EBAday 2021: Modernisation, a catalyst for payments utopia

Kicked off with an engaging challenge speech by RTGS Limited’s founder Nick Ogden and a fiery strategic roundtable, the content across today’s EBAday sessions stretched from payments regulation, to real time payments, to correspondent banking, to digital identity and more. We’ve pulled together some of the best highlights from each of the panel sessions below.

Modernising the financial regulatory system

Diving into day two, Nicola Coyne, director, head of immediate and low value payments at Barclays, opened the ‘Modernising the financial regulatory system’ with a salient question: can regulation act as an accelerator, not inhibitor, to banks’ adaption of new technologies or projects?

For Tara Rice, head of CPMI, Secretariat, BIS, the short answer was yes. “Regulation can inspire trust, in money, in banks and in new technologies.”

By this Rice elaborated that looking at the broader picture, trust in the financial system comes down to the regulation that exists in the underlying payments system, including commercial banks and their ability to issue commercial bank money.

“Money is a social convention. With trust comes our ability to use it in all aspects of our daily life, without that trust, money is no longer valuable as a social convention.”

Pushing the question further, Coyne asked Martin Georgzen, chief strategy officer and head of business execution at P27 Nordic Payments whether the industry-led push toward payments modernisation, as has been the case with the P27, has helped innovation, or whether regulation could be more effective to accelerate banks’ adoption of new initiatives.

Rather than choosing one single outcome, Georgzen argued that the winning approach would be one that takes a combination of approaches.

While he noted that regulation can create the necessary momentum for things to move forward, the aspects of speed, adaptation, and proximity to the true users of the services are also pivotal. He added that the P27 initiative presents a situation where the Nordics’ biggest banks have come together and tried to build an innovative framework. Navigating this landscape has been no utopia, and during this process it has been obligated to consider a future regulatory regime and account for legacy systems and basic infrastructure.

“The basic infrastructure below all of the juicy services was old, expensive, very hard to manoeuvre and will be difficult to adapt to future regulatory requirements. So, to be able to fulfil all of these things, the banks came together and tried to do this on their own while adhering to any future needs from the regulatory regime.”

Where P27 has tried to shape its approach around a future landscape where regulation has been implemented, Paul Thomalla, global head of payments at Finastra, argued that rather than regulation following innovation, it should be the other way around.

“We look to the regulators to scope the bigger picture, and then it should be up to the fintechs to figure out the ‘how’. The regulator is the ‘aiming’ function […] I think that if it’s left to the financial institutions, then legacy might be a problem. We still support checks from 1659 and if left to our own devices we will always filibuster to something that’s more imminent for us. I also think that some of the topics are just too big to be left to banks.”

A considered approach was recommended by the European Commission’s Eric Ducoulombier, head of retail and payments, DG FISMA. Coyne raised the Commission’s Retail Payments Strategy published late in 2020, which outlined its vision for European payments, its four pillars going forward and the role it will therefore play in ‘aiming’ the payments industry.

To this, Ducoulombier elaborated that the strategy shows what direction of travel the Commission recommends that the market should take and works to inform the market about what it believes their priorities and key actions should be.

“In this respect, it is useful for the market to know what us as regulators as policymakers, what we believe should be our collective target or aim. That being said, it is only a blueprint from our perspective, and we would need every stakeholder both private and public to achieve this collectively.

He furthered that while the Commission alone cannot achieve any of these outcomes independently, without the Commission, it would be more difficult for the market to achieve these outcomes themselves. It must be a partnership behind common goals.

Ducoulombier noted that the Commission is not announcing a significant amount of regulation, as regulation is not its “number one policy tool.”

Rather, regulation “is only to be resorted to, if the market forces themselves will not be sufficient to achieve what we believe should be the goals in the general interest of payments. We are often considered to be obsessed with regulation, we are not.

It can be wrong or be rapidly obsolete, so it has to be handled with care, and it must really be the last the last choice where we are convinced that it is indispensable.”

Payments in a real-time world – reality, future or utopia?

In stream two, Petia Niederländer, director of the Austrian central bank Oesterreichische Nationalbank took to the virtual stage to moderate a session on ‘Payments in a real-time world ¬- reality, future of utopia?’ With the exponential increase in the requirement for real-time payments - and standards, schemes and rails being forced to converge for different payment types - it is evident that payments services providers have no choice but to transform their infrastructure to deal with the technological and operational challenges that a real-time world continues to present.

