A ‘LEGO moment’ for payments

Simon Wilson for ThePaytechMagazine | Issue 14

ISO 20022 could be the foundation on which financial institutions can build an infinite number of creative solutions, says Simon Wilson, MD of Payments Automation at valantic FSA

The interlocking principle of the LEGO brick made it unique when it was launched onto the toy market, inspiring boundless creativity as each generation added its own imaginative new layer.

According to Simon Wilson, valantic FSA’s MD for payments automation, the universal adoption of payment messaging standard ISO 20022 is financial services’ own ‘LEGO moment’. Once fully embedded in the world’s transaction systems, the standard will similarly trigger a period of intense digital construction, with as-yet unimagined interlinked products and services sitting on top of a new payments architecture.

What will these structures look like and how far are they from becoming a reality? Wilson is realistic: there’s a way to go. But valantic FSA is already enabling clients on the journey and inspiring their imagination.

Founded in 2012, valantic FSA is now one of the leading business solutions technology platform companies, enabling customers to flexibly buy and build powerful electronic trading, post-trade, payments, and enterprise data capabilities. Its client list includes giants of banking, such as Erste Bank, Santander and UBS. The flagship platform within its payments vertical is X-Gen, a low-code, end-to-end messaging, and workflow automation solution for financial institutions, capable of handling both ISO 20022 MX messages as well as legacy formats, which slots into an institution’s existing systems, including client channels and core banking platforms.

Wilson’s colorful LEGO metaphor is an apt one for what’s happening in the payments industry and, hopefully, it’s a portent of what it can do for banks’ contested place within it. The LEGO company is, despite fierce online competition for kids’ attention, still innovating and is still the most valuable toy company in the world, after all. Could ISO 20022 better help banks compete with their own digitally native rivals?

We asked Wilson how he sees this ‘LEGO moment‘ panning out.

THE PAYTECH MAGAZINE: How has the cross-border payments industry changed in recent years and how has that impacted the banks?

SIMON WILSON: In many ways, cross-border payments have been at the bleeding edge of change – not only because the shift to ISO 20022 has been coming for a long time, but also because, historically, cross-border has been one of the most profitable areas for banks, and, like bees to a honeypot, it’s attracted a lot of competition.

That’s forced banks to modernize. Banks have been spending so much of their budget on just keeping the lights on, keeping one step ahead of the regulator, that they’re struggling to invest in real change that adds value to customers.

But to compete with those new entrants, some of which are looking pretty mature themselves now, they will have to change to offer better value and better services. The ISO 20022 standard is helping to bring that about.

THE PAYTECH MAGAZINE: The deadline for full implementation of ISO 20022 across many critically important systems is looming fast. What does that mean for the industry, and the players within it?

SIMON WILSON: It has taken some time for that deadline to sink in, and it’s been shifted a few times already – I think there’s a natural expectation that this stuff can be done, but it’s harder in reality than maybe many people appreciated.

Everyone knows that the hard deadline for everyone is coming, but it’s very dangerous to leave it until 2025 [when the Swift migration completes]. The sooner the basics, in terms of a compliance foundation, are in place, the sooner banks can look forward to leveraging the revenue opportunities around it.

The technology modernization journey will take some time, for sure. So, while there’s core system ISO 20022 transformation, there are plenty of short-term fixes as well. They’re very valid and absolutely have their place but remember that this is about reducing complexity long term, to help reduce costs, so we mustn’t let those short-term fixes become legacy themselves. Thinking carefully and strategically about what the path to true modernization might look like, in a risk-adjusted, sensible fashion, is all part of the journey that many banks, in reality, are still on.

THE PAYTECH MAGAZINE: So, would you say most banks are ready for ISO 20022 adoption and implementation, or not?

SIMON WILSON: I’d say the banks are broadly in a good position, and if not ready today, they will be imminently. But the pressure has been high and they’re dealing with it in different ways.

As I said, there’s lots of core transformation of technology needed, in terms of moving to ISO, but there’s a lot of shorter-term wraparound message transformation capability being used, too. Long-term, to be fully digitized, to be modern, to reduce the costs of running a payments ecosystem, there are lots of options for banks.

But then there’s also an eye to how banks make the most of the business opportunities that ISO 20022 presents. We’ve barely started on that curve yet, and it will be a refreshing change to talk more positively about the opportunities and benefits of the change, and not just the pressure of the deadline!

THE PAYTECH MAGAZINE: So, how much thought is being given to leveraging the added-value opportunities presented by a mass migration to ISO 20022, and how can technology providers such as valantic FSA help with that?

SIMON WILSON: There’s one challenge for banks in addressing system replacement and message transformation. There’s another in leveraging that – looking at the operational setup, bringing in new technology to analyze the data and help use it to automate processes. There’s another area, as well, and that’s educating the banks’ customer base. Ultimately, this is all about providing better value for customers, whether that’s through smoother, faster processing of payments, or through new services that leverage the data, right? And, on the client side, their systems aren’t all shiny, new, and modern, either.

The more banks can help their corporate client treasurers think about the data that they’re providing to them, the more the bank can use it in an effective way, and return value to the corporate – as, indeed, fintechs are starting to do. More value will be returned to the banks that way, too, which means they can monetize all the investment they’ve made in the move to ISO 20022.

So, there are three aspects there for them to grapple with – the first is about getting it right, the second and third are about making the most of it.

THE PAYTECH MAGAZINE: What are some of the benefits for corporate clients of banks that embrace ISO readiness earlier than some of their competitors?

