The march towards instant digital payments is changing the way that banks and financial institutions operate, collaborate, and compete. Although efficiencies can be gained from this transformation, there is also work to be done to take advantage of the opportunities and better serve customers in a rapidly evolving digital landscape.
Payments have gone from being an overlooked but important part of trade to becoming front and centre of the conversation in financial services. A number of trends have driven this shift in focus for payments. There are more competitors in the payments space, and there is more dis-intermediation, both upstream and downstream. The continually evolving regulatory environment is also pushing payments up the banking agenda. Technology advancement continues apace, as does demand for richer data and digitisation from both financial institutions themselves and, crucially, from end users. Last but by no means least, the ongoing and growing threat from cybercrime and fraud has focused the minds of the community on how to secure payments processes and infrastructures.
For SWIFT, recognising these trends offered the opportunity to renew its strategy to target the frictions that exist in global payments. Speaking at the SWIFT Community Update for North America, Chief Strategy Officer David Watson explained how SWIFT gpi played a crucial initial step on this new path:
"What gpi did was enable us to have real data, that helped us understand where the real friction points are," Watson said.
"It's not about avoiding those controls, but rather how we do those things faster and better. That's where ISO 20022 comes in, to enrich data to enable that."
SWIFT's vision is all about putting that richer data in the centre and facilitating around it. Being available through instantaneous API connection, SWIFT can facilitate the interaction between members of its ecosystem, and support the transition to an instant and frictionless cross-border payment experience around the world.
"The key word around what SWIFT does is 'interoperability'," added Watson. "How we facilitate that interoperability between both open and closed loop players and bring the benefits of those environments to the global financial landscape. Whether you're a market infrastructure, a bank, or a corporate, helping to leverage that around the world is the key role that we will continue to play in the future payments landscape."
SWIFT strategy: Our vision for instant, frictionless payments and securities
A corporate perspective
Digitisation is on the agenda for corporates, as well as banks. This is the case for US-headquartered multinational General Electric, which is in the process of wrapping up a multi-year journey to modernise its treasury infrastructure. For Peter Claus-Landi, Executive - Treasury Operations & Industry Initiatives at GE, certainty and predictability around payments is an even bigger priority than speed.
"It is less about a need for speed and more a need for certainty for us," Claus-Landi commented. "A key area we'd like to see evolve a little more is around pre-validation. If we had the ability to pre-validate transactions, knowing ahead of time that there were no issues with funding or compliance, for example, we can improve our overall payment flow and cut down on the number of exception queries that we have with our banks."
Access to robust data is an important step to enable this visibility in real-time, which is where ISO 20022 has a big role to play. Preparation for the transition to ISO 20022 is important for both banks and corporates, as Claus-Landi explained:
"One of the priorities for my team for 2021 is a focus on shifting towards ISO, starting with legacy payment formats first, and also looking at our legacy bank reporting, to move to where banks actually have true structured reporting that we can take advantage of."
Ensuring that the data sent with a payment is carried through the entirety of the transaction lifecycle is also a big area of focus at GE.
"If we send data as part of a payment message, and we send as much data as we have, we expect that data to be carried through from origination until the point that is credited to the beneficiary," Claus-Landi said.
The future of payments: A corporate’s view
Meeting the BigTech challenge
To meet customer needs for instant and frictionless payments, the banking system needs to move beyond processes that are based on batch processing cut-off times. Only with this can the industry deliver on customer expectations and create a payments experience that on a par with other digital platforms that are always available and instant.
"At the consumer level, you can envision a world where a US-based wallet can interoperate with a different wallet based in Sweden, for example," said Russ Waterhouse, EVP, Product Development & Strategy at The Clearing House. "Consumers will expect that for business. Infrastructures have to do the hard work underneath to actually support that sort of experience, and in terms of how they communicate and how they transact account to account."
As the payments ecosystem evolves, we have also seen new Fintech players come into the space as well as the big technology firms such as Apple, Amazon, Facebook and Google. FinTechs have been successfully able to identify and operate in specific parts of the value chain, particularly those that are closer to the consumer. Where they have not done as well is when they need to scale. This is something that BigTechs can bring to the table, thanks to their deep financial resources.
"Whether it is investing in cybersecurity or offering data-driven solutions, the BigTechs will be formidable competitors in the payment space," noted Gayathri Vasudev, MD, Head of Global Clearing Product Management at J.P. Morgan. "I think it will be similar to the relationship between banks and FinTechs - we will have to collaborate with them on some aspects and compete with them on others."
On the collaboration side, a prime example of this is the Citi Plex account that is coming soon to Google Pay.