As Niederländer explained, the subject of instant payments was one of the most discussed in 2020 as the Covid-19 pandemic encouraged the financial services industry to digitise and speed up payments flows. However, while digitalisation is occurring everywhere, with different expectations from different entities, Francis De Roeck, head of industry engagement for payments, BNP Paribas highlighted that although real time payments are a reality today, only 8% of corporate banking payments volume is instant.

De Roeck continued to say that to achieve real-time payment finality, the full potential of instant payments must be leveraged. “This is the game changer because now, instant payments in a corporate environment can follow an economical cycle where payments can be fully embedded.” He added that beyond the benefits of Request to Pay, machine to machine communication through the Internet of Things (IoT) can support integration of instant payments and in turn, instant finality.

Tom Lambrecht, country manager, Benelux, Sopra Banking Software agreed. “Instant payments is a lot more than just adding another payment engine into your existing payment infrastructure.” The impact, as Lambrecht explained, can and will also be felt in the accounting system and affect the bank’s liquidity management process. Today, there are no cut-off times: money can move after 6pm and at the weekend.

He also said that smaller banks in the Benelux region state that they do not have a business case for instant payments, overestimating the effect instant payments could have in the short term for challenges like fraud and financial crime as well as underestimating the opportunity for competitive differentiation for the long term, Lambrecht said.

Guy Moons, head, enterprise payments solution consultants, FIS offered his view and also confirmed that real-time payments also need to work for high-value payments. “When you now transform your payment engines from batch processing to real-time processing, the whole ecosystem surrounding those payment systems need to follow this trend. You are also moving from simple formats to ISO [20022] formats, and the volume of data gets larger. The quality of data also [improves] and better systems that underpin payments processing can be brought to market.”

Considering BCBS248, Mario Mendia, senior vice president international markets, TAS Group echoed these sentiments around cut-off times and stated that “banks will have to work in an open dialogue with their regulators and understand how to treat these new payments intraday.”

Circling back to the fact that only 8% of corporate payments are real-time – far from being the new normal - Eugenio Tornaghi, director of marketing and sales, SIA compared this progress to developments in the retail banking space. “If you use Apple Pay or Samsung Pay, you can tap and pay in an easy and cheap way. […] We have to offer the same customer experience and I do believe that there is a very interesting time coming because I see what is possible. It is just a matter of how to deploy, as the potential is there.”

Near the end of the session, an audience poll revealed that 42.5% of payments professionals believe that overlay services and e/m-commerce payments is the area with the largest potential for instant payments, with retail payments on point-of-sale (27.5%) and corporate payments and cash management services (26.2%) following close behind.

Correspondent banking – a business in transformation

Moderating a panel on the state of correspondent banking, and how banks should respond to increased competition, new technologies, and compliance requirements, was Veerle Damen, head of network management, propositions and customer journeys, NatWest.

Joining Damen was Saskia Devolder, managing director, head of Europe north, SWIFT; Akshat Saharia, head of European financial institutions product and propositions, HSBC; Dean Sposito, head of institutional cash sales & client management, western Europe, Deutsche Bank; and Gayathri Vasudev, head of global clearing, J.P. Morgan.

Together, the speakers explored the ways in which a faster international payments ecosystem can be enabled by correspondent banks, and examined which initiatives and challenges are on the horizon.

To kick off the discussion, Devolder pointed to the progress already made: “In 2017, SWIFT developed gpi, because payments were taking too long. Cross-border payments are now very fast; as of October 2020, 42% of all SWIFT payments are credited to the beneficiary’s bank account in under five minutes. Thanks to the number of financial institutions using gpi, as well as its tracking and tracing measures, we are now able to detect why a given payment isn’t executed in five minutes.”

Saharia also stressed the advancements SWIFT and correspondent banks have generated in the last several years: “There is a misconception that correspondent banking is slow, but most payments are getting done in minutes. Only a small percentage are not done in time. This is due to things like sanctions screening, formatting issues, varying time zones, and so on. However, even this small percentage of payments equates to a very large number of transactions. Adoption of ISO 20022 will help to speed up the process, by reducing formatting issues and enriching available payment data.”

Looking even further ahead, Saharia noted that technologies such as APIs will also streamline the payments ecosystem – enabling further integration, tracking, and better status updates.

The need for integration was a strong theme in this session. Thankfully, pointed out the speakers, there is an increasing number of instant payments schemes around the world that are cross-border, such as, P27 Nordics and SEPA. Earlier this year, there was even a collaboration between the Monetary Authority of Singapore (MAS) and the Bank of Thailand (BOT) – enabling users of the two systems to send money to each other with ease. “All these initiatives need to come together to make the whole picture faster,” said Saharia.

