The definitive source of global instant payments intelligence

Sibos 2019 – Daily Reports

27/09/2019

Sibos – Day 1

Long queues did not deter the financial services industry as SWIFT’s Sibos 2019 conference begun at the Excel Convention Centre on 23 October in London, UK. InstaPay’s Editor, Lauren Jones, reports.

Dame Minouche Shafik, Director of the London School of Economics and Political Science officially opened the four-day Sibos 2019 show alongside new SWIFT CEO Javier Pérez-Tasso and SWIFT Chairman Yawar Shah. No opening in London could escape a discussion on Brexit but Shafik noted that in a post-Brexit world the UK’s current 80% service-led economy is unlikely to change. This was met with a sigh of relief from the 11,000+ financial services audience, a record breaking attendance for this year’s Sibos in London.

How is Europe progressing towards payments transformation?

The European payments market has come a long way since 1992 when the Maastricht Treaty laid the foundation for the euro as a single currency. We have seen many new innovations in payments since then and the Single Euro Payments Area (SEPA) which extends beyond the EU affects the lives and businesses of over 500 million people, 20 million companies and 4,000 payment service providers.

European payments innovation is entering a new sphere and Hays Littlejohn, CEO of EBA Clearing noted that ‘as well intended as regulation is, it can never be crafted perfectly’. There are new challenges of fraud and fraud detection in the real time space that need to be thoroughly thought through and increased regulation can lead to unintended consequences.

The European payments market is having to contend with GDPR, PSD2, instant payments as well as ECB Target Consolidation  – a program to consolidate both technical and functional aspects of the ECB’s Real Time Gross Settlement and Securities Settlement systems. Part of the latter is migration to messaging standard ISO 20022 but one enhancement of the new system will be better liquidity management assures Fiona Van Echelpoel, Deputy Director General, Directorate General Market Infrastructure and Payments at the ECB. Van Echelpoel stated that ‘it is in everybody’s interests to move full steam ahead’ and gave a stark warning that ‘the ECB does not have time for dishonest views from banks regarding their readiness’.

The panel were all in agreement that instant payments, whilst not mandated in Europe, is still progressing apace. EBA Clearing’s RT1 platform, the first pan-European system, is connecting over 2100 Payment Service Providers across the continent. RT1 is currently processing 2 million transactions a week, with a fifth iteration of the scheme being launched in November 2019. Littlejohn added that ‘request to pay functionality will be our next big project’ as EBA Clearing continues to grow the platform.

The ECB also launched their own retail instant payments system at the end of 2018 and Van Echelpoel noted that ‘the ECB considers instant payments as important and Europe needs to be at the centre of this change’. The SEPA for cards scheme never really gained traction in the industry and the ECB see ‘instant payments as the solution’. Van Echelpoel added contentiously that ‘RT1 is good but we see there is potential for greater reachability with TIPS’. The ECB want a product that ‘encourages instant payments at the point of sale and ‘are supported in by the European Commission in this’.

The question was posed – does Europe really need multiple instant payments systems? Stephen Mueller, Divisional Board Member Transaction Banking at Commerzbank noted that ‘from a pricing and resiliency perspective having multiple systems might be beneficial but interoperability has been disappointing’. There is definitely room for improvement to ensure effective and efficient instant payments landscape in Europe.

Extracting value from data

Payments transformation is occurring globally. Aite Group discussed their recent research Payments Transformation: Criteria for Success’ undertaken in conjunction with payments technology provider Icon Solutions. David Bannister, senior analyst on Aite Group’s Wholesale Banking & Payments team noted that ‘there is no cookie cutter definition of payments transformation’. For many it is purely a compliance exercise, but some see it as an ‘opportunity to transform’.

Bannister added that each market is at a different stage of their transformation journey. The US are later than most developed markets in implementing instant payments and open banking is not a topic of real discussion in the US market, so we are seeing a slower pace of change. Conversely markets such as the Nordics are much further advanced and one bank in that market is in fact merging their business and retail banking practices as that is where the technology and value is taking them.

Alongside Bannister, Deutsche Bank discussed the second iteration of their research ‘Regulation driving bank transformation’. Polina Evstifeeva Head of Regulatory Strategy, New Ventures for Deutsche Bank’s Corporate Bank stressed the importance of data – ‘data is the basis of everything, not just the data itself but it’s availability’. She added ‘taking the data economy to the next level should be a priority’. The core of most banks strategy’s it how to use data to produce better insights and customer propositions; Artificial Intelligence (AI) are increasingly being used in this regard. But all will agree the industry is still in it’s infancy in producing tangible advancements in this area.

The debate is raging as part of payments transformation in regards to how much technology banks should operate in house. Evstifeeva highlighted the need to revisit how we deal with new technology. Cloud providers are now a critical part of the payments industry and questions will start to arise as to whether they should be regulated.