"The Google and Citi partnership is indicative of where banks need to be," commented Tony McLaughlin, Managing Director, Emerging Payments and Business Development at Citi Treasury and Trade Solutions. "We need to be where our customers are, and they are transacting on these BigTech platforms. We should be running towards APIs. Communities like SWIFT, who really have a great role to play in standard setting, must bring us together as banks and help us publish standard APIs that enable us to show up on these BigTech platforms."
Customer insights: The future of payments in an evolving digital landscape
Drivers of digital transformation
Online attendees were polled on the key business drivers were that are fuelling digital transformation at their organisation. Options ranged from competitiveness and shareholder value, customer expectations, operational efficiency, regulation, and safety and security. The poll results supported the anecdotal evidence from speakers throughout the event, as customer expectations came top with 71%, clearly ahead of the second place driver - safety and security with 52%.
"For any change of this magnitude, you have to have a business case and logic across all those factors," noted Michelle Brick, Senior Director, Real Time Payments Digital Integration at RBC. "A digitisation programme has to actually have a benefit across every single one of those points, whether it's customer experience, operational efficiency, and even regulation, all have to be met."
The impact of the pandemic as a driver for payments digitisation was also felt keenly in North America. In Canada, this was seen in a rise in digital payments volumes. Brick commented that Canadian interbank network Interac had seen a 45% year-on-year increase in the volume of e-transfers.
"Volumes of digital payments in four months exceeded that over the previous 10 years," added Tracy Lagasse, Financial Services Industry Solutions Executive at Microsoft. "We also saw from our customer base that real time payments and modernisation is happening in Canada, and those projects are so strategic. We also saw a big increase in demand for different types of modernisation in payments, with questions like how to create value added services, and interest in things like managed services for payments and the different business models that clients can go to market with for modernisation."
Customer insights: What is the right technology for your digital transformation
Innovating in a digitised world
Most banks are seeking to understand how to position themselves for success in an increasingly digitised payments world. This involves learning to adapt to new ways of thinking and working, and not just relying on the old ways of operating.
"We are on our digitisation journey, and one of our core learnings so far is around the need for constant experimentation," explained Saket Sharma, CIO & Digital Officer at BNY Mellon Treasury Services. "You have to constantly experiment, and combine this with a culture of being a 'learn it all' rather than 'know it all'. It is vital to learn quickly, adapt and move on."
"Fear of failure is a barrier to innovation," commented Todd Roberts, Partner at Deloitte. "Most North American executive teams are tied pretty tightly to quarter over quarter earnings progression. To be successful as a sector, financial institutions need to adopt more tolerance for how we invest on a longer horizon."
Part of that change comes from a shift in culture within the organisation. As Sharma noted, BNY Mellon adopted a start-up mindset on its digitisation journey.
"We tried to act as a startup company, in that we set out with a vision and we changed our vision drastically as we moved through the experimentation. It is also important to explore partnerships with FinTechs as you cannot do everything yourself. You've got to figure out what the best hybrid solution is, take the best of breed and combine them together to provide a frictionless service to the customer."
Customer insights: How are banks and fintechs responding to a digitised world
Financial crime compliance in the instant age
With instant payments ramping up, the focus on financial crime compliance becomes ever more important. For financial institutions, this ramps up the challenge around identifying fraudulent payments, sanctions screening, and more.
"If we're going to get truly instant, then all the compliance has to be done in advance," said James Sayko, Head of Financial Crime Compliance, Institutional Banking & Payments at Wells Fargo. "That's a challenge that is going to require pretty big systemic changes. But there are some really workable ideas out there."
The issue with any financial crime compliance steps is to be able to integrate them into the world of instant payments without adding any friction to the process. Sanctions, for example, pose an issue to this in North America.
"The United States is a strict liability regime,” added Sayko. "We have to keep that in mind as we build out solutions. But there are some interesting ways you could pre check customers before payments go out that can be tested."
Cross-border payments also pose the sanctions challenge, but in addition they can pose a payment routing challenge.
"Data quality is really important in this regard, making sure that you transfer the right data into the relevant country, because each country is going to have different requirements of what they expect to see," added Megan Buchheit, Global Financial Crimes Executive, at Bank of America."Maintaining data quality all the way through a transaction is an important issue we need to watch."
Opposing forces: compliance needs to enable instant, frictionless transactions
Innovating as a community
The trends and developments that have placed payments at the front and centre of the financial services conversation, will transform the industry. SWIFT is at the forefront of exploring these trends and the new SWIFT strategy transforms how it can approach these changes, while placing responsible innovation at its core. To be truly successful, however, collaborative innovation with the community is essential.
"We need to work with our community," explained Jade Batstone, Global Innovation Manager at SWIFT. "That includes banks, as well as tech giants and fintechs, to solve these challenges together, because these are bigger challenges than any one of our organisations has the ability to solve alone."