Our previous article in this series discussed the digital disruptions faced by the payments and financial services industry due to the pandemic. It is time to know why banks need to make a significant change in their operations now more than ever.
The industry has experienced significant challenges with business models changes, digital commerce, rising fraud, geopolitical pressure, commercial/productivity pressures, regulatory change driving the need for the new ISO Standard.
Global remittance and cross-border payments’ transaction value is expected to grow from $37.15 trillion in 2020 to $39.9 trillion by 2026. All significant participants are exploring the new Payment-as-a-service (PaaS) and remittance-as-a-service (white label) business model by leveraging their in-house payment platforms. Global PaaS is expected to reach $25.5 billion by 2026 from $7.1 billion in 2020, expanding at a Compound Annual Growth Rate (CAGR) of 23.9%
Efficiency – After initiating an international transfer, funds move through multiple correspondent banks before reaching the recipient. Traditional cross-border payments have high costs and are extended due to the lack of direct transfers between the sending and receiving banks, processing times.
Legacy Swift FIN XT payment instructions rely on free-text fields and side applications, making it slow to send/settle/reconcile payment transactions (e.g., trading and settlement applications, ERP/procurement, invoicing, bill presentment, and payment).
Coronavirus has fuelled digital transformation, with institutions demanding the evolution of the cross-border payments industry, payments, and settlement. For example, SWIFT GPI is a new cross-border payment standard that allows financial institutions to transfer funds in a much faster and cheaper way. Therefore, it has seen a rapid increase in popularity among banks during the pandemic.
Ecosystem evolution and Digital Transformation – The rise in digital, mobile, and social media has integrated finance into the individual’s daily life. eBay, PayPal, Ariba, Alibaba, digital currencies, digital wallet.
Regulation, Compliance, and Privacy – Data protection, compliance, and identity theft (e.g., KYC) are increasing concerns for consumers and regulators.
Security and trust: There is a need to develop robust cybersecurity strategies and frameworks; fraud attempts have steadily increased with Swift MT. Cyber-criminals are now targeting their attacks at the very heart of the institution, gaining control of the back-office and fraudulently sending payment instructions over the SWIFT network.
Changing Demands of Commerce
The world is moving towards digital-only modes of commerce and trade finance. The freight and transportation industry are moving to fully digital/electronic transportation documents (e.g., digital bill of lading and digitized customs documentation). Internet payment is transforming from money transfer via Swift to forms of digital currency (e.g., central bank digital currency (CBDC)).
Non-bank entities are disrupting the liquidity and trade finance market, offering new products and services. In addition, government regulation is increasing, focusing on sanctions, knowing your customer, and anti-money laundering.
Technologies now facilitate real-time purchasing and settlement, reducing the need for intermediaries (e.g., corresponding banks). Technology has developed ways that buyers and sellers can trust each other in a transaction without a banking institution. Real-time settlement is improving transparency and traceability
Fraud reduction and Crime management reduction – Various crime groups, spy networks, child trafficking, and other distasteful types of people have taken advantage of gaps in FSI cross-border payments capabilities to fund various illegal activities worldwide. In addition, globally restricted entities leverage various financial institutions to funnel money to sanction groups and countries. As a result, global regulators have taken a hard-line approach to any FSI not meeting their international regulatory requirements. For example, French bank Crédit Agricole funneled $32 billion in financial payments through its New York branch in violation of US regulations resulting in the bank paying $787m to settle with US federal law enforcement and New York State Department of Financial Services.
A challenge to the broader industry
There are many payments, liquidity, and clearing systems across the world embarking on ISO 20022 transition. By 2023, 80% of high-value payments by volume and 90% by value will have migrated to ISO 20022. In addition, financial institutions around the world are either commencing or currently inflight projects to adopt. However, many have yet to initiate projects to migrate.
Legacy Infrastructure – Many financial institutions have under-invested in their cross-border payments infrastructure and enterprise integration capabilities. Some institutions have applications built up in the early 2000s. Their application ecosystem is unlikely to be upgraded into the ISO 20022 (or at the end of life, i.e., GPP Classic). They will need to execute core system transformation and ISO200022 migration simultaneously.
The move from MT to MX is not a straight migration. The introduction of MX with ISO20022 means many firms will have a data modeling exercise to complete to map the required data field in their SWIFT MX messaging. Likewise, many migration engines that work from MX/MT will have translation and integration issues; despite “out of the box” translation capabilities claim, FSI’s will do significant data mapping exercises to make this viable. In addition, specific applications such as liquidity management tools, payment monitoring, and similar will need to be integrated.
FSI’s are evaluating the commercial viability of their trade finance and cross-border payment product offerings. However, the cost of migration and (ever-increasing) compliance exceed economic benefits for the required investment to update their Swift payment ecosystems, often pushes to consider partnering with a white label service provider.
Many CIOs are grappling with how to insulate their payments ecosystem and future roadmap from Legacy systems. Critically how do CIOs introduce agility into the ecosystems to facilitate swapping payment components, API’s and web/microservices components
Since Covid-19, Cross Border Payments transaction numbers have reduced, making the current change business case for investment challenging to justify. Benefits realization has moved from revenue generation to compliance costs.
Except for cross-border eCommerce (e.g., eBay, Aliba, etc.), cross-border payments declined significantly in 2020-21. Digital and cryptocurrencies, distributed ledger technology, blockchain, and onshoring value chains have seen an approximate $5T reduction in Cross Border Transactions via Swift. OECD report that capital flows reduced by more than 40% in 2020 (COVID-19 and global capital flows (oecd.org))
For those choosing to upgrade to ISO20022, the SWIFT network expects a co-existence period to commerce by Nov 2022, which will continue until late 2025. However, while completing cross-border capabilities in ISO20022, financial institutions will need to complete updates to their domestic Real Time Gross Settlement (RTGS) so that Australian institutions can interface with the Reserve Bank of Australia. This will impact every payment type and payment aggregator in Australia.
Time for Change
By November 2022, all swift members will need to accept the new ISO 20022 payment instruction/Swift FIN MX format. SWIFT has mandated the industry to take ISO20022/Swift MX messaging for cross-border payments and cash reporting by November 2022. Between 2022 and 2025, the industry will work in a co-existence phase. The migration will end by November 2025, by which time all financial institutions must be able to send and receive ISO 20022 CBPR+ compliant messages for cross-border payments. MT Categories 1, 2, and 9 will be decommissioned as of November 2025 for cross-border payments only.
David Coli has more than 29 years of Experience in Financial Services, Wealth Management, Institutional Banking, Equities/Derivates trading, Cards & Payments, BPO, Digital, Core Applications, Program Delivery, Governance, Insurance, Core Transformation and Service Management. David has held Wealth Distribution/Products, Lending, Credit management, and Corporate Bank roles. He has worked in major companies like EY, Microsoft, SAP, Sun Microsystems/Oracle, PM Partners, Telstra, NSW Police, Asgard Wealth, NAB, and Westpac. Across Industry sector experience includes Financial Services, Digital, Payments, Intelligence & Defence Industries, Law Enforcement/Police, Health Government, Retail and Aviation. In Infosys Consulting David currently focuses on Broad industry initiatives in Payments, Mortgages, Wealth, Digital, channels, product, transformation, and operations.