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2021 Predictions: Realising the Value of Payments Transformation

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2021 Predictions: Realising the Value of Payments Transformation 1

By Simon Wilson, Co-Head, Payments at Icon Solutions

It has been said that prediction is very difficult, especially if it’s about the future. The unprecedented events of 2020 demonstrated quite how difficult it can be. The monumental uplifts in digital volumes, shifts in customer requirements and broader economic impact would have been (and frankly still are) barely conceivable.

As such, financial institutions find themselves facing a very different, uncertain world. Yet from this period of unique instability, digital change has been substantially accelerated and foundations have been laid that will shape the direction of banking and payments for years to come.

Getting serious about data-driven payments

A 2019 survey by Aite Group found that only 18% of banks were moving from a transaction-based revenue model to a data-based approach. Although this figure is unlikely to have changed significantly since, data-driven payments are increasingly on the agenda for banks and we can expect more movement towards this.

This is partly due to the accelerated cost-pressure on payments as a result of events in 2020. More importantly, though, banks are steadily identifying concrete use-cases and seeing their benefits. Helping corporates manage cash and liquidity through automated data-based actions can start to ease serious headaches for treasurers, for example. Equally, payments data can be used to provide valuable economic insights to corporate customers. At the same time, retail banks are getting better at making informed offers and suggestions to customers based on payment flows.

With the rise of embedded finance, the ability of banks to support personalised and contextualised payments will increasingly be expected by their customers. But organising data efficiently to undertake such actions is no mean feat. Perhaps in 2021, we will see more ways for actionable and insightful data analytics to help monetise payments.

ISO 20022 migration moves up the agenda

ISO 20022 will play a critical role in supporting the shift to a data-based revenue model. With constantly shifting timelines and strained resources, it has been easy for banks to put ISO 20022 migration on the back burner. But as deadlines near, it is important for banks to focus on the long-term opportunities rather than the short-term pain.

ISO 20022 allows banks to improve and extend the payments-related services they provide to business customers, enabling the move from pure transaction-based services to value-added insights and advisory services. As banks look to reassess their long-term strategy, expect ISO 20022 to provide a catalyst for banks to embrace payments innovation.

Realising instant payment benefits

Following years where the focus has been on technical implementation, we are now seeing industry initiatives focused on maximising the value of instant payments.

Simon Wilson

Simon Wilson

From a retail payments perspective, we can expect to a hear a lot more about the European Payments Initiative (EPI) in 2021. Unlike the several aborted attempts that preceded it, EPI has big bank buy-in and a strong regulatory mandate from the European Central Bank. This may well mean that the long-held ambition to create a third payment scheme in Europe will actually come to fruition and bring the benefits of instant payments to the point-of-sale both in-store and online.

On the corporate side, Request to Pay schemes could prove to be the ‘killer app’ for B2B instant payments. If uptake builds and businesses get on board, the significant benefits could start to be realised.

The time is now for cryptocurrencies and CBDCs

Beyond instant payments, momentum is also building for cryptocurrencies as an alternative payment method. Although lauded by their advocates for their efficiency and low cost, crypto has for many years been something of a fringe curiosity with a hardcore fanbase.  As the underlying technology matures, however, cryptocurrencies are increasingly crossing over into the mainstream with support from global banking and payments giants.

It is central bank digital currencies (CBDCs), however, that stand to present the most wide-ranging strategic implications for commercial banks. Central banks that find themselves compelled to mitigate the decline of cash, modernise payment systems, support economic recovery and promote financial inclusion are looking to expand their fiscal armoury, and this has renewed focus on the potential of digital currencies.

And with private initiatives such as Diem – rebranded from Libra in an attempt to remove the radioactive Facebook connection – posed to launch in 2021, we can expect increased urgency from central banks to explore and leverage CBDCs.