“Despite the politics that’s woven into this picture, despite supply chain disruptions – as we saw with the pandemic and the Suez Canal crisis – the global payments economy is here to stay, and will only continue to grow,” added Sposito. “With that, the demand for faster cross-border payments will grow too. Over the few last decades, the correspondent banking network has grown immensely in reach, and now has a very large network for enabling cross-border payments. Alternative payments suppliers are actually helping to further drive competition and innovation in this area.”

So, while there are improvements and consolidations to be made, panellists agreed that the correspondent banking ecosystem has already built a strong foundation for the future. But, “this doesn’t mean we can rest on our laurels,” warned Sposito. “We need to continue innovating.”

Speaking to where the landscape would be without the likes of correspondent banks and SWIFT, Vasudev pointed out that faster payments are indeed possible through distributed ledger technology. However, “all these closed loop systems need ubiquity,” she said. “They need more people on the network. Only SWIFT has that ubiquity needed to scale and enhance its service.”

Vasudev also agreed with Sposito on the importance of alternative service providers pushing banks to innovate: “We don’t want to be left to just provide the rails,” she said. “Complacency comes from incumbency.”

So what exact challenges are currently holding incumbents back from innovating? Saharia argued the real challenges are the costs involved: “To enable cross-border payments between the UK and Turkey, for instance, you need KYC and AML measures. That is what makes this enterprise so expensive,” he said. Once again, the panel agreed that ISO 20022 will help to iron out these issues and reduce the pressure on margins.

Another challenge lies on the compliance side, commented Sposito. “There’s an uneven playing field,” he said. “Regulators are treating banks and non-banks differently.” Indeed, incumbent banks are under much regulatory scrutiny around financial crime, which comes with a huge cost impact. “It’s not the same for fintechs,” added Sposito. “If the goal is to keep the whole system safe and streamlined, fintechs need to be subject to these regulations also – a level playing field helps everyone.”

Vasudev took this idea further, and suggested banks should work closer with fintechs, and even learn from them: “Looking at fintechs can reveal what consumers want, and what banks are failing to provide,” she said. “Some correspondent banks don’t want to offer cross-border payments because they are worried it’ll cannibalise exiting revenues. But, if they do, it will attract more flows and more clients.” Clearly, there needs to be a shift in how incumbents look at these issues.

Providing a flavour of what SWIFT is working on to improve the overall process for correspondent banks and their customers, Devolder said: “Building a sanctions screening utility is one of SWIFT’s roles in this space. It would support all players in the ecosystem – even small banks. This would make things safer and faster. In addition, APIs could be further explored to exchange data and power reference tools to speed up payments processes.”

To close the session, Damen asked the speakers whether the role of correspondent banks will diminish in the future, as a result of more and more alternative payments providers entering the space.

Sposito assured the banking audience that the correspondent model is evergreen: “Correspondent banks will always remain a key part of global payments ecosystem, but it’s in our hands to continue to make it a success. We have the reach and the network, but we need to partner, connect, and offer more value-added services.”

So long as there are different currencies and clearing schemes around the world, we will need correspondent banks for their ubiquity and reach.

Digital identity for digital natives

Dissecting developments in the digital identity arena, Eefje van der Harst, senior manager, Innopay welcomed Rod Boothby, global head of identity, Santander; Ville Sointu, head of emerging technologies, Nordea; Parit Patel, solutions director, EMEA, NICE Actimize and Uri Rivner, chief cyber officer and co-founder, BioCatch to question how a digital ID scheme can work in today’s environment and what the driving force behind the concept should be.

Boothby kicked off proceedings and highlighted that it is becoming increasingly critical to protect identities and therefore, identity must be perceived as an asset. “You don’t want to leave your biometric footprint on every small startup’s database, because it will get stolen. Instead, you want to be able to protect them.” The solution, Boothby believes, is for financial institutions to offer a custodial service for their customers, which could be inspired by the successful initiatives currently being used in the Nordic region, but he reiterated that a global standard is required here.

Sointu riffed on this point and said that while the Nordic blueprint is an excellent starting point, digital identity needs to migrate away from a model where authentication can only be completed on an online portal that the customer cannot have access to. “Digital identity is a collection of credentials and attributes and you should be able to share those credentials and attributes with different parties who are interested in those credentials and attributes.” Further to this, digital identity cannot be binary – to share or not to share. Customers should be able to choose what information they share with who within effective infrastructures.

Patel elaborated on this point and stated that it is not about financial institutions owning digital identity data; technology companies should support financial institutions in securing the identity data they have access to and can consume to utilise for other actions. “Every technology company has a role to play in terms of access to identity and making sure that the identity itself is secure when it's in use,” Patel said.