Investing in knowledge pays the best interest

António Horta-Osorio, Group Chief Executive at Lloyds Banking Group kicked off a series of ‘views from the top’, a new aspect for Sibos 2019 by underlining the importance of the focusing on the human element within banks. As the industry looks at increasingly at machine learning and AI to solve many problems, banks still require people to ‘make things happen’. Horta-Osorio discussed how Lloyds Banking Group increased their in-house training per colleague by 50% to ensure staff are equipped to deal with the new challenges the industry is facing.

But Lloyds Banking Group went further in reducing complexity internally within the bank by reducing levels of sign-off and ‘implementing an agile methodology, so the bank can move quicker and become more efficient’. But Horta-Osorio noted that it was not just about equipping staff from a knowledge perspective but also ‘instilling a culture of positivity around the change the bank is going through’.

 

Sibos – Day 2

Challenges in the cross border payments space and compliance in an instant world were key themes on Day 2 of SWIFT’s Sibos 2019 trade show in London, UK, says InstaPay’s Editor, Lauren Jones.  

Delivering cross border instant payments – is there a sweet spot?

Banks have shown that they can deliver fast, even instant, cross-border payments around the world with SWIFT gpi as well as deliver robust domestic systems. SWIFT have taken it a step further by undertaking a pilot with a selection of banks to link the gpi platform with domestic real time payments systems.

Hua Peng, Deputy General Manager, Operation Management Department at Industrial and Commercial Bank of China, one of the banks involved in the pilot, told a busy Conference Room 4 that ‘the biggest challenge in taking this further is regulatory’. It will be vital ‘to work with central banks on sanction screening requirements’.

Prajit Nanu, Co-Founder and CEO of Instarem stated that ‘India has the secret sauce’ when it comes to instant payments. But there are many considerations that still need to be thought through in a cross border environment. Nanu added ‘at the moment the transaction limits are too low for cross border use cases’. A large use case for cross border instant payments may lie in the corporate space, where €15,000 (the current TIPS limit) may not provide a significant enough value proposition to invest. Christof Hofman, Global Head of Payments and Collection Products, Cash Management at Deutsche Bank added that ‘all payments are not created equal and low limits are not enough’. He informed the audience that Deutsche Bank has recently increased their instant payments limit to €1million for certain clients.

Nanu also noted that ‘data truncation is likely to occur’ between systems, as different infrastructures will support differing amounts of data. Hofman added that ‘consistent usage of ISO 20022 will significantly help with this. Will Lovell, Head of Future Technology at the Bank of England added that ‘clear rulebooks exist in domestic markets, but this is not necessarily the case internationally’. Whilst SWIFT gpi continues to make good progress, but cross border instant payments is still in its infancy and these issues will need to be solved before seamless cross border payments become a reality for everyone.

Keep calm and carry on being compliant

As banks continue to roll out instant payments around the world, the industry is facing increased security challenges from real time demands on payments systems both domestic and cross border. The rapid pace of innovation and technological change characterises today’s climate banks need to balance their customer demands for speed with regulatory demands for financial crime and risk controls.

‘Payments touch every person, every day’ stated Marion King, Director of Payments at Natwest. Today’s consumers want everything now. Contactless payments have taken off because they’re fast, convenient and friction-free but there can be a trade-off between speed and safety. Understandably, security is vital whether you’re a consumer or a corporation and the threats are growing.

As an increasingly digital society we are experiencing a “dash from cash”. This is a tension from physical to digital payments. Digital services provide numerous advantages. They save time, provide insight and facilitate instantaneous gratification, liberating consumers to spend time doing other things.

King noted that to help combat fraud the UK payments industry are introducing Confirmation of Payee, a mechanism that will cross-check a payee’s account number and sort-code to their name before validating a payment.

Patricia Sullivan, Global Co-Head, Financial Crimes Compliance at Standard Chartered added that ‘the technology is there for real time compliance, but there are regulatory challenges that need to be overcome to make significant progress in the cross border space’.

The UK’s moves towards transformation

The global payment system is undergoing huge reform. Many of the major global markets are enhancing aging payments infrastructure or developing new systems. The UK itself is undergoing large-scale changes, but is it quick enough?

Chris Hemsley, Managing Director at the Payment Systems Regulator (the UK’s dedicated payments regulator), informed the audience that ‘the UK is in the top ten non-cash payments markets in the world’. Clearly a feat for the market to be proud of. However, he warned that ‘not everyone wants to or can use digital payments’ and Ofcom (the UK’s communications regulator) estimates that ‘12%  of the population suffer from digital exclusion’. Whilst digital penetration in the UK is high, some in society do not own a laptop or mobile phone and therefore find it challenging to access digital services.

Victoria Cleland, Executive Director for Banking, Payments and Innovation at The Bank of England echoed Hemsley’s positive commentary on the UK market, noting that ‘the UK received more investment last year than New York’. But this does not necessarily equal success, the UK payments infrastructure still has a way to go to ensure it remains modern and future proof. Cleland stated that ‘the Bank does not just want to focus on monetary and financial stability but also wants to see what it can do to spur on innovation’.

