EBAday 2021: Payments innovation and the benefits cascading down the waterfall model

These sessions set the pace of the day’s four panel discussions, with audience questions that flowed unwaveringly until platform close across subjects including ISO 20022, CBDCs, payments innovation trends and leveraging practical technology like cloud. Below is our roundup of each of the day’s sessions.

On the homestretch with ISO 20022

Asking the panel to provide one word they associate with ISO 20022, moderator Tanja Haase, customer engagement lead - transaction management, SWIFT, formulated an interesting definition of the new financial messaging standard.

Volker Heinze, head of business development, Unifits GmbH, gets the ball rolling with the term ‘Interoperability’, and furthered that when we do cross the finish line of the homestretch for ISO 20022, that is when we will reach interoperability.

“In a few years we will have similar ISO 20022 formats and processes for mass payments, instant payments, high value payments, and cross border payments is all around the world. Yes, there will be local flavours, but in the end, this is only a minor issue. ISO 20022 is the common language for financial messaging, I would say it is the lingua franca of payments.”

The most fitting word is ‘opportunity’ for Neil Brady, head of transition and surveillance operations, Deutsche Bank. He explained that ISO 20022 is an opportunity for the industry to rationalise processes and the legacy infrastructure that we have across many of our institutions.

“We can do this as a result of the enriched data, the more structured data that we’ll receive in the future within the payment landscape. Also, with any opportunity there's going to be risks and challenges, but at the end of the day I think this is basically one opportunity that we all have to embrace.”

Daniele Pasqualini head of GTB RFP and onboarding, Intesa Sanpaolo, argued that ‘awareness’ is the is the key word here. “This is because we're working in several ISO projects and working groups such as TARGET2 and correspondent banking.”

With hundreds of customisations, Pasqualini noted that Intesa Sanpaolo has worked on creative solutions over the years, which were not tied to entirely considering the value of the standard itself. “Now we have the trouble of understanding who did it and why, and again, we’ve had to re-engineer what we've done in the past. We have several projects around reverse engineering, to identify and translate the gap, and now we must translate again in the ISO “lingua franca” that was mentioned earlier.”

Taking a different tack, Daragh Kirby, head of sales and marketing, Intercope stood out as the more pessimistic voice with his word choice of ‘caution’.

The more realistic perspective on ISO 20022, Kirby noted is that “we're entering into a coexistence phase, so I'm not really sure I would call this the homestretch for ISO 20022. It's probably the homestretch for the coexistence period but we're a few years away yet from the homestretch horizon. I would say caution, but at the same time acknowledging all of the optimism that came from the others.”

Hitting on a flash point of the migration debate, Haase questioned Kirby whether it is possible to make sure that the benefits that ISO 20022 brings, actually outweigh the cost of the investment in transition itself?

Kirby pointed to the SEPA scheme, and while noting the fundamental differences between it and the ISO 20022 migration, he observed that a lesson vendors can take from SEPA is that it is essential to take a strategic or even macro view of the transition itself.

“We saw with SEPA that people who only took for example data transformation or tactical solutions to ensure that they were compliant with the scheme from a message format point of view, that was often a challenge later on, as the systems in the back office weren't ready for this format. I think it is key to take that point in the sand and say that you shouldn't just look at this from a data transformation or a data migration challenge.”

What Intercope sees is that banks need to look at the best future use of ISO 20022, and that best future use would be to have interoperability across the bank.

Heinze echoed Kirby’s remarks, adding that while “we as vendors have a wider market and banks have a wider choice,” what we’ve learned from SEPA is that ISO 20022 is complex.

“For a technical example, there are more than 750 fields in the EURO1 or TARGET2 customer credit transfer, and there are more options to populate the payment than you have in SWIFT MT 103 and additionally more message types and flows. From my point of view, do not invest in workarounds, to map is a trap, do it right from the beginning to control complexity.”

Do we really need Central Bank Digital Currencies?

Considering the ECB’s recent public consultation on the digital euro, Facebook’s progress with the Diem Association, El Salvador becoming the first country to adopt Bitcoin, cryptocurrency exchange Binance ordered to cease UK activity, Sweden potentially participating in ICOs, the Bahamas having issued the Sand Dollar and JP Morgan creating digital coin JPM Coin, do we really need central bank digital currencies?

