Change is needed
Besides my very personal interest, there are a host of very good reasons why the financial industry should keep a strong focus on making cross-border payments convenient and easy to use, including:
- Today, sending a payment can already be as easy as starting a video conference. You only have to look at the retail sector and (often) domestic solutions, such as instant payments in Europe, which offer immediate confirmation and proxy resolution of long IBANs.
- Cross-border e-commerce is growing rapidly – in part, but not entirely, due to Covid-19 – and requires easy, fast, and reliable execution of cross-border payments.
- Regulators across the globe have identified the issues around cross-border payment execution, and the Bank for International Settlements (BIS) together with Committee on Payments and Market Infrastructures (CPMI) has defined a global roadmap to enhance cross-border payments.
- Payments between and into digital wallets are gaining more and more market share in the retail space – and are likely to follow a similar trajectory in the business-to-business (B2B) space if “classic” cross-border payments continue be hampered by perceptions of slow speeds, high costs and low reliability.
- Automated business processes based on smart contracts – and executed on a blockchain – will result in “trigger”-based payments that will be in high demand for reliability and speed of execution to void breaking the high levels of trust and automation.
The common denominator of all these topics – and all other drives to innovate payments – is to improve the “ease of use”, which is mainly driven by the following components:
- Reliability. The trust in the successful execution of a payment after initiation without any intervention.
- Velocity. The time it takes from payment initiation to confirmation of a successful credit to the beneficiary account.
- Transparency. The availability of all information associated with a transaction, such as the full costs prior to payment initiation.
- Interoperability. The easy integration of payment processing – including the initiation and reconciliation – into the underlying business processes.
Introducing ISO 20022
The introduction of ISO 20022 – a common, global standard for the exchange of payment messages in the cross-border payments ecosystem – from November 2022 could address a lot of these components. However, this still requires a shift in mindset to understand the ISO 20022 migration as more than just a cumbersome change of messaging format.
I don’t want to repeat all the changes coming with ISO 20022, as those have been documented in various Guides to ISO 20022 migration by my colleagues and in previous blogs outlining the benefits for Anti-Financial Crime, Operations, from a Corporate Treasury perspective. Instead, I intend to focus on the value of driving this payments evolution by addressing the four components listed above.
Most important to highlight is that the introduction of a single standard for payment message exchange enables interoperability between payment types. For example, it allows you to initiate a domestic credit transfer in the same way you would a cross-border single payment. Furthermore, the single ISO 20022 standard comes with the benefits of supporting fully structured data (e.g., breaking down a free text name and address into clearly defined address attributes of a name, a street, a building number, a town, etc.) and the exchange of rich data (i.e., support of comprehensive structured remittance information). The structured data enables frictionless execution by reducing uncertainty in the interpretation of the instruction data and enables better integration into business processes (as the required process-related data points can travel with the payment instead of using a separate route).
If comprehensively implemented from end to end across all payment market participants, with all components enabled – from payment capturing via controls, processing and reporting – the migration to ISO 20022 can be the key for the financial industry to accelerate innovation and unlock an easy-to-use payment offering.
At this point, you may be asking, “Christian, this is not new. Why are you highlighting it again and why now?” The best answer is that this is a unique opportunity to create a payment offering that is easy-to-use and comes with significantly higher efficiency in payment execution and a materially improved client experience.
Think opportunity, not effort
The ISO 20022 migration is not just a cumbersome effort simply to change a format; it is a huge opportunity. The rest of the world outside payments is not standing still. If the banking community doesn’t realise that a holistic approach to ISO 20022 is one of its key activities to remain relevant and competitive, it may be too late – new market players are likely to address the customer demand and take a significant share of wallet.
While there will always be the need for banks as trusted partners to keep liquidity and foster the settlement of value transfer, much of the value chain could be lost to other players that are able to accommodate client demands for easy-to-use payments more quickly. If we are not careful, our role might be reduced to mere providers of liquidity for settlement.
Thinking longer term, even digital currencies require a standard format to exchange information that could likely be based on ISO 20022. Introducing ISO 20022 now with the existing technology will improve interoperability and make moving to a blockchain-based solution easier in the future.
And let us not forget about the agenda of regulators and authorities globally to address the key challenges in cross-border payments around costs, speed, transparency, and access. This requires a response from the entire community – and the migration to ISO 20022 can play a key role here.
Finally, I would like to conclude this blog with reference to the analogy I started with: why should I be worried about the convenience of making cross-border payments in the future if the current ISO 20022 migration can lay the foundation for an easy-to-use payment offering? Let us all embrace the benefit of ISO 20022 when adopted end-to-end and let us jointly work on making it happen.
by Christian Fraedrich,
Head of Business ArchitectureBack