By Marcus Sehr And Isabel Schmidt
The migration to ISO 20022, the new payment messaging standard, is set to have a profound effect on payments. Challenges lie in wait for many banks and their clients, who will have to invest significant resources to cope with the upcoming change. Yet crucially, these efforts will not go unrewarded. Marcus Sehr, Head of BNY Mellon Treasury Services, Europe, and Isabel Schmidt, Global Head of Direct Clearing and Asset Account Services, BNY Mellon Treasury Services, explain.
During the next five years, ISO 20022 is set to transform the payments industry. The migration will touch the payment lifecycle end-to-end and, as the implementation deadlines draw near, the implications and considerations are set to be far-reaching – requiring significant efforts and resources from banks and their clients. But, while many within the industry might be familiar with the term ISO, many remain unaware of the changes that await them.
So what exactly is happening? ISO 20022 will gradually replace SWIFT MT messages as the standard messaging format for the transfer of cross-border and high-value payments – bringing with it more structured, robust and comprehensive data. The migration is taking place in various stages, beginning first with the euro clearing system in November 2021, including TARGET2 and EBA Clearing. By that time, any bank that pays or receives euro transactions through the European clearing system will therefore need to be able to both send and receive ISO payments. The original November 2021 timeline for the migration of the SWIFT network to ISO was recently pushed out by a year to the fall of 2022.
While other jurisdictions are yet to fully confirm their timelines, industry experts expect the Bank of England’s deadline, for example,will follow in early 2022, with the US Market Infrastructures expected by late 2023.
The upcoming changes should not be underestimated. In the lead-up to and aftermath of the transition, banks will face a myriad of challenges. If they can overcome these hurdles – by establishing a clear, comprehensive strategy, educating and supporting their staff and clients, and preparing their systems – they have an opportunity to deliver a truly improved end-to-end payments experience for clients.
Used by legacy clearing systems established as far back as 40 years ago, MT messages and their equivalents– the incumbent payment messaging standard – lack the depth of information required to meet today’s cross-border payment needs. Therefore, to keep pace with evolving client requirements and technological advancements, the standard is changing to enable transactions to be optimised, with ISO setting the foundation for the future of payments.
ISO messages (otherwise known as MX messages) are based on XML (Extensible Mark-up Language), a text-based format that, when compared to MT messages, contains many more data fields. For example, under ISO, the comparable equivalent to a half-page MT103 message will take up multiple pages. ISO also fundamentally changes the language associated with cross-border payments. Those referred to as “originators” or “ordering parties” today will be called “debtors”; “beneficiaries” will be called “creditors”; and the parties along the chain will also have different terminologies.
As a result, the size, amount and type of data transferred across the payment chain will be vastly different. While this will unlock a host of benefits for banks in the long-term, ensuring their staff can understand the additional complexities and that their systems can handle the more granular data will prove a significant challenge.
What’s more, receiving and transmitting the additional information means that any system within a bank that touches a payment could be affected. As a result, they will need to engage in an in-depth review of each of their systems. As part of ongoing digitalisation efforts, many banks may have already incorporated systems that can cope with the richer data. The incoming challenge, however, will be most acute for banks that continue to operate on legacy systems that have little to no provision for ISO messages. To ensure their existing products and services continue to perform effectively, these banks will need to decide between fully upgrading their legacy platforms or building transitional models or insulation layers.
The coexistence conundrum
Another challenge that banks will need to navigate results from the fact that the fragmented migration approach necessitates a coexistence phase, during which some banks will begin to use ISO while others will continue to use legacy messaging formats.
This creates a number of complexities. This is because some European banks are likely to use the November 2022 deadline to migrate cross-border payments for all their currencies – not just euros – as many banks use a single platform for all high-value payments and will at that point be able to eliminate the complexity of handling multiple formats. As such, a payment might be originated in ISO but cleared through a market infrastructure that is not yet ISO-ready. This will impact not just those in Europe, but all parties in a payment chain who will have to deal with receiving differing amounts and types of information through a variety of channels and, in some cases, with excess data forwarded separately from the main payment information.
