Significant changes are underway in the payments industry today, driven by technology, customer demand and business initiatives such as open banking and a new standardized, international communications system. While this evolution is not pain-free, the good news is that it provides some great opportunities for businesses, such as the availability of better-quality data and a chance to improve the customer experience.
The impact of ISO 20022
Let’s start with what’s known as ISO 20022. This is an international standard for all financial communications and data exchanges between financial institutions and payment systems. In other words, it creates a common language. More than 70 countries currently use it and ISO 20022 can be used by anyone in the industry on any network.
ISO 20022 has other benefits like providing a better payment experience. With the new standard, payments are faster, more reliable, more secure, and cost less due to better interoperability and the elimination of different standards from various countries and financial institutions.
At the same time, institutions can also benefit from ISO 20022 because it dramatically improves the quality of data that is shared about customers. This enables businesses to understand customers better and provide improved experiences. While most financial institutions are in the early days of ISO 20022 migration, Citi is accelerating its ISO 20022 adoption in a partnership with Volante Technologies. One of Citi’s goals is to get better payments data to offer to corporate clients.
Another benefit: When banks aren’t forced to use unstructured and ambiguous data that can arise from cross-border payment systems and instead rely on common standards under ISO 20022, compliance and efficiency are improved.
“Moving to ISO 20022 is definitely worth the effort – and banks should use this watershed moment in the industry to ensure they make the right turns,” advises Accenture.
For example, Credit Suisse explains in a case study from ISO, an independent international organization, that using ISO 20022 has improved its communications with other banks and upgraded the quality and quantity of data it can provide to clients.
Another major development within the industry is open banking, which also seeks to share more information among institutions.
The impact of Open Banking
Open banking – also known as PSD2 Second Payment Services Directive – was launched in 2018. It requires the United Kingdom’s biggest banks (HSBC, Barclays, RBS, Santander, Bank of Ireland, Allied Irish Bank, Danske, Lloyds and Nationwide) to release their data in a standardized format. But while open banking may be closely linked to the UK and Europe, many other countries are also moving to implement a similar infrastructure, such as South Korea, India, Australia, Canada, Hong Kong, Japan, the U.S. and Singapore.
While this data sharing can provide information to customers such as the locations of various bank branches or where to find the best bank account deals, it also lets account holders give permission for their data to be shared with third parties or even other banks that can use it to create new products and services to attract and retain customers. An example of this type of third-party aggregation service is Intuit’s Mint, a free budgeting app launched in 2006 that puts all a customer’s information in one place, such as loans, credit cards and investments. Mint has been a thorn in the side of banks for years as it acts as the customer’s ‘window’ into their accounts. More banks are now seeking to become “aggregation hubs” – a sort of go-to portal for all their customers’ financial data, very similar to Mint.
Still, it’s worth noting that sharing of this data may not take off overnight since some consumers are leery of providing private information because of cybercrime and privacy protection concerns. Their acceptance should improve as better communication with customers helps them understand that steps have been taken to make sure privacy and security rules are followed.
Despite some initial growing pains, there are numerous advantages from ISO 20022 and open banking:
- Account aggregation: Under open banking, banks must share customer data through a standardized API format with sanctioned third parties. Once a customer gives permission, these third parties can gain access in a “read-only” mode so data can only be read, not changed. This is a pretty effortless process for banks, although privacy and data protection standards must be followed. Perhaps more importantly, account aggregation allows banks to improve the user experience by offering customers a way to check all of their worldwide bank accounts through one channel. As mentioned earlier, the US already has such an offering with Intuit’s Mint. With Mint, users can see all their personal financial information in one place. The service helps users pay bills on time, set up a savings plan and monitor their credit scores. All of this leads to greater brand loyalty and at the same time, customers don’t mind sharing their personal information because of the value they receive. Banks that ignore account aggregation possibilities miss out on a gold mine of accurate information about their customers and how best to serve them. It’s also worth noting that aggregators like Mint generate revenue through website and app ads, premium-account offerings and referrals to other financial services companies – all potential revenue sources missed by banks that don’t offer similar aggregation services.
- Global Payments: While U.S. banks can stay on ACH (Automated Clearing House) or SWIFT (Society for Worldwide Interbank Financial Telecommunications) to communicate and make transactions, the problem is that ISO 20022 is necessary if banks want to handle international payments. For example, any bank that will want to do instant payments globally through the Federal Reserve’s upcoming real-time payment settlement platform, FedNow, will have to be in ISO format. While implementing ISO 20022 isn’t easy, the best approach is strategic: adapting the bank’s infrastructure and application system to create an architecture that has ISO 20022 capabilities rather than, for example, just trying to translate ISO 20022 messages in a legacy system. Once ISO 20022 is implemented, the benefits abound in that the financial messaging standard encompasses not only payments but also certain trade transactions. It also provides users a way to coordinate formats that didn’t offer cross-operation before, which boosts efficiency while cutting labor costs and reducing risk exposure. Data collected through ISO 20022 will allow better business decisions for the institution and how to enable that data for clients through different types of products. For example, Merck reports in a case study that by using ISO 20022, it has cut costs by being able to monitor local markets and override payment types that are too expensive. They also report that they have automated cash management processes in every country and have centralized in-house bank infrastructure and standardized processes that free up employees to work on more value-added priorities.
- Clearing/settlement of securities: New international and local market infrastructures (MI) are appearing on the scene as a way to improve and smooth the processes of clearing and settling securities. But with increasing trans-border transactions, it’s obvious a new messaging standard is necessary, and Eurosystem’s renewed securities settlement service TARGET2-Securities has chosen ISO 20022. For example, financial market infrastructure providers use ISO 20022 to send and receive collateral messages with members, including margin call notifications with its members. Companies like U.K. clearinghouse LCH report that the standardization under ISO 20022 brings greater operational efficiency at a time of increasing margin calls, greater reporting transparency and client asset segregation.
A real-time data platform is essential
When discussing the changes coming to the payments industry and open banking, you need to include cross-data center replication (XDR). It’s crucial because XDCR provides greater security and flexibility when handling critical data, allowing it to be moved where and when it’s needed (such as retaining some data in a home country because of data and privacy regulations). It also means that there isn’t a single point of failure that could crash an entire system, and data can be accessed globally when needed.
For XDR, it’s key to have a real-time data platform. Organizations need to make sure they have a data platform that can build globally distributed applications and access regional data easily and quickly. In addition, there needs to be ongoing compliance with local data regulations such as those being considered by the United Kingdom.
For example, now that the United Kingdom has left the European Union, it’s looking at how to also move away from European data protection regulations and forge its own path instead of complying solely with the General Data Protection Regulation (GDPR) as it agreed to do before Brexit.
“It means reforming our own data laws so that they’re based on common sense, not box-ticking,” says Elizabeth Denham, who is overseeing the transformation.
It’s expected that the UK’s aim will be to convince other countries that any data protection plan they devise can meet international standards and easily allow for the transfer of information across borders. If not, the UK risks being locked out of data transfers to other countries.
There are numerous revenue opportunities for financial institutions because of open banking and ISO 20022, such as the chance to gain more valuable data, better understand customers and deliver improved experiences. But to be successful, it takes the right data platform and an understanding of local compliance demands. With all those pieces in place, financial institutions can realize exciting new opportunities.