Government backed, digital identity usage goes mainstream

With digital transactions and interactions rising, there is a corresponding and increasingly urgent need for a trusted, convenient and scalable digital identity system to promote financial inclusion, reduce fraud and improve the customer experience.

Yet, it is fair to say a widely used solution to the digital identity challenge in the private sector has so far proved elusive, and the industry has not yet reached critical mass. Revisions to regulatory directives such as eIDAS, the coming age of CBDCs and emerging concepts such as Self-Sovereign Identity (SSI) – plus a whole raft of other national, bloc and international policies on “Digital” – are pointing towards a fully digital world built on a cornerstone of trust. Banks’ trusted position and regulatory know-how gives them a head start, and we saw growing momentum for bank-led digital identity activity in 2020. Expect this theme to continue in 2021, creating opportunities for new disruptors to emerge and the old guard to build on their transformation journeys.

Building the business case for payments transformation

Given the scale and pace of change, transforming expensive, inflexible and unreliable technology estates is no longer optional and must now be a key priority for many banks. Reducing total cost of ownership (TCO) is a critical consideration for any transformation project, but the required investment is about more than cost savings from IT simplification. Dramatically lowering cost requires re-architecting to offer the fastest route to staying competitive in a rapidly changing landscape.

This reflects a big challenge for banks, in that many are not sure how to identify the long-term revenue opportunities and quickly build the capabilities needed to realise them. Indeed, McKinsey reports that less than 10% technology spend at an average bank increases value-added business functionality.

It is crucial, therefore, that transformation projects are underpinned by a clear business case that reflects the importance and role of payments data as an enabler across the organisation. Perhaps the key underlying trend we can expect to see in 2021, therefore, is banks increasingly considering the strategic role that payments can play, but most need to cut costs by factors, not percentages.

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Sterling gets vaccine boost to hit 8-month high vs euro

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Sterling gets vaccine boost to hit 8-month high vs euro 2

By Joice Alves

(Reuters) – Sterling rose to a fresh eight-month high against the euro on Wednesday as Britain’s faster COVID-19 vaccine rollout than in the European Union offered support to the pound.

Although Britain’s deaths from the coronavirus pandemic passed 100,000 on Tuesday, its faster initial vaccine rollout has fuelled hopes for economic recovery.

Sterling was up 0.3% at 88.28 pence at 1049 GMT, after hitting a fresh eight-month high of against the single market currency.

Graphic: Sterling 27 Jan, https://fingfx.thomsonreuters.com/gfx/mkt/jbyvrnbbbve/Sterling%2027%20Jan.png

Geoffrey Yu, senior EMEA market strategist at BNY Mellon, said “the general theme of UK doing well with vaccinations is playing a role” in lifting the pound, which is “not expensive and not over-owned yet”.

On the other hand, “the euro is clearly being undermined by ongoing concerns over vaccine rollout speed and supply,” Yu added.

Versus the greenback, sterling was flat at $1.3736, not far off a May 2018 high of $1.3759 touched earlier.

Hopes for a large U.S. fiscal stimulus package has fuelled risk sentiment in markets in recent weeks, benefiting sterling. Market participants are expecting Federal Reserve Chair Jerome Powell to renew a commitment to ultra-easy policy.

“It’s FOMC today so the adjustment in dollar positions may be playing a role as well,” Yu said.

As Britain left the bloc in December, the City of London said the capital’s loss of some financial business due to Brexit has not been catastrophic and it will thrive even if the European Union “irrationally” blocks access.

“For now Sterling continues to trade more on hope, vaccines, than current reality,” said Jeremy Stretch, head of G10 FX Strategy at CIBC Capital Markets.

(Reporting by Joice Alves in VARESE, Italy. Editing by Alexander Smith and Andrew Cawthorne)

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Dollar advances as investors shy away from risk

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Dollar advances as investors shy away from risk 3

By Saqib Iqbal Ahmed

NEW YORK (Reuters) – The dollar edged higher against a basket of currencies on Monday, as a burst of volatility in stock markets around the globe sapped investors’ appetite for riskier currencies.

