Covid-19 has exposed the status of banks’ digital transformation strategies. While the steps that banks have already taken are positive, they have not yet launched the next payments generation. However, if we look at the pandemic as a circuit breaker, Swift’s new strategy could turn the power back on and inject renewed energy into payments transformation for banks across the co-operative’s network.

The interbank payment network in September announced a new strategy focused on instant, frictionless payments and securities processing that it plans to roll out over the next two years and beyond. The industry co-operative’s significant strategy will expand its operations beyond financial messaging to offer member banks a raft of transaction management services via a new digital platform. And it will do so in a way that enables banks to leverage these new capabilities at their own pace, providing backward compatibility so that institutions can protect existing investments.

The objective of Swift’s transaction management services is to provide the next generation of seamless, instant, end-to-end transactions among its member banks by resolving the frictions in the payments process. The platform will connect players through APIs that leverage data held in the network’s core engine; this engine will also be migrated to the new platform.

The platform will also use cloud technology and APIs to provide a set of common processing services that historically banks have had to invest in individually. Extensive new data capabilities will enable the pre-validation of essential data, fraud detection, data analytics, transaction tracking and exception case management.

In payments, this results in value-added services that banks can provide to businesses, while in securities, financial institutions will benefit from improved reconciliation, reporting and asset servicing processes, as well as end-to-end visibility of transactions to reduce settlement fails and fines.

Swift first signalled this realignment in March, with the full strategy and new evolutionary approach announced in September ahead of Sibos 2020. Following the conference, Swift’s chief strategy officer David Watson elaborates that if financial institutions are excited about the idea of instant and frictionless transactions, they’re just as enthusiastic about predictability of speed and price and to be able to achieve this in a well-paced, incremental way, instead of a ‘big bang’ shift.

Looking backwards for evolution

As Covid-19 has caused significant pressure on resources, expenses and profit, Swift has adopted an evolutionary approach to implementing its new strategy: one that takes stock of the current status of financial institutions, what products they desire, and crafted the timeline for implementation in a way that remains comfortable for firms.

“The whole idea of having a strategy that takes us somewhere new and better across financial messaging and transaction management, and does so in a backwards-compatible manner, has been really well received. There hasn’t been much debate around where we’re going: the discussion has been around the approach we take.”

Watson believes that engaging with the network’s community has enabled Swift to build a robust plan and means that there is a deep understanding as to the potential complexities and pitfalls of certain approaches across the market.

Despite the compressed timeline, Watson explains that the shift makes it easier for users as it brings the pain of transition toward the Swift centre and ensures that the mechanism can coexist within the old world and new world simultaneously.

A strategy crafted with clients front of mind

Emphasising the role market players held in the strategy’s development stages, Swift believes that this strategy enables it to support members in the acceleration of innovation through the platform’s innate interoperability, coupled with the accessibility and immediacy that comes with being cloud-based.

It also paves the way for both financial institutions and Swift’s customers – either independently or in collaboration with their partners – to have access to an ecosystem where they can create new value-added services to support their growth.

The new strategy will also enable Swift to integrate seamlessly with other ecosystems or closed loop networks, such as those in the trade finance space, allowing entities to bypass banking powerhouses and payments giants and set up their own payments systems. 

“Things that were once considered a threat of disintermediation to financial institutions suddenly become an avenue of opportunity for the Swift community and the closed loop networks themselves.”

This is significant as the more that Swift is able to globally connect and integrate new and traditional closed loop players, from domestic market infrastructures all the way up to financial technology closed loops,[LG1]  the greater the interoperability across the new network and ecosystem.

Knowing when to pull the trigger

Launching such a significant strategy is difficult to schedule at the best of times, let alone in the throes of the tumultuous 2020. A recent report by Marqeta found that 80% of banks have accelerated their plans to digitally transform as a result of the pandemic, and 69% noted that digital transformation projects will need to be delivered in two-thirds of the time originally earmarked.

The core of Swift’s new platform is currently being designed, with a launch slated for around November 2022, and is aligned to the adoption of ISO 20022 for high value payments in the Eurozone. The need to address unmet customer expectations equates to the increase of potential disintermediation and increased competition, these concerns have long contributed to the need for banking transformation.

“We as a community that supports financial institutions and financial services see now as the right time to react to this drive. The goal of Swift and our community is to deliver open and frictionless international transactions and now is the right time for us to step up and change because the industry is changing. We’re well placed to be the catalyst of this transformation.”

Swift is particularly well placed as a catalyst for this change given the mutualised services it can and does offer to its community of 11,000+ users argues Watson. He continues that, “cost is always an important question and has become ever more important during 2020. If we are able to provide a mutualised service in a non-competitive area, it saves all of our community from having to bear that cost.”

Watson explains that five years ago most players would speak to the expense of transformational projects when weighed against their ability to speed up the payment, yet the data to prove or disprove their impact was non-existent. Now, given the transparency that Swift gpi has afforded the community, Swift can show the true cost, needs and timeline of embarking on such journeys; and with gpi, the building blocks are already in place.

“Gpi means that we can do this based on data and real-world examples rather than emotions or perception. This helps us to understand how we can help the community even better.”

Incremental enhancements for stability

As Swift expands beyond financial messaging to transaction management, Watson notes that certain elements of the strategy are already in place and will help to bolster pillars of Swift’s multifaceted roadmap over the next two years.

Other new products and functionality, such as Swift’s recent move into low value payments, are scheduled on a regular basis over upcoming quarters. “We’re moving forward to transaction management in November 2022, but our approach is more about delivering continuous and incremental benefits to the community on the journey to instant, frictionless transactions, rather than a big bang launch.”

Commenting on Swift’s foray into low value payments, Watson says Swift gpi has, “transformed the high-value cross-border payments experience and has been rapidly adopted by the industry following its launch in 2017.”

Watson continues, “In recent years, the domestic payment experience for SMEs and consumers has significantly improved and they expect the same level of speed and predictability for their cross-border payments, with costs and processing times known up front. The next step for us was to build on that strong foundation and help financial institutions extend the benefits of gpi to lower-value cross-border payments made by SMEs and consumers.”

There are few players more appropriately placed than Swift to drive change across the global payments landscape. It’s comforting to see the co-operative recognise friction and pain points in the payments landscape and work to address these – all the while engaging with its communityh to ensure that priorities are aligned across the board.

This type of overhaul could very well be the leap the payments world needs to kickstart the next generation of transformation. It should be welcomed by financial institutions with a serious eye to innovation through collaboration.