Financial institutions in the UK have faced a variety of challenges this year, including the complexities of the geopolitical environment and new and challenging macro factors caused by Covid-19 that will extend into the coming years.
At the same time, the pace of technology advancement continues to accelerate, and the pressure is on to innovate in order to improve the front end user experience for customers, providing new data insights and trying to meet the challenges of instant and frictionless transactions, while maintaining the highest standards of operational resiliency and cyber security.
Against this backdrop, Swift's recent UK-focused Community Update explored how the community is working on transforming the payments landscape, to take advantage of new technologies and standards in order to satisfy customer expectations.
Three high level trends in the UK payments market, identified by Russell Saunders, managing director, payments strategy at Lloyds Banking Group and also a board member of Swift, are regulatory actions, transformation, and end user demand.
"Open banking within the UK, which has been largely a competition driven initiative, has broadly delivered many of its core objectives for the payments infrastructure, banks themselves and the market providers, which are really quite exciting," Saunders said. "Those trends are now moving from competition drivers to commercial applications, monetising some of that capability, and driving innovation as well in areas such as open finance and premium APIs."
Saunders also noted the move to ISO 20022 as a major regulatory trend, and one where Swift has an important role to play. Also, specifically within the UK, there is the New Payment Architecture (NPA) programme, a regulation directed to replace Faster Payments and a lot of ancillary services. The intention is to move from faster payments to instant payments with richer data, greater transparency, and frictionless activity for all end users.
"Reinventing the core is key for both big institutions and market infrastructures, in order to enable the strategic goals of improving transparency and capability," Saunders noted.
Key enablers for this reinvention are the new Swift strategy and Swift’s transformed platform, which aim to reduce friction and increase the speed of cross-border payments. "Our goal in life is to make the multi-bank payment model as good as it can be, to make that cost effective, and allow financial institutions to offer a much better service to their clients," said Harry Newman, head of payments strategy at Swift.
An important element of the Swift strategy is not just around the speed of the transaction, but also the richness of the data that accompanies the payment. This has implications not only for banks, but also for their corporates and beyond.
"Today there is a necessity to create richer data - for transparency, for safety, for reconciliations, for business communities - it is really compelling. We see this from our business customers, corporate treasurers have been seeing the benefits of ISO 20022 for some time, but now their customers are beginning to see the opportunities as well," commented Lloyds' Saunders.
Addressing changing expectations
While customer needs - the ability to transfer money and know that it is safe - may not have changed in centuries, Helen Bierton, chief banking officer at Starling Bank, made the point that it is a rapid change in customer expectations that are propelling change in the payments industry.
"We live in a far greater digital world, where people have real life experiences that are already setting their expectations far higher," Bierton said. "Like an Amazon delivery, they want to know where their payment is, they want to know when it's going to arrive, they want to be able to track it, and they want it as cost effective as possible. We're in a world where these greater expectations can be met, and if they're not met you will fail to serve customers."
The ability to track payments is one of the core features of Swift gpi, and Philip Fellowes, EMEA head of global liquidity & collateral management at HSBC, provided an example of how important this had been during the pandemic.
"At the start of the Covid-19 pandemic, there was a global surge in the demand for personal protective equipment (PPE) in the hospitals across the world," Fellowes explained. "Swift gpi actually made a huge difference as we took that payment tracking data to confirm receipt of funds, and used that information to help expedite the delivery of PPE that was made in China, and delivered to hospitals in Italy at the start of the crisis. That really shows how Swift innovation has moved the needle for our customers."
Market infrastructures have a crucial role to play in enabling the payments services that customers want. In the UK, the Bank of England embarked on a real-time gross settlement (RTGS) renewal programme last year, in order to adapt to these changing capabilities.
"As part of the renewal, we're trying to let more players in to the system in order to increase innovation and competition," said Victoria Cleland, executive director for banking, payments and innovation at the Bank of England. "We're also thinking about the different technology that's out there and what that delivers. So while we're not building the new RTGS on DLT technology, we have run a proof of concept to make sure that people can join it using DLT."
As the online world has a 24/7 availability expectation, operating hours and standardisation of rich data are other important areas for market infrastructures to consider.