The Bank of England is upgrading it’s Real Time Gross Settlement system to increase resilience and widen interoperability both domestically and internationally and has a delivery plan for this program that stretches to 2025. The implementation of ISO 20022 and APIs will significantly enhance the system and collaboration with end users on this is key. Cleland went on to note that the Bank is building in 24/7 functionality from the start even though there is ‘not heavy demand from the industry’, she added ‘but in a cross-border world it may be necessary’.

Paul Horlock, CEO of Pay.UK brought his perspective on the UK’s New Payments Architecture – a revamp of UK’s domestic retail payments architecture. But with no real deadline in sight, it may be that the Bank of England’s RTGS program will ignite the debate further.

Sibos – Day 3

Taking advantage of open data and the digital transformation landscape were central themes of the third day of SWIFT’s Sibos 2019 trade show in London, UK says InstaPay’s Editor Lauren Jones

Can banks be marketplaces?

Drew Graham, Director of Digital Strategy at Barclays gave the audience a reality check at the Discover Stage as he confirmed ‘western countries don’t have the luxury of building shadow payment systems like in China, we are stuck with legacy’. Rhetoric that is an honest but bitter pill to swallow.

Whilst there was initial fear in the industry of open data and open banking, significant momentum has now built around the opportunities that it presents. However, the panel all agreed that the industry is in a regulatory paradigm where customers are given ownership of their own data but institutions must commercialise it within a utility environment.

Graham noted that ‘Barclays is taking a commercialisation first model rather than regulation first’, allowing them to be driven by value points rather than compliance.

Whilst open data and open banking bring a wealth of opportunity, the industry must look at this opportunity with a degree of realism if organisations want to be successful. Graham added ‘we can’t live in a paradigm where data is open but applications are secure. The application is inherently insecure and therefore it is the data itself that we must make secure’. In the wake of a number of high profile IT outages and data breaches in recent years, maybe apps can actually be some of the biggest security weaknesses for major organisations.

Graham perceived that the data that needs to be homogenised and mined is largely within the banks – ‘banks have some of the payment data such as who, when and where a purchase was made; but they will need to work with partners to gain more valuable intelligence on customers such as why and what’. Gathering information on a customer’s intent will be a big challenge.

Joshua Fernandes, Product Owner – Open Banking at Revolut added that ‘open banking is not going to save the world just yet’. With 100s of apps and 1000s of APIs powering business today, it it is just a matter of time.

Real time payments are yesterday’s challenge

An esteemed panel of real time payments operators met in Conference Room 1 on Wednesday morning to discuss whether they are keeping up significantly with the pace of change. New platforms, new processes and new services have far-reaching implications, not least because many market practices and technology stacks have been in place for decades.

Jan Pilbauer, Chief Payments and Innovation Officer at BankservAfrica, the largest payments operator on the African continent, noted that the ‘African landscape is quite different compared with their Western counterparts; de-cashing and educating the populace on digital payments is primarily the main objective’. Pilbauer added that real time is ‘yesterday’s challenge’ and we must now focus on ‘making it simple, intuitive and cheap’. A sentiment maybe not all the industry would agree with.

Jane Song, Head of Rules and Strategy, International Business Department at Alipay, the payments arm of Chinese marketplace giant Alibaba, noted that is imperative the industry  start from the user experience. Alipay has approximately 320 million active daily users on the platform and processes on average 175 million transactions a day. Song stated that ‘users nowadays are less patient, don’t care as much about security and want feedback immediately’ in today’s tech age. Alipay wants to bring this thinking into all their products.

Marco Hughes Global Head Core Payments at HSBC Global Banking and Markets brought the banking perspective by noting that ‘the amount of information that we can provide our clients is greatly increased thanks to real time payments’.

Miguel Diaz Diaz, Payments Systems Director at the Banco de Mexico observed that ‘payments systems and operators have to adapt’. The Mexican central bank will go live with its new Request to Pay service, an overlay to the Mexican real time payments system next week. However, he noted that the Mexican population had a way to go in their adoption journey of real time payments and there is still a heavy reliance on cash. However, he added ‘cash does not leave a trace and therefore banks cannot provide any additional financial services’, even though they could bring greater value to the customer’.

Operators clearly have a way to go to ensure that they provide the infrastructure that their customers expect, but in a game of margins where banks are already feeling the pinch, will infrastructure be given the necessary investment to keep up?

The digital transformation journey for payments

Payments is one of many industries undergoing digital transformation, but Daniel Szmukler, Managing Director at EBA Group remarked to a busy Conference Room 4 that ‘digitisation is not just taking paper and making it digital’. There is a need to reengineer processes to work in a more digital ecosystem.

As the industry moves towards much deeper digital integration, ‘getting away from traditional product development cycles will be key’, added Szmukler. It is true that the customer does not think about payments as a product, but can the banks move that way? Szmukler thinks so. ‘By viewing payments as a streamed exchange of value’ where payments are part of a broader ecosystem that satisfies a customer’s lifestyle this will start to liberate minds away from a product mentality.

It is vital not to lose sight of customer priority and banks will need to find their