For some reason, I had always associated Real-Time Payments with ISO20022. As I read more about the ISO20022 standard, I began to wonder why they are even associated with each other? There is nothing that inherently connects ISO20022 with Real-Time Payments. In fact, many countries had an RTP system even before the arrival of ISO20022 standard. So why is it considered as the Coen brothers or the dynamic duo of Payments modernization? Is it just a coincidence that when a country decides to implement Real Time Payments, they would also consider adopting ISO20022 standard along with it ? Or just because it is the new kid on the block?
Well, there is more to it than meets the eye. Let me explain, starting from Real-Time Payments (RTP).
What constitutes a real-time payment?
Key Drivers of RTP
- Faster and certain payments mean immediacy of payable and receivable clearance.
- Growing competition FIs face from faster fintech/non-bank space (2).
- Create a level playing field for big and small players in the payments market. (3)
- Need for instant movements of funds across the globe to be complaint with trading partners.
RTP systems across the world
This Figure 3 is from 2015. The table below shows a more updated status sourced from (5) and (6).
Characteristics of RTP (1) :
1. 24×7 availability
5. Alias databases that connect an alias to a bank account information (like Interac email transfer in Canada or Paym in the UK).
These characteristics pose both technical as well as non-technical challenges.
Challenges with Real-time payments
Scale of change
As you see from the charts above, real-time payments have been very slow when it comes to market adoption. The growing economies were among the pioneers to implement them. For them, building an advanced payments system was as good as starting with something new. Whereas developed countries had to deal with legacy systems and transition strategies. Payments modernization is a massive initiative in terms in the impact it has, and complex network of stakeholders involved – consumers, businesses, government, fraud, compliance, risk and credit management agencies inside and outside the country.
Return on Investment and lack of a proven Business Case
Considering what is at stake, experts struggle to quantify ROI. Difficulty in estimating transaction volumes, cost and revenue complicate the business case for RTP (7) although it is generally argued that cost per transaction will be lesser than traditional RTGS systems (8) (9). Even then, the question is whether the customer will be ready to share the price of transition. Countries like India and China offer these services free of charge. So how can FIs and partners generate ROI on this investment?
The adoption rate is another crucial factor to consider when calculating ROI. Experience from implementing RTP in countries such as UK and Denmark have shown that factors such as the formation of strategic alliances between banks and fintech, sharing the cost of development and have influenced the mass adoption rate (4). Denmark was able to achieve payment volumes relative to its population within seven months as the banks had a corporation with popular fintech services such as MobilePay. Whereas for the UK it took seven years (1). Another factor that affects adoption is the ease of transition for consumers to move from traditional methods to RTP.
When major market plans to change their payment systems, their trading partners are also forced to follow the suite. Modernization of the Canadian payment system was long overdue, until the USA, Canada’s major trading partner modernized their payment system. In such cases, benefits from the investments may not be immediately evident.
Hence, FIs and business are on the lookout on how to improve ROI on RTP by providing additional services to their customers.
The faster speed of transaction means that the lesser review time for payments, making the payments susceptible to failure in fraud detection/AML or KYC validation. The financial institutions might have to design workarounds such as two-factor authentications (7) to mitigate this risk. However, this would slow down the end to end payment processing.
The speed of transaction also brings up the question of liquidity management. The financial institutions might have to consider methods such as pre-funding or settlement guarantees to make sure the liquidity is available all day, every day (7). On the other hand, in the UK, immediacy, and certainty of the transactions has helped improve liquidity for banks as well as businesses. Knowing that payments don’t have to be parked days in advance for payment will help manage the funds efficiently (9).
The real-time payments are often linked with e-commerce and mobile payments (person-to-person payments). However, in practice, RTP has an impact on large value payments as shown in the chart below. E.g. in the UK, there was only a 2% increase in p2p payments (7).
By design, immediate payments are more favorable for retail payments. However, to maximize the value from the system, customer adoption in other segments should also be promoted through new use cases and value-added services.
The role of ISO20022
From the challenges in RTP, we can conclude that the value of RTP can be harnessed efficiently if more information is included along with the payment message. Information relevant to fraud detection, KYC compliance, AML will help reduce the review times. Additional information can be added to support cross border interoperability (with support for non-Latin symbols and Asian languages) so that the payments become truly ubiquitous. The data could be used to feed into the IT infrastructure of customers and FIs to reflect the transactional changes in payables and receivables.
ISO20022 messaging standard helps payments carry richer information required for all scenarios mentioned above (10) and thus enhance straight through processing (STP). It is compatible with SWIFT network that operates worldwide thus providing an opportunity for the creation of a universal cross-border payment standard. It might also eliminate the need for having multiple payment types by using one single format (11). Thus, ISO20022 could be the solution to RTP’s ROI problem.