Led by Robert Bosch, partner at Bearing Point, Marion Laboure, macro-strategist at Deutsche Bank and lecturer in economics and finance, economic faculty at Harvard University addressed these developments and opened the discussion with an exploration around the definitions of cryptocurrencies, stablecoins, and CBDCs. Referring to the Bank of International Settlements’ taxonomy of money called ‘the money flower’, Laboure stated that money can be defined with four different dimensions: demand, accessibility, digital vs. physical and transmission.

Sophia Bantanidis, head of regulatory strategy and policy, TTS innovation, treasury and trade solutions, Citi also referred to the BIS taxonomy: “There is no legal definition of what a CBDC is, there’s a taxonomy around it, but there is no clear, precise definition because it could refer to a number of different concepts. The fact is that we could end up with a combination of new forms of central bank money in the form of CBDCs, alongside existing central bank money like we have today.”

While it is evident that there is a power play occurring between different types of digital money and there are several approaches across the globe, Naveen Mallela, global head of coin systems, ONYX, JP Morgan draws attention to commercial bank digital currencies, namely JPM Coin.

In addition to the four dimensions of the money flower, Mallela said “it is about creating new infrastructure, creating new rails, providing the ability to have value-added products and services, leveraging programmability, the ability to offer our clients better express ability, especially as we move towards an economy of things and machine to machine payments.”

Jack Fletcher, government relations manager, digital currencies, R3 also picked up on the requirement for CBDCs and the use cases for the wholesale market. “We started in the wholesale space and examined how a CBDC, or a digital currency could address problems. This plays into developments that we’re seeing in security settlement and tokenisation of the financial markets and how you get value on ledgers within a DLT system, so that when you are making transactions, you can reduce the risk you have an asset.”

Addressing a potential retail need, Dirk Schrade, deputy head of department payments and settlement systems, Deutsche Bundesbank posed the question: “shouldn’t we also offer the possibility for consumers to have a claim towards the central bank?” He added that in times of uncertainty, this could increase trust in the monetary system, which could be improved by providing a public alternative to cash which would also have a digital trace.

On this and the concept of financial stability, Bantanidis reiterated that while CBDCs could support with use cases such as tax evasion or anti money laundering, “on the flip side of the coin, it can also cause instability. If it were to come at the expense of a competitive, multi-tiered financial system and healthy competition, it could potentially - depending on how it's designed - it could induce depositors to move commercial bank deposits.” This would increase funding costs of commercial banks, and therefore adversely impact financial stability.

She elaborated on this point: “Payment systems work best as a public and private partnerships and payments with a CBDC shouldn’t be an exception to this. If anything is done that potentially crowds out the private sector and stifles innovation, then that could cause instability. A CBDC should build on the foundations that we have in place already.”

Trends in global payments innovation

Sabrina Small, managing consultant of Lipis Advisors set the tone of the session as she stated that what remains important about innovation, is that the best technical solution or flash of inspiration will come to solving a customer problem. Achieving economic success and solving a problem is what innovation should be about, “that is its real goal,” she argued.

Yet, the conundrum of global innovation as a concept, Small acknowledged that “the idea that innovation can be global, is often trumped by what the specificities of a given payments environment are, and the banking environment itself.

On the back of this observation, Small posited her first question, asking Michel Vaja, head of payments consulting, Icon Solutions, what he feels is the most interesting payments innovation of the past five years.

Vaja responded that the answer is clearly open banking and the PSD2 evolution. Why? “Because the bottom line is, that it pushed banks to rethink their definition of value.” He argued that it has encouraged banks to rethink the way they serve their customers and that it has shifted the thinking around what they can do with the data they hold. The bank accounts have become data commodities of sorts.

Jon Levine, co-head of institutional banking, Banking Circle, countered that while Vaja’s suggestion was strong it wouldn’t make any of Levine’s top three choices. For him it’s all about instant payments for low value clearing.

“To me, this is the seminal event. While it isn’t 100% adopted everywhere yet, it is fundamentally such a game changer.”