"While we're not currently seeing demand to extend operating hours that much, we do need to build in that capability," Cleland said. Harmonisation is also going to be really important, so we will be moving to ISO 20022 starting in June 2022. That interoperability will help domestically in talking to the New Payment Architecture, but also globally as well."
The drive to renew the underlying payments infrastructure to enable financial institutions to innovate and meet their customer expectations was welcomed by the banks on the panel.
"This drive to bring about innovation, and the work that Swift doing, is welcome," said Starling's Bierton. "In the UK, solutions such as faster payments came from that sponsorship from a regulator, and if you look at the European regulations on PSD2, that has driven significant amounts of change and has enabled significant benefits for customers. That degree of sponsorship and change is needed going forward."
Alignment and consistency of service in cross-border payments is another challenge, but the panel thought that there are reasons for optimism in that regard.
"80% of cross-border payments are in just three currencies, the US dollar, euro and sterling," pointed out HSBC's Fellowes. "The good news on tackling these challenges is that if we can align the standards between the US, the Eurozone and the UK, we can solve those customers’ pain points for the vast majority of international payment flows. Then, over time, we can move to standardise our approach in other markets around the world beyond the big three currencies."
Finding the right approach to technology
Technology is obviously an important element in the payments transformation that is underway, but selecting and implementing the right technology in a timely manner is a challenge for the industry. Another panel at the event explored where the UK is in this regard, and how banks can adapt.
"There are so many programmes of work happening in the UK right now, like the RTGS renewal, the NPA, and open banking, I can understand why people might feel like the technology is moving at quite a rapid pace," commented Tom Harris, chief technology officer at ClearBank. "But when you look at the underlying technology, that's where it's too slow. The fact we're only just adopting RESTful APIs in 2020, we're years behind the curve on this."
"Ultimately, we are going too slow for where we need to be, not only from a global competition standpoint, but also balancing that against customer expectations and regulatory expectations," agreed Ian Povey, head of payments services & technology at NatWest.
For incumbent banks, having large legacy systems prevents a complete and instant switch to operating on a modern interoperable platform. Many are instead 'rewiring with the lights on' as Povey put it, managing and winding down legacy applications while trying to support 24/7 real-time payments.
"Banks can leverage the richness of current technologies, and then do a managed, phased shutdown legacy without inflaming any risk management areas,” Povey said.
This hybrid approach has proved popular with many incumbents, and the 'small and often' approach to technology innovation is something that resonates with newer entrants to the market.
"You should always be striving to introduce new technologies," agreed ClearBank's Harris. "We need to be on the front foot of understanding what additional benefits it brings, and the benefits of a faster, more incremental release cadence."
Fintechs have been one of the important drivers of change in the payments landscape, in terms of both how banks think about payments and the technologies that are used to facilitate transactions. This has particularly been the case in the UK, which has had a thriving fintech community.
"We need to ensure that we continue to support our startups and scale ups on a capital and investment basis, but also that we're bringing in the right type of skills and talent both on the fintech side and on the incumbent side," commented Janine Hirt, COO of Innovate Finance. "We also need to continue to promote the UK as a home for financial innovation internationally, and also connect up the various hubs across the UK."
While the relationship between fintechs and incumbent banks may have been somewhat frosty a few years ago, it has thawed as both parties have a greater understanding of what they can offer each other. Collaboration has become key, and Swift has helped to facilitate some of this.
"This year, we ran the largest ever Sibos hackathon, with around 70 participants from 25 organisations including banks, fintechs and tech organisations from 18 countries," enthused Nick Kerigan, head of innovation execution at SWIFT. "As this was all about the community collaborating, we organised those participants into teams that mixed up the companies, so you had participants from a variety of firms all working together. Swift provided the synthetic data and APIs that allowed very practical solutions to be developed using advanced analytics tooling."
This example of the community coming together to identify innovative ways to address pressing industry challenges typified the collaborative spirit seen throughout the day at this UK focused Swift event. With UK banks facing a variety of geopolitical and macro challenges as we approach the end of the year, it was a timely reminder of the benefits of engaging with the payments ecosystem.