Crucially, stakeholders will likely not be able to ignore the additional information contained in ISO messages – even if they themselves are not yet migrated. Intermediary institutions are expected to uphold the integrity of the information they receive, while each individual bank will also need to assess whether the information needs to be sent to the client, as well as what needs to be done from a regulatory perspective. The upcoming migration should, therefore, not be underestimated.
Scale and scope
The scale of the task at hand for the payments industry is enormous. The areas of the business affected goes much further than just payments operations and cash management – potentially extending to all business lines that make payments. Depending on the structure of individual banks, this could make the move to ISO enterprise-wide.
For the affected business lines that sit outside of payments, performing the necessary impact assessments, obtaining stakeholder support and securing funding can be challenging. In such cases, knowing which stakeholders to involve in the migration strategy, be they product managers, customer services or enterprise risk teams, can prove difficult and could demand a more collaborative, multi-disciplinary approach.
Furthermore, while much of the migration’s focus is on the transformation of payment messages, ISO is also being extended to advice and statements. This means that demand deposit accounts (DDA) and reporting systems, as well as nostro reconciliation platforms, could be affected. Banks will also need to consider ancillary data translation services for the current MT FIN equivalents, as well as global client access functions that transmit statements and reporting.
What’s more, it is not just banks that will feel the effects – end clients will also have to prepare for ISO messages. Banks will be required to educate and support their clients in this endeavour, ensuring that they have the required information in the correct format and structure. As part of their ISO strategy, banks will need to decide what work they will undertake in this respect and what work needs to be done by the client, and find the right balance during the transition process: creating an enhanced ISO user experience, and making the preparation manageable for clients.
Banks should not underestimate the time it will take to prepare for ISO and should work to implement a transition roadmap accordingly.
It is important that all take note of the scale of the task ahead, from a technology, client support, compliance, operational risk and business strategy perspective. Equally, everyone who plays a role in the payment chain – be it those in operations, customer service, payments compliance or cash management sales – needs to understand the complexities of the new transformation.
But education is just the beginning. Banks should then look to establish a dedicated, cross-discipline team to capture the front-to-back impact of the transition. From here, strategic decisions will need to be made for clients, striking the right balance between adding value and making the transition as seamless as possible. In tandem, banks should be in a constant dialogue with their market infrastructures and should work alongside SWIFT. SWIFT is working to provide banks with the training and tools necessary for the migration, such as the Readiness Portal and MyStandards tool that have been launched to make it easier to carry out testing and validate messages.
Of course, there is no catch-all blueprint for banks to follow. The upcoming changes must be assessed on an individual basis and the preparations chosen will depend on a bank’s technical capability, their role, their business scenarios and priorities, as well as local regulatory requirements.
A new era
Though ISO undoubtably brings a host of challenges, it will also herald a new era for payments – and one that will deliver considerable benefits to banks and their clients. The richer, more structured data will improve straight-through-processing (STP), enhance speed and drive efficiency – all while reducing manual intervention and cost. Eventually, ISO, in combination with other industry initiatives, could potentially even clear a path to end-to-end 100% STP rates.
For beneficiaries, the richer data contained in ISO messages will allow them to undertake automatic reconciliation, which will benefit cash flow, counterparty risk management and even help deliver against their own client experience goals.
For banks themselves, the enriched data provision will bring greater automation – reducing friction in the payment processing flow. Over time, this will result in fewer false positives in risk management systems, allowing for more focused, effective risk management and the optimisation of resources. Payment risk modelling and scoring will also see benefits – with the ISO format allowing banks to offer enhanced data analytics to their clients.
The full extent of ISO benefits will, however, only be fully unlocked when critical mass has been achieved. The developments that follow could then be even more transformational. A key priority for cross-border payments is to make them real-time. If the combined powers of ISO and SWIFT gpi, which is already enhancing the efficiency and client experience in cross-border payments, can be realised, this long desired goal could be achieved.
The views expressed herein are those of the authors only and may not reflect the views of BNY Mellon. This does not constitute Treasury Services advice, or any other business or legal advice, and it should not be relied upon as such.
The ever-changing representation of value
By Vadim Grigoryan, Partner, Lunu Solutions
Ask a selection of people about cryptocurrencies and you’ll likely receive a wide range of answers. Some will wax lyrical about the huge potential of the underlying infrastructure that supports them, while others will dismiss them as nothing more than a worthless speculative bubble.