Still, not all the countries who have an RTP system have implemented ISO20022 standard either. The main concerns when ISO20022 was implemented in India was that adding more data to the message had made it four to six times longer and required twice the bandwidth and storage space (12). However, during benchmarking processes, Reserve Bank of India (the Indian central bank), found that the messages were processed more efficiently, and the content attached helped in better MIS and regulatory reporting.
ISO 20022 is not only a financial messaging standard, but also a business model. Through the growing adoption of ISO 20022 for financial messaging, this model is becoming increasingly used by Market Infrastructures (MIs), Financial Institutions (FIs) and commercial solution providers in this space. As such, ISO 20022 will facilitate and enable the uptake of new technologies in the financial industry, as its business model will be applied to block-chain as well as API-based solutions.Patrik Neutjens ISO 20022 Programme Director (13)
Technically, ISO20022 can be stored and accessed as XML or another markup language making it easy to develop and use. Also, many ERP systems have a native format in ISO20022. A wide range of conversion tools and validation portals are also available (14). Therefore, it is easier to build and integrate the new standard into the system and thus reduce the IT support costs (15). However, it is necessary to keep legacy systems operational in parallel during the migration period (16). The length of the parallel run period might affect the adoption of the new system and increase the operational cost (17).
ISO20022 is also superior to other highly successful real-time payments standard such as ISO3583 (used in Card transactions) in many ways (18). Although ISO3593 allow some degree of global interoperability and real-time payments, they are limited in the data that can be attached and lack a rich data dictionary like what ISO20022 has. Also, ISO20022 is speculated to support futuristic blockchain applications.
Ability to add additional data to the payment messages certainly open new opportunities to innovate. There are many uses cases that have been proposed. Some examples are given below.
Although getting paid immediately is good, it is not a big gamechanger for some of the segments. Whereas certainty is. That is one of the reasons why the impact of RTP and ISO20022 was more profound in certain segments compared to others (as discussed in the ‘Target Segment’ section).
Here are some use cases as per the Clearing House, USA (20). Again, the focus seems to be more on B2P and B2B segments.
Cash-On-Delivery: Cash on delivery ensures payables and receivables are cleared instantly on both the ends, freeing up cash and improving customer experience. The customers could then solicit discounts for instant payment.
Request for Payment: This service is expected to eclipse the existing Direct Debit mechanism. The utility provider sends a “Request to Pay” or invoice to the customer. The customer then selects “Pay” and generates a payment message in real time. The instant exchange makes reconciliation more efficient by STP. It is very similar to the existing e-transfer mechanism in Canada, with the difference that the data ISO20022 carries makes reconciliation more seamless and efficient.
Conditional Payments: This is a service where the payment can be used only for a specific purpose. The additional data embedded in the message could facilitate this. For example, a parent sending $100 to the child at University where they are only allowed to use the funds for a textbook. If the textbook was less than $100, a return of the difference could be initiated through RTP. Another example is that if an item gets delivered in time, then the payment goes through, providing a possibility of the payment messages acting as a smart contract.
Augmented Services: Regardless of how the customer makes a payment (ACH, immediate payment, card, etc.), FIs can benefit from having a single view of all incoming and outgoing transactions (along with other information such as loans, cash management). The overall picture can be augmented by the use of business analytics, which can facilitate the development of additional services such as cash forecasting and invoice discounting (7).
Auxiliary Services: There some other services and products that FIs that are an indirect consequence of engaging in RTP. These are services that help corporates in liquidity management, payments reconciliation, invoice discounting, etc., (7). In the UK, 54% of SMEs say that experiencing cash flow problems is their most significant obstacle to business growth (21). Banks that can alleviate some of the issues through improved real-time services can drive loyalty and satisfaction with their fast-growing customers. (9)
Benefits from Implementation
It is not a surprise that ISO20022 was first mandated in the EU under the Single Euro Payments Area (SEPA). The new system mandates the use of ISO20022 for all bank transactions (22). The mandate reduces the number of payment formats required to function in SEPA across the countries, thus improving STP, reducing the maintenance cost and improving ease of correcting mistakes (23). Even then it has been observed that the standard was implemented in variations or nuances based on how different communities interpreted the same rules (14)!
In South Africa, BankServ saw unusually high return rates for its EDO direct debit products. Traditionally, the direct debits used to get rejected as not enough information could be provided with the payment message for the debit to go through. With the introduction of ISO 20022, this would no longer be a problem. The information is also expected to enhance efficiency in KYC checks (14).
