has never seen so much collaboration with the front and middle offices, and it is Volante’s Prabhakar opinion that the payments industry should not operate in a void, particularly given the unprecedented times we are currently living in.
He says: “In today’s society it is important for payments vendors and their clients to look at their role in the broader economy. This includes their role in expanding financial inclusion and lessening the impacts of systemic crises, such as pandemics and wars.”
As of 1 March 2022, payments giant SWIFT blocked a large number of Russian banks from its international payments system in response to Russia’s invasion of Ukraine after other financial sanctions imposed by the west.
However, speaking on the wider future of payments Nexi’s Catanzaro says the payments industry needs “the integration of different offerings and channels to create ecosystems of services that can satisfy a wide range of clients’ needs”.
“To achieve this goal, payment market operators need to keep investing in the development of new technologies and functionalities as well as consolidating industry partnerships in order to enrich their proposition.”
To which CGI’s Ward echoes: “Delivering solutions that facilitate change and are more easily integrated have become must-have traits, and naturally cloud-native support is a must. We all need to accept change as a constant, and plan for it accordingly.”
However, the question remains: can everyone afford the same necessities?