Cryptocurrencies have often been described in this way, mainly because – according to their opponents – they aren’t backed by tangible value. This is an argument that could easily be dismissed as very short-sighted, particularly if we remind ourselves that our current currencies all rely on trust – not exactly the most tangible of assets.
As Kabir Sehgal, a bestselling author and former JP Morgan vice-president, said: “In order to deal in money, humans must be able to think symbolically”. Financial history teaches us that money, in its first intent, was almost never meant to have intrinsic value – but to be a representation of it. For example, the porcelain-like shell of the cowry circulated around the globe for 4,000 years – longer than any other currency in the history of money. And its value was perceived not on its intrinsic utility, but on its beauty. Indeed, intrinsic value has long stopped be a measure of the real value of money. Let us not forget that each individual banknote costs a fraction of what it’s worth to produce – a $100 bill costs around 12 cents.
Money first appeared from the original evolutionary need to eat and survive by exchanging energy with another. That is why money has become whatever represents that energy: first food commodities – such as barley, cacao beans or salt – and then the tools to cultivate them. The symbolic distancing of money from its real value has developed over the years into coins, paper currency and mobile payments. Since money is fundamentally a mental abstraction of symbolic representation of value, what money is and what it will be can be is limited only by human imagination. Could something as invisible and intangible as cryptocurrencies be the next step?
Building value through trust
Something that has value should check two boxes: scarcity and utility. Scarcity of cryptocurrencies is often guaranteed by their design, in terms of a finite or limited supply (e.g. Bitocoin has a set cap of 21 million coins). Their utility is already embedded in the divisible nature of cryptos (unlike gold, which is very difficult to use transactionally, you can buy a coffee, a ferrari or a house with bitcoins). As such, the potential of cryptos to be a more efficient currency than what we already have would further increase with the wider adoption of digital currencies in retail.
We know that the representation of value has changed over time and is a fast-moving one in our society. That’s one reason why the concept of ‘money’ is much more abstract and complicated than most people realise.
But one thing that has never changed throughout the long evolution of money is the importance of trust. The reason money works is because people trust in its value; this is a key rationale behind most currencies – including cryptos. In fact, one of the key selling points of cryptocurrency is that it is built specifically on trust.
Although they lack the legal and institutional backing of traditional financial services, cryptocurrencies provide trust through technology. Blockchain technology enables the use of a distributed and immutable ledger of records, providing total transparency and making every transaction tamperproof. Data is decentralised and encrypted so that it can’t be interfered with or changed retrospectively. The crypto sphere is also intrinsically democratic. There is no central authority and no individual entity can change the rules of the game, which protects against government interference and makes it almost impossible to lobby private interests.
So, with this in mind, why are cryptocurrencies still largely used as an asset rather than a means of payment? It’s mainly because the real-life economy is still lagging in terms of providing crypto-based payment solutions. Many stores still fear accepting cryptos as a means of payment – whether due to technical limitations or concerns around fees and exchange rates – creating a vicious circle reinforcing the speculative nature of cryptos as assets that are just bought and sold.
We believe it’s time to break this circle and move towards a new financial model that accepts cryptos as a means of payment. It’s time for cryptocurrencies to be appreciated for the value they provide.
Recognising crypto personas
Our research into the ever-growing crypto community has uncovered an ecosystem of global citizens that share a philosophy; one pegged to a thirst for freedom, equality, inclusion and global interaction. For example, they are actively involved in social causes and place a high value on social responsibility for individuals and companies.
We also identified several different persona groups within that ecosystem, all of which have varying degrees of influence in the community.
- Hamsters: this group is enthusiastic about cryptos, but lacks either the wealth or knowledge to shape the market or effectively navigate it.
- Geeks: comprised of tech-savvy specialists who expect others to be up to their level of technical expertise
- Cool cucumbers: a group of wealthier individuals focused on the investment opportunities and less emotionally involved with cryptos as a way of life
But the most powerful and engaged of the various user groups we identified, is the one containing individuals who have the financial capital and technical knowledge to drive and shape the future of the market – the Apostles. They are the community gurus, the public figures and the influencers who aren’t afraid to voice their opinions. Indeed, their minds have the power to drive widespread adoption of cryptos.