The benefits could show up in very unexpected industries as well. For example, Canadian metal manufacturing industry feels that the benefits ISO 20022 are extensive. From simplifying the tracking of cross-border payments to less reliance on manual processes, ISO 20022 will bring with it faster, safer, and more data-rich systems (24).
However, like any new disruptive change, the benefits come with risks as well.
Data privacy is one of the hottest topics for regulators all over the world. What does adding more customer or transactional information on payment messages mean to data privacy? I couldn’t find any discussion on this topic in my research. Traditionally, we might only deal with FIs while making a transaction. Bank’s network connections and data are secured by cryptography. Even then, we have reports of data breaches every year.
In the case of ISO20022, the information could flow outside this ecosystem. More data on the payment messages means that the information will get shared across more services and third parties who are involved in the payment stream. Therefore, the network is only reliable and secure as the weakest link in the flow. All the parties involved in the transaction has the responsibility to ensure security and regulate the usage of information.
The Elephant in the room
So now we have seen how the ISO20022 helps overcome the pitfalls of the RTP system. We discussed various drivers for RTP in the beginning. However, there is a major player who is driving this initiative that we haven’t mentioned so far – SWIFT.
SWIFT is the organization that creates financial message standards and provide infrastructure to send these messages across the world. If we look at the problem from their lens, we would realize their brilliant strategic execution.
The promotion and implementation of ISO20022 is not just about RTP. The challenges that came during RTP implementation were only signs of an existing malaise. Like any other traditional industry, disruption had reached payments space as well, right to SWIFT’s doorstep.
To understand further, let’s look at the payments market through Value chain lens. The core payments processing function is at the risk of becoming a utility business (25). However, most of the value lies before and after payments processing. The value in pre and post-payment services are relevant to the customer through information processed in these services. Nontraditional payment services in Fintech space extended to both sides when SWIFT stuck to the traditional role.
SWIFT still holds the monopoly of cross border transactions. However, the rise of alternative cross-border payment mechanisms in blockchain such as Ripple posed a threat to this monopoly. Ripple came with additional benefits such as eliminating the need to maintain expensive currency Nostro positions. Ethereum introduced the concept of smart contracts, where a currency transaction is also programmable! Both Ripple and Ethereum were examples of how a transaction system can be more than just a service that relays messages and are very disruptive concepts in their respective markets.
From all this competition, SWIFT learned that to stay relevant in the industry, they need to come up with a strategy to cut across the disadvantages. They required something that would help them harness the value from pre- and post-payment value chain. For this, they need to extend their services to smaller FIs and business and capture the local payments market as well. More data needs to be included with the message, which would also provide additional language support (26). The payment modernization initiatives that began across the world was an opportunity and ISO20022 was the solution.
With the high rolling clientele who are already hooked to their infrastructure, SWIFT could use the market forces to influence conversion of other non-conferment players to join their network. SWIFT would act as single window connectivity for its clients to all sorts of payment delivery solutions. In my view, SWIFT is using their strengths very efficiently to their advantage.
As discussed earlier, the challenges are massive. SWIFT is helping their partners walk though these problems by facilitating platforms for discussion, creating shared libraries and tools (27), conducting POCs and helping create effective transition strategies (28). Through initiatives such as Common Global Initiative – MP, ISO20022 was implemented across the board in market areas such as trade finance, cash management, reporting and payments for banks as well as corporate (29). The initiative focuses on wider acceptance of the standard through network effects. It helps clear, consult and agree upon common implementation templates of various financial methods, thus promoting the recognition and adoption of the standard (30). SWIFT gpi initiative has been highly successful (31) so far. Here are some stats (32)
- $40 trillion gpi payments sent in 2018
- 56%+ of all SWIFT payments are now sent on gpi
- All payments on SWIFT are tracked end-to-end, thanks to the Unique End-to-End Transaction Reference
- Same day credit to the end beneficiary of nearly all payments: 50% within 30 minutes; 40% credited within 5 minutes; many in just seconds
- More than $300 billion carried over gpi every day across 1,100+ country corridors, representing 80% of all SWIFT cross-border payments (and growing!)
- Tracking payments across 55 networks and market infrastructures
In conclusion, the association of ISO20022 to RTP is no coincidence. RTP systems require ISO20022 to realize their full value. Although ISO20022 might have been a strategic maneuver by SWIFT to stay relevant, it surely has the potential to revolutionize the payments market and even result in the creation of new markets and business models. As Patrik Neutjens rightly put, ISO20022 is not just a financial messaging standard, but also a new business model. And that requires a network mindset.
Thanks to Jim Filice and Marcia Cowan for entertaining my thoughts and giving inputs to write this article.
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