Alluding to a past conversation with Rivner, Patel added: “We've been looking for a digital identity utopia where we can facilitate seamless transactions, but at the same time, there are fraudsters out there who will have an incentive.” Rivner also believes that this utopia will not be achieved as the balance between security and convenience is a “cat and mouse game,” especially when considering the UK payments industry’s evolution from phishing, to strong authentication, to authorised push payment fraud, to faster payments.

However, earlier this month, the European Commission introduced a proposal for an EU digital identity wallet that would allow users to open bank accounts or file tax returns digitally, but also allow everyone across the 27 member states to store and manage identity data in digital form. While Sointu believes this is an ambitious government project that encourages interoperability, it “doesn’t stop private or public/public partnership models from deploying versions of their own wallets and utilise that to create very fast credentials from multiple sources.”

First steps with Request to Pay

In September 2019, EBA Clearing published a white paper which identified Request to Pay as the missing piece of the payments puzzle.

To address why this might be the case, and assess how successful the broader Request to Pay initiative is progressing, Kevin Brown, independent non-executive director and advisor, Payment Industry Insights, moderated an EBAday 2021 panel, titled ‘First steps with request to pay’.

Joining Brown in the discussion was Mark Lohweber, CEO, CoCoNet; Petra Plompen, senior manager, EBA Clearing; Dr Hubertus von Poser, member of the management board, PPI AG; Russ Waterhouse, executive vice president, The Clearing House; and Xavier Herrero, manager operational fora / development of banking services, CaixaBank.
Together, the speakers explored how Request to Pay ties in with banks’ instant payment strategies, the experience PSPs have with the new messaging functionality, and whether Request to Pay has already contributed to the ramp-up of instant payments.

Herrero kicked off the discussion by arguing that banks are not developing Request to Pay products quickly enough: “We still aren’t there yet,” he noted. “We’ve been living with instant payments for a while now, and we are continuing to work on it. Request to Pay is indeed the missing link.”

This was a sentiment the entire panel agreed with, and confirmed that many large corporates are increasingly asking for Request to Pay services linking to open banking and instant payments.

The first step, however, needs to be education, argued Lohweber: “Our direct customers are banks, and some don’t quite see the potential of Request to Pay. A big part of the proposition is discussing with corporates how it can best be deployed, and how it will push their business forward. Information is lacking.”

Poser echoed this as a key issue: “When SEPA schemes were first introduced, there were many projects, but a lack of business cases. With Request to Pay, there is a strong business case, but a lack of projects to introduce Request to Pay on the bank side.”

Offering an impetus for wider Request to Pay usage, one audience member suggested that initiatives such as Confirmation of Payee have the potential to greatly enhance the potential value created.

Plompen responded by arguing that with the four-corner model taking shape in Europe, there is a role for PSPs to contribute: “If they can confirm their payers,” she said, “they can add value to Request to Pay solutions.” Indeed, there is a need for further payee validation. If a request for payment gets sent to a payer, and it is confirmed to be from a verified payee, the entire Request to Pay experience is streamlined and enhanced.

In terms of the value-added services that Request to Pay can offer, panellists noted that consumers can use it to better manage, among other things, their direct debits and subscriptions, while businesses – such as utility and mobile companies – can reduce friction and lower their reconciliation costs around the billing process. The key challenge that remains in the B2B space, however, is integrating Request to Pay tools with ERP systems.

Poser said: “Wherever you can connect billing data with payment data, Request to Pay delivers value, and saves money on the reconciliation side. In e-commerce, there is even a ‘Try Before You Buy’ model that could be enabled.”

Looking ahead, Plompen argued that Request to Pay may even catalyse the shift to machine-to-machine payments.
“This is clearly an opportunity for banks to pull in traffic,” said Lohweber. “It’s also a chance for corporates to be first-movers. We need to encourage corporate and retail customers to use this service more.”

Reflecting on the potential issues that surround an increasing uptake of Request to Pay, Lohweber, Plompen, Poser, Waterhouse and Herrero warned that Request to Pay solutions from fintechs are not always reliant on central schemes. As such, there is a danger of a fragmented landscape developing, where multiple kinds of Request to Pay services that don’t operate, emerge. “We need an extra push from regulators to help instil standardisation early on,” said Herrero.

Poser agreed that further regulatory intervention is required – and can even be expected: “Clearing infrastructures, like TIPS, don’t have a messaging system for Request to Pay. This needs to be resolved. I believe PSD3 will involve a mandate for Request to Pay, due to its necessity in the ecosystem.”

