21 October 2017
Chris Brown

Trusek Technical

Chris Brown - Trusek

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Innovation in Financial Services

Innovation in Financial Services

A discussion of trends in innovation management within financial institutions, and the key processes, technology and cultural shifts driving innovation.

The current payment networks are no longer fit for purpose.

23 June 2017  |  11375 views  |  5

“The current payment networks available to the financial institutions around the world are no longer fit for purpose.”

I think that this is a statement that has been generally agreed by all those involved but let’s go through them just to be clear:

  • As discussed in a previous blog, the card networks are expensive to join, expensive to transact on, expensive to be part of (due to PCI DSS and the separate transaction and settlement process) and are prone to fraud (due to the excessive reliance on the secrecy of the card number).
  • SWIFT is slow (it can take a week to get a payment credited to a beneficiary’s account), unreliable (transactions can go missing for months) and expensive to join. It is difficult to create a network of partners in order to send payments through and there can be very unexpected pricing per transaction.
  • BACS, CHAPS and Faster Payments Service (UK) are all closed clubs that are very hard to join and massively expensive for those allowed in. If you are not a direct member the cost per transaction is high enough to make non-members uncompetitive in the banking community.
  • ACH (USA) is ludicrously slow and expensive.

Ant Financial is coming with clean, fast, modern systems that will make western banking look archaic, slow and expensive.

So, what are we doing about it?

Countries around the world are forming committees to address this problem. I listened to an interview with one American man waxing lyrical that with over 400 members on his committee it was such an open and positive experience. But “designed by committee” is an expression that rarely has very positive connotations and tends to involve creating systems that are overly complicated, are difficult to implement and will take a long time to go live.

An alternative approach is what the Canadian central bank has chosen. They have appointed a big international systems integrator (in this case Accenture) in a process they have described as taking several years, involving many parties and being very expensive.

Part of the problem is that there is an ISO standard for payments (ISO 20022), which was also designed by committee and is horribly complicated, so it’s pretty much a foregone conclusion that it will be chosen as the basis for any new payments network.

Interestingly, very few people seem to be looking at the card schemes though. While it is generally agreed among the people I speak to that what the card schemes are providing is difficult to use, suffers from all sorts of non-transparent processes, is expensive, complex and prone to fraud, no one seems to feel there is any choice, so we need to just be quiet & make the best of it.

Then there’s R3 and the holy blockchain. Billions have been invested into blockchain and distributed ledger technology over the last few years, but in my opinion this is another over-complicated, over-engineered solution to a problem that is, while by no means simple, eminently solvable with much more mainstream technology.

What is clear is that most current efforts to solve the problem are looking for a solution within the very systems that are causing the problem.

Surely what’s needed is some fresh thinking, unencumbered by legacy systems & vested interests.

We believe there is a solution and that it comes from the world of IT, not banking. More on that next week but if you can't wait feel free to contact me directly or you can find further information here.

 

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Comments: (8)

Susan Hall
Susan Hall - ING NV - amsterdam | 26 June, 2017, 05:11

This is a bit of a sweeping brush generalisation. SWIFT itself isn't slow - they aren't responsible for banks holding on to payments. This could be for legitimate reasons, such as a compliance hit, for example, or indeed because earns it's revenue on float. I'd take this more seriously if it had at least mentioned the SWIFT gpi initiative which looks to address the issue of timeline (along with a number of other value added services).

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David Godfrey
David Godfrey - ACI Worldwide - Watford | 26 June, 2017, 07:41

I'm not sure I fully agree with your statements. Payments schemes are "expensive" to join (if you believe they are) partially because of the regulation, compliance, and risk management that is necessary. The technology is not the issue, or not the major issue. I don't see how your proposed solution deals with the challenge of sanctions screening (for example) any more effectively than any other payment mechanism.

At the same time, with PSD2 around the corner, whilst instant payment schemes are coming to fruition in Europe, we will have the answer to many of the issues you identified with current payment schemes. Simple, ubiquitous, and "cheap" access to initiate payments with real time confirmation and immediate funds availability. That will be possible in a cross border scenario throughout Europe, with a vision of extending that capability to interoperate with immediate payment schemes across the world.

And, as it's outside any payment scheme, there is the freedom to be far more relaxed about the format/structure of data used to initiate these payments - RESTful APIs rather than 20022 messages if required.

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Chris Brown
Chris Brown - Trusek - Amersham | 26 June, 2017, 10:08

@Susan Hall: Hi, I agree that this blog is a generalisation. Unfortunately, a blog such as this isn't the vehicle for a detailed analysis of each point, although I am very happy to have that conversation with you.

The point I was trying to make is that all of the payment systems around the world have issues, as evidenced by all the work that is going in to try and address those issues. There comes a time when thought must be given to replacing the proliferation of different, often-patched systems with a single new system that will do it all well.

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Chris Brown
Chris Brown - Trusek - Amersham | 26 June, 2017, 10:09

@David Godfrey: Hi, I agree that instant SEPA will be a huge step forward for Euro payments from account to account within Europe, both in terms of speed and cost. Even within Europe this is only part of the story however. My argument is not with any one payment system (even though Instant SEPA does sound like it will be a particularly good one) but with 3rd party payments as a generality and the wild profusion of different payment systems for different payment types.

Compliance, AML, sanctions screening and so on is clearly a large conversation, and one I am very willing to have. This is where any new network will be made or lost.

As a customer you must be reasonably confident that if you send a payment it will get to its destination if you have provided the information requested and you must be 100% confident that if it doesn't it will be returned immediately.

As a bank you must be confident that the partners you are dealing with, with whom you may have no direct relationship, have done their jobs properly in capturing KYC and screening for PEPs and sanctions and that the information provided by them is correct and complete.

I'm not sure how any 3rd party network (without regulatory powers) could achieve either of those things. A community of banks could though.

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João Bohner
João Bohner - Independent Consultant - Carapicuiba | 26 June, 2017, 13:08

In Brazil, since the beginning of the Century, we have the "Sistema de Pagamentos Brasileiro (SPB)" Brazilian Payment System,
which allows the on-line clearing of operations carried out by the Reserve Transfer System (STR), reducing the possibility of a
financial institution facing difficulties in settling its daily commitments, affecting customers, investors and the Central Bank.

To make a transfer of funds from one bank account to another, the option called "Electronic Transfer Available (TED)" is used.
The funds will be available on the account in minutes and safely!

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A Finextra member
A Finextra member | 26 June, 2017, 16:05

Looks like the author wanted to promote his offerrings by generalising the problem.

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Susan Hall
Susan Hall - ING NV - amsterdam | 26 June, 2017, 16:13

One system to respond to all of the various payment needs clients (retail, corporate big & small, FI) - it would be a nice dream but I think in the near future it's closer to a dream than reality. Things have grown over time to be the way they are but there's a good reason for the different approaches - different needs, different drivers and different priorities.

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Chris Brown
Chris Brown - Trusek - Amersham | 26 June, 2017, 16:40

@Susan Hall: As you say, each of the payment types has grown over time to meet the needs of the payment type in question. The card schemes grew to meet the needs of the shopping transactions, SWIFT grew to meet the needs of international transactions and the local payment types also came into being largely in a vacuum. The reality is though, that each is simply moving funds from one regulated entity to another while complying with the different requirements of the payment type.

Perhaps now is the time to architect a single solution that is better by design.

The technology can make it work. It's the mindset of the stakeholders that will determine the reality.

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Co-founder and CTO of Trusek (trusek.com). Trusek is a FinTech development house with 3 products: a multi-currency core banking platform. A connections hub: for connecting FinTech service providers to...

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