SIMON WILSON: There’s a lot of opportunity around the new data standard, not just from an efficiency perspective – which is important, but the exciting stuff is the new services that can be provided around the standard, especially when you’re combining the data with real-time.

As I said, it’s not just about how you process a payment – moving money, in the form of data, from A to B. It’s about how you leverage that in the realm of other products and services that the bank offers. How can you improve the granularity at which you credit rate your risk, from a lending perspective? How can you improve the reconciliation through services such as Request-To-Pay, combining that with the ISO 20022 data and real-time, so that maybe you’re providing invoice financing, or trade finance, on the back of goods hitting the shore, rather than waiting for a whole bunch of paperwork to be progressed?

Once ISO 20022 becomes the universal messaging standard for all transactions, the foundation will be there for creating an almost limitless range of products and services on top. It’s a bit like LEGO bricks. You get your key blocks locked in place – in this case, your core technology, capable of handling MX messages – and then add or swap out other blocks to create any number of value-added services.

We’ve barely scratched the surface of the inventiveness and innovation that could come around the products as moving money becomes more standardized and more commoditized, which is part of the advantage of a single dataset.

The more that it becomes about leveraging it in the product domain – by integrating evolution and modernization of the whole banking architecture, operations as well as IT – the more the benefits for corporates will really become apparent. And there will eventually be some big winners among the banks that lead the way in implementing those things.

THE PAYTECH MAGAZINE: What are some of the challenges, and maybe opportunities, coming out of cross-border payments now that people’s expectation is of real-time movement of money?

SIMON WILSON: ‘Expectation’ is certainly the way to describe it because what we often see is people’s experiences in their lives as an individual, are also transferred to the corporate world. Even when it’s B2B, that’s true of payments, too.

That expectation of speed is something that the industry has come under a lot of pressure to provide, and I believe it’s made great progress. If you look at Swift, I think the latest figures are something like roughly 70 per cent of the network payments that are cross-border go through within five minutes. Now, that’s not instant, but given the complexities, that’s pretty darn good.

Getting that last 30 per cent – that five minutes down to 30 seconds, or whatever it is – is very challenging, though. It’s challenging operationally to be able to deal with the complexities of real-time and cross-border, but it’s also challenging in terms of the technology change that is needed, and how unsuitable banks’ legacy systems are.

We’ve seen banks take different approaches, at different speeds; some are further on that journey of replacing their core with ISO-native systems, some are doing message transformation around the edge. To be honest, most are doing a bit of both, in different ways. But ultimately, if we are to realize the advantages of real-time for customers, and of the additional data that the new ISO standard brings into play, then new technology is needed.

It’s needed to make things smoother, more efficient, to leverage that data to provide better fraud and sanctions checking, for instance, and to provide new services. It’s a challenging area, but we see a lot of customers taking a very proactive approach to it.

For me, what’s going to be really interesting is the talk of equality in terms of the credit transfer standard, SEPA, and Instant, and equality in pricing. Now you’ve got something that’s going to trigger demand, because it’s not going to cost more to do instant.

Coming back to what we said before, in the corporate world, it’s going to become much more of an expectation. And that will bring challenges. As the volume shifts, and other services are introduced around things like Request to Pay, that’s going to bring pressure on technology that was maybe introduced as a short-term fix for some people, as opposed to a robust, long-term kind of capability.

Operationally, dealing with a higher volume of rejects and complications, albeit there should be less with ISO 20022, puts pressure on the back office, too. So the more you can use artificial intelligence and robotics to deal with those exceptions, rather than people, the lower cost and the better it will be.

THE PAYTECH MAGAZINE: You’ve alluded there to real-time payments presenting banks with an even greater challenge when it comes to identifying and preventing financial crime. Is the increased dataset behind an ISO payment really going to help banks combat anti-money laundering (AML) and other types of fraud?

SIMON WILSON: It’s always been a race to stay ahead, between the bad guys and the good guys. But the world, from a payments perspective, will now at least be on the same message set. I won’t go as far as saying on the same standard, because there will still be plenty of variations, even within ISO 20022, but it clearly helps when you’ve got the same recognition of what data is there.

With the upgrade of technology, you can leverage that data, and react to it much more quickly, which means spotting things earlier. There’s a consistency in the data, to help with the checks around sanctions and AML.

So, yes, a general recognition and commonality helps improve efficiency and the quality of what people are doing. But there isn’t any room to be complacent. We’re going to have to keep modernizing, to keep ahead of those bad guys.

THE PAYTECH MAGAZINE:

ISO 20022 is just one part of the payments landscape – it just happens to be the noisiest one at the moment. What other events should banks be focused on?

SIMON WILSON: There are things on the horizon, that will be near soon enough. Dare I mention PSD3 and the further evolution of open banking, and how that’s leveraged? And, as I’ve already mentioned, you’ve instant payments in Europe, and the mandate for all banks to do that, which is coming.

What I find fascinating is that with a single ISO standard in the cross-border space, there’s the coming together of the last leg – direct connectivity – from a real-time perspective between schemes.

And that’s upping the ante. There’s been an interesting proliferation of different ways to move money globally. Only a few weeks ago we saw Singapore and India link their real-time schemes – two big financial centers, with big populations, so, potentially that’s a huge volume of payments that might go through.

Whether it’s cross-border or domestic, there are also the increasing number of wallets, different mechanisms for payments, and, not least, the introduction of central bank digital currencies, and what that might enable.

There is no end of change. And still so much that’s unknown.

For us, it’s about helping banks modernize their technology, and have the right foundation of flexibility to be able to react to whatever that future brings, in whatever order it might be.

Whatever happens, I think we all know it’s going to be an exciting ride.