So, what other barriers remain? What challenges do banks face in getting Request to Pay up and running? “The biggest challenge is not the availability of technology,” said Herrero, “but how to prioritise which services to provide next. There are many areas for banks to advance in, when it comes to payments.”

Payments as a Service

Distilling the common themes around Payments as a Service (PaaS), the session’s moderator Teresa Connors, managing director of Payment Matters, outlined three key pillars that work to build (as close to) a perfect definition of PaaS itself.

Connors explained that these can be observed as the “three C’s” of PaaS: “the first C is the customer payments as a service must allow customers to make payments when and where they want to. The second C is collaboration, we've got is incumbent upon all of us as an industry, to collaborate, to add value. The third C is cloud, as we need to future-proof payments, and make them into cloud platforms.”

Directing a question at Craig Ramsay, managing director global innovation, HSBC, Connors asked what potential an app store really holds for a global bank for its corporate customers.

Ramsay stated that first and foremost, we must consider where the app store is going to reside if we’re going to effectively going to carry out PaaS. “Consumers are used to Google or Apple, and in the corporate world, actually there's lots and lots of places that you're going to be able to go to pull down these payment apps. So, as a bank, you have to think, am I going to drive everybody to me or am I going to have to police myself in the appropriate app stores for those people to take those services?”

Ramsay also noted that depending on who a bank is servicing through its PaaS or product, some organisations will be able to take solutions from an app store as the requisite developer community already exists. However, when it comes to larger corporates they are likely to encounter more complex problems or requirements that go beyond open banking or have proprietary data elements.

Another factor Ramsay encouraged the panel to consider was depending on who you're servicing with your payments as a service or your product, some will be able to take it from an app store because they have the developer community, and they'll want to actually just download that. Yet, when it comes to larger corporates, they might have more complex problems, or they might have some requirements that don't just have open banking requirements. There could also be other data elements that are proprietary.

“You're now actually having to develop a more unique API or micro service, that won't be publicly available, but it will be in a private App Store. You've got a dimension of having to consider where and how to place it in public or private app stores.”

Ramsay also warned that app stores are not going to be the only way that a corporate is going to solve a problem. This is because batch payments are here, and they will continue to be here for some years to come. “You have to think about a continuum of services as a bank, and think about the problem the client needs solving, and giving them the best choice for them to take, to actually add value to their customers.”

Ana Climente, head of open banking BBVA Spain echoed Ramsay’s comments, adding that corporates that come to BBVA are looking to solve the complexities of their cash management system in order to make their day-to-day operations more efficient.

“They look for real time transactions, end to end and integrate it with their systems, real time reconciliation, traceability, and interoperability.”

Referring back to one of the three ‘C’s’, Climente added that when it comes to collaboration, global clients especially see the need to for solutions that meet regulation in each country with one single file or one single format that they send to the banks.

This also rings true for the use of data. “What we see in corporates, the payments are not only a transaction, they are also a source of data that can lead to cash forecasting, anticipate needs and even optimise their financial management.”

“All banks had to make this movement toward digital transformation beginning in 2007, and once you transform yourself, you’re ready to offer something different to your clients.”

But is an app store approach just one solution out of many? Connors questioned where this variety of choice leaves banks, which are also trying to forge ahead with their digital transformation journey.

Charles de Rouge, head of SaaS solution, Bottomline, also circled back to the key role of collaboration. Even if banks are becoming more agile and initiating transformation, de Rouge explained that fintech partners, players and platforms all play a part in support the banks and helping corporates to innovate and or participate in this innovation.

“I'm not sure that our store is like a consumer-app store, I think from a technical perspective, to go below the glass level, we need more white label partnerships. I think this is a way forward to not only offer global services to the corporate consumer through the bank, but through a collaboration between fintechs banks and other players.”

Giving Domenico Scaffidi, head of market infrastructures, Volante Technologies, the floor, Connors asked what he would include in a bank’s successful digital payment strategy.

First, Scaffidi argued that the bank should concentrate in meeting the customer’s needs. This may involve changing its mentality or culture to shift the focus away from a narrow target of speed or technology or real time payments. “Changing the mentality, the culture and the internal sponsorships – in other words, changing the way we bank.”

“Everything is possible when thinking about PaaS. The technology is important, is there, and it is where we are moving. This, in reality, means offering real time reconciliation - reducing resources drastically, because this means making a payment faster and cheaper. And again, offering the capability to move liquidity, or pull the liquidity in real time.”

Standardisation is currently in focus in the UK, with Scaffidi adding that the government, the Bank of England, Pay.UK are all working on revitalising the ecosystem with the New Payments Architecture (NPA), all based on the same language of ISO 20022.