Commenting on an earlier reference to Transferwise, Levine explained that part of their success is the use of instant payments as the money gets across the world in seconds.

“If you fast forward to what the world might look like in two-five years, I imagine that most of the world's payment flows, including B2B, B2C, C2B payments, if they all happen instantly and the efficiency gains across the payments landscape across treasury management, I think there is seismic shift about to happen. So PSD2 is certainly very important, I think if you add instant payments over that then the world is going to change in the payments environment.”

Turning the conversation to regulation, Small asked Adrian Smyth, head of innovation and strategic partnerships, NatWest, about the role regulation should play in promoting innovation.
While banks like regulation, Smyth noted that “we're missing the benefits of customers is where it goes appropriate above that.”

He explained that open banking in the UK has been a great example of where banks were directed to open up via those API's to accounting details, payment details, service details etc. “What you then see is the innovation above that, which is where they’ve taken the opportunity to drive different opportunities for customers in the payment acceptance space and the payment disbursement space.”

“There is a clear view of where banks can just be compliant but need to look at the opportunity to see what you can do better for your customers.”

Beyond these examples, Smyth added that regulation around keeping customers safe and secure with Confirmation of Payee to counter push payment scams has been hugely beneficial in terms of leveraging the open banking regulation, standards and standardisation, and enabling the industry to respond fairly quickly to that threat.

When it comes to considering how this regulation should be rolled out, Christian Schafer, head of global payments, corporate cash manager, Deutsche Bank, commented that the European Commission, has been focused on coming up with a clear, stakeholder-based strategy which sets a clear picture for the next couple of years.

“When it comes to the particular issuance of new regulation, I would feel that a stakeholder-based approach is key, and this approach would take some time. Also, I will say that the EU is fast enough in terms of coming up with new regulation or regulatory change. I also feel, particularly in Europe, the approach of stakeholder engagement and listening to the different interests and coming up with good solutions has gone very well - especially given the complexity we have in Europe.”

Technology that delivers

How can cloud services and artificial intelligence help PSPs turn their big data into customer insights, and thereby enhance service provisions? How can predictive analytics aid in the fight against financial crime?

These are just some of the questions that moderator Kate Pohl, managing director, Senior Advisory, explored in Stream Two, before the lunchtime roundtable, with panel speakers Sean Devaney, vice president strategy for banking and financial markets, CGI; Adrian Lovney, CEO, New Payments Platform Australia; Martin Moeller, senior financial services transformation executive, Microsoft; and Jan Pilbauer, CEO, BankservAfrica.

Kicking off proceedings, Devaney commented that cloud technology should be about helping businesses deliver on their core aims, and drive value for shareholders: “Cloud means spending less time on running IT,” he said. “Big organisations – especially banks – often have bigger IT shops than most IT suppliers. So, leveraging technology infrastructures to support business aims can only be a good thing. Innovations like robotic process automation (RPA) and artificial intelligence (AI) can free up staff time, enabling them to focus on better and more interesting jobs. Cloud can remove that administrative and bureaucratic element.”

Moeller also believes in the efficiency-driving potential of cloud services: “The idea of cloud is to make advanced technology a commodity, so that banks can focus on innovation. For instance, technology has made it cheaper and quicker to build a new bank from the ground up – this is something we have always assumed takes a considerable amount of time, whether it be via the greenfield or brownfield route. Once again, cloud has shifted the game.”

In the wake of the pandemic-induced digitalisation wave, Moeller and his team helped build a number of banks from the ground up, including Flowe. After just five months, Flowe was built, and went live in July 2020. It already has 700,000 customers.

Moeller’s case study is yet another proof point of cloud technology making processes more streamlined. What’s more, thanks to the support of cloud technology, Flowe is already fully data and AI-driven. “Even incumbent banks still struggle to do this,” noted Moeller.

Lovney, however, was more cautious in his appraisal of cloud technology: “Yes, cloud makes processes easier and cheaper, but when you’re running payments infrastructure projects from end-to-end, does agility really make things faster? We want things to develop in a sequential way. Stakeholders in the ecosystem need to get to certain milestones at the same time.