Over the coming years, this cohort of individuals will continue to grow and impose its expectations on retailers and stores. They understand the concept of money as a representation of value and recognise the role that secure, decentralised and globally connected cryptocurrencies can play in the existing economy.
If money is a symbol of value, this community appreciates the need for other symbols that represent other values in the world of tomorrow – such as transparency, empowerment and the end of the abuses of power that we have seen in the past.
Ultimately, although cryptocurrencies have been inching their way into the mainstream steadily since their introduction in 2009, the main stumbling block has been how to use them in everyday life. The good news is that we are during a transition. Trust is continuing to build, and the ‘value’ barrier is slowly being overcome. There is light at the end of the tunnel – driving cryptocurrencies and other forms of digital money forwards as the next step in money’s ongoing evolution.
Revolut Junior introduces Co-Parent – teach children about money together
- Premium and Metal customers can invite a team mate to jointly manage their child’s Revolut Junior account
- Setting Tasks, Goals and topping up up Allowances can also be done by a Co-Parent
- Lead and Co-Parents both have full visibility and oversight of the child’s account
Revolut has today announced that parents can now add a Co-Parent to supervise their child’s Revolut Junior account and make learning about money easy and fun together, because teamwork makes the dream work.
Those on paid plans (Premium and Metal) will benefit from the new Co-Parent feature at no extra cost. The lead parent can invite a Co-Parent to join Revolut on any plan, including a Standard plan. The Co-Parent can be another family member, carer or guardian who is responsible for the financial wellbeing of the kids.
Parents and guardians can use Revolut Junior to teach their little ones important lessons about finances and responsibility so they become more informed with each passing day. Both the lead and Co-Parent can use Tasks to teach children the value of money, Goals to help them learn to save and top up Allowances when they deserve a reward or just their weekly pocket money. Both will have full oversight of the child’s Revolut Junior account.
To add a Co-Parent to Revolut Junior, the lead parent can head to the Junior tab to find the Co-Parent invite link at the bottom of the screen.
Revolut Junior’s five top tips for parents/guardians to make learning about money fun
- The power of together: Utilise the power of your joint experience and arrange a time or schedule a regular monthly meeting to sit down as a family to answer any money questions your kids may have.
- Set your own Goals: Learning the usefulness of savings is a valuable life lesson that will benefit kids when they hit adulthood. So if your child has been begging for a new game or toy, then encourage them to create Goals to save up faster and more steadily. Parents can add to it or children can choose to fund it from their allowances or by completing tasks, giving them some financial independence, but with full parental oversight!
- Sharing is caring: Show your child your app and how you use it to manage money so they see how the ‘grown-ups’ do this. Perhaps take a look at Budgets, and explain your reason for using this.
- Cherish your belongings: Get your child to put their top 10 favourite possessions in front of them and ask them to tell you why they picked each one. Explain the importance of selecting items they really like instead of comparing them with what their friends have.
- Money matters: Inspire your child to take some time for themselves to go through their purchases and expenditures in-app and use this time to reflect on if they still use all these items or if the buys were a good use of money.
Felix Jamestin, Head of Premium Product at Revolut, said: “We have added the Co-Parent feature to Revolut Junior so parents, guardians and carers alike can come together to teach their kids valuable skills for life. We have made sure that those with unconventional or multigenerational families will also be able to use this, so not only parents but grandparents, carers or members of their wider family can also support their child through their financial education with Revolut Junior.”
Revolut Junior’s Co-Parent feature is currently available to all Revolut Premium and Metal users in the EEA and the UK. It’s designed for kids aged 7-17, providing an account for children to use, controlled by their parents or guardians. So far over 270,000 kids have signed up to Revolut Junior. Revolut Junior has just launched in Australia, and plans to launch the product in Singapore and Japan in the near future.
Banking on the Future: Why Payments Transformation is the Key to Success
By Simon Wilson, Co-Head, Payments at Icon Solutions
Standardisation, regulation and technological innovation means payments are well on the way to becoming instant, invisible and free. This is good news for everybody.
Well, not quite everybody. Banks are now faced with the significant challenge of transforming business models and legacy technology systems to meet the demands of a new era in payments.
Banking is historically a conservative and risk-averse industry where the pace of change varies between sedate and glacial. But now is not the time to ‘wait and see’ and finding the right approach to payments transformation must be the immediate and fundamental priority for banks.