Concerns over the timing and size of additional U.S. fiscal stimulus sent major U.S. stock indexes briefly more than 1% lower before they recovered to trade little changed on the day.

The sharp move in stock markets soured FX traders’ appetite for risk, Karl Schamotta, chief market strategist at Cambridge Global Payments in Toronto, said.

“Your high beta currencies – currencies that are highly correlated with equity markets and global risk appetites – are tumbling in synchrony with equity indexes,” Schamotta said.

Market sentiment turned more cautious at the end of last week as European economic data showed that lockdown restrictions to limit the spread of the coronavirus hurt business activity.

The U.S. Dollar Currency Index was 0.19% higher at 90.396, after rising as high as 90.523, its strongest since Jan. 20.

The euro was down around 0.28% against the dollar. German business morale slumped to a six-month low in January as a second wave of COVID-19 halted a recovery in Europe’s largest economy, which will stagnate in the first quarter, the Ifo economic institute said on Monday.

The Australian dollar – seen as a liquid proxy for risk – was 0.16% lower against the dollar.

U.S. stocks have scaled new highs in recent sessions even as concerns about the pandemic-hit economy remain. Investors are trying to gauge whether officials in U.S. President Joe Biden’s administration could head off Republican concerns that his $1.9 trillion pandemic relief proposal was too expensive.

Despite the dollar’s recent rebound – the dollar index is up about 1.3% since early January – analysts expect a broad dollar decline during 2021. The net speculative short position on the dollar grew to its largest in 10 years in the week to Jan. 19, according to weekly futures data from CFTC released on Friday.

The U.S. Federal Reserve meets on Wednesday and Chair Jerome Powell is expected to signal that he has no plans to wind back the Fed’s massive stimulus any time soon – news which could push the dollar down further.

Sterling strengthened on Monday against the weaker euro as Britain’s COVID-19 vaccine rollout over the weekend offered support to the British currency.

(Reporting by Saqib Iqbal Ahmed; Editing by Andrea Ricci and Sonya Hepinstall)

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London and New York financial services treated the same, EU says

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London and New York financial services treated the same, EU says 4

By Huw Jones

LONDON (Reuters) – An EU forum for discussing financial services with Britain will be similar to what the United States has, and it must be in place before market access will be considered, the bloc’s financial services chief said on Monday.

Britain’s Brexit trade deal with the EU from Jan. 1 does not cover financial services, leaving its City of London financial center largely cut off from the EU.

Both sides are committed to creating a forum for financial regulatory cooperation by March, but talks have not started yet, the EU financial services commissioner told the European Parliament.

“What we envisage for this framework is similar to what we have with the United States, a voluntary structure to compare regulatory initiatives, exchange views on international developments and discuss equivalence related issues,” Mairead McGuinness told the European Parliament.

U.S. and EU regulators took about four years just to agree on rules on cross-border derivatives.

Trading in euro shares has already left London, along with a chunk in swaps trading. That questions the value of any future EU access given that many banks and trading platforms from the UK have opened units in the bloc.

McGuinness said regulatory cooperation will not be about restoring market access that Britain has lost, nor will it constrain the EU’s unilateral equivalence process.

Equivalence refers to EU access when Brussels deems a non-EU country’s rules are similar enough to the bloc’s.

“Once we agree on our working arrangements, we can turn to resuming our unilateral equivalence assessments… using the same criteria as with all third countries, including anti-money laundering and taxation cooperation,” she said.

Britain plans to amend some EU rules.

“The United Kingdom intention to diverge requires a case-by-case discussion in each area. Equivalence and divergence are polar opposites,” McGuinness said.

“I am optimistic that over time, through cooperation and trust, we will build a stable and balanced relationship with our UK friends.”

(Reporting by Huw Jones; Editing by Dan Grebler)

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