Agility makes it difficult to synchronise these efforts. While cloud is great for managing data, reinforcing security measures, and streamlining certain areas of DevOps, payments infrastructures are best built in a waterfall manner.”

Indeed, many central payments infrastructures are yet to take advantage of cloud technology. Pilbauer, unlike Lovney, feels this is a missed opportunity: “Cloud has the potential to enable us to be much faster. But look around – how many national payments systems and solutions are actually running in the cloud? If they are running in the cloud, are they actually leveraging native cloud technology to deliver value, or have they simply moved into the cloud?”

Pilbauer likened the mindset toward cloud technology to handing the fastest axeman in a felling company a chainsaw. The axeman’s felling speed drops, and after investigation, headquarters realises he has not turned the chainsaw on. “Like the axeman, we need to start the engine,” he said.

Clearly, financial players need to focus more deeply on the implications of cloud, as opposed to just its implementation. So what exact benefits does cloud technology offer?

Moeller resonated with Pilbauer’s analogy: “Cloud spans many different areas in financial services,” he said. “For me, data, and the insights you get out of it, is key. Having data alone is like having a barrel of oil in the garage. It’s really only valuable if you have an engine to bring horsepower to the road.” Indeed, data should be harnessed by cloud technology to create efficiencies, fight fraud, and upscale customer service.

“We are working with shifting goal posts,” continued Moeller. “When we talk about breaking down silos, we are often referring to banks, insurers, or PSPs, bringing together the vast amounts of structured data they possess internally. Five years ago, you’d have been in the middle of the pack if you’d managed that. You were at the top of the pack if you could augment that with unstructured data. Our industry is still moving along this line, but in reality, the true goalpost is breaking down even more silos by augmenting internal data with external data.”

Yet, this may be one area where technology does not always solve the problem, contested Pilbauer. “Technology makes it possible to get more data – take ISO 20022, for instance,” he responded. “But, we are struggling with bigger questions that need to be answered first, and technology cannot help us with them. Who owns the data? Who should be allowed to work with the data? How do we protect consumers’ privacy? These are the challenges we need to overcome now.”

Moeller agreed: “Technology is always just an enabler,” he said. “If you want to be truly customer driven, you need to be data driven. Firms need to go above and beyond to really serve customers’ needs.”

Devaney pointed to the need to open access to data – particularly in the fraud space, where information sharing is lacking. “Banks don’t see much benefit in this, because they are already working with a large number of transactions,” he said. “But, many smaller organisations don’t have access to that volume of data. Opening the space up – and allowing smaller organisations to operate on the same level playing field as large banks – will really help the industry as a whole serve and protect consumers.”

Naturally, industry-wide data sharing will facilitate the growth and innovation we all expect from open banking, and regulators will be pivotal in encouraging data sharing going forward.

Diving deeper into the theme of financial crime, Moeller pointed out that further AI adoption is necessary for banks to continue “stepping up” to the high volume and sophistication of cyber criminals. “Some are so sophisticated, they’re outplaying many banks,” he warned. The panel agreed that AI and machine learning technologies are a sure-fire way to tackle this rising tide of financial crime with speed, rigour, and cost effectiveness – particularly when compared to more traditional, manual methods.

To close the discussion on technology that delivers, Pohl asked the speakers to provide an evaluation of the path ahead for financial technology, and the broader open banking paradigm.

“Open banking should be about separating the really difficult things – such as new payments platforms – from the areas we want to innovate, using a fast-fail model,” said Devaney. “This is necessary in financial services because its people’s money, and the economy, that’s at stake. Open banking allows us to innovate more freely, and low risk, because we aren’t impacting the core instruments that lay beneath.”

“Open banking enables the stack to be unbundled, allows specialisation across the value chain, and doesn’t require banks to be good at everything,” agreed Lovney. “However, I don’t agree that it is without risk. Moving data from regulated to under regulated firms, for instance, will be complicated.”

“Open banking will not work without data sharing,” said Moeller. “But, at the same time, we need to protect the consumer. Any more Cambridge Analytica scandals, and people will lose faith in the movement.”