Understanding the need to transform
Firstly, we must ask: Why has payments transformation become an urgent priority?
For one thing, increased competition has seen banks’ market share of the global banking and payments industry reduce from 96% in 2010 to 72% today. Fintechs, challengers, payments companies and big tech have entered the playground and started taking banks’ lunch money, demonstrating a level of innovation and agility that incumbent banks are struggling to keep up with.
And of course, there is Covid-19. We have seen years, if not decades, of change in a matter of months. The crisis has torpedoed traditional and reliable revenue streams such as cross-border payments to accelerate margin pressure, while driving a rapid shift to online banking channels and a massive uplift in digital volumes.
Breaking the shackles
In the context of increased competition and unprecedented digitalisation, the banking industry is waking up to the fact that payments are about adding value, not just processing. There is increasing recognition that capitalising on the potential of emerging payment rails, monetising the standardised datasets unlocked by ISO 20022 and launching new external services are huge opportunities to diversify and retain relevance. The introduction of overlay services such as Request to Pay or the European Payments Initiative are also poised to spur on the move to digital payments.
Decades of inaction on legacy infrastructure, however, is limiting options. Banks across the globe find themselves lumbered with expensive, inflexible and unreliable technology estates. The ability to respond to marketplace innovation, let alone lead it, is constrained by the need to devote massive amounts of cash, time and ever-dwindling internal resource to simply keep the lights on.
It is apparent that doing nothing is no longer an option, but transformation is a nebulous concept. There is no one single way to effectively transform. Different organisations have unique considerations based on their technology, capabilities, resource and culture, and there are various routes to take.
‘Don’t outsource your heart, your soul…and your spinal cord’
One option is to make payments someone else’s problem and outsource them. This can be an appealing proposition to get a seemingly perennial cost centre off the books, particularly in the current climate. But speaking at Sibos, J.P. Morgan CEO Jamie Dimon cautioned against the risk of inadvertently “outsourcing your heart, your soul and your spinal cord.”
For it is true that payments are the beating heart and soul of an organisation. Payments represent 80% of all interactions, providing critical customer touchpoints, data and service opportunities. As for the spinal cord, not much can happen when mission-critical payment systems go down.
The big problem, as Dimon notes, is that a lot of companies who have outsourced “have no idea what they are doing.”
Banks can find themselves stuck with equally costly, complex and cumbersome alternatives, falling even further behind the innovation curve and losing control in the process. “You end up paying too much money and then you’re beholden to costs that are going up.” But most importantly, “you’re not even doing a better job serving your client.” Outsourcing a commodity execution service may well be the right strategic approach for some, but you need to ensure you have the other pieces of the payment process running smoothly and that you really are not leaving money on the table or developing risk longer term by constraining future choice.
Still, the alternative is not necessarily better. Modernisation needs to happen now, so it is not surprising that enthusiasm for years-long, ruinously expensive and inherently risky in-house transformation projects has dimmed somewhat.
Best of both worlds
Yet it is wrong to say that the only choice is buy or build. There is a middle-ground. A collaborative approach to payments transformation that allows banks to move quickly to seize opportunities, while retaining control, significantly reducing costs and adding value.
This begins with banks understanding their starting point, defining a crystal-clear strategic vision for the role that payments play within the organisation and identifying market opportunities. Indeed, as McKinsey notes, “success for banks will depend on thoughtfully assessing capabilities [and] determining the role of payments in market strategies.”
Banks should then consider low-risk and lightweight options for upgrading legacy infrastructure to meet their strategic objectives, while minimising business impact. Payment platforms based on Cloud-native, open source technology promote flexibility, scalability and independence, rather than restrictive and expensive vendor dependencies.
Collaboration also plays a critical role. Finding the right fintech and service provider partners can allow banks to simplify complexity, reduce manual heavy-lifting and lower their cost base, driving efficiencies that enable resource to be focused on delivering for customers. As Dimon explains, “If I can’t build it better than you can, I’m better off just using yours.”
This combination of strategy, enabling technologies and true collaboration provides a foundation for innovation. It can help drive new revenues, further develop existing business lines and, by moving payments from cost to profit centre, help banks thrive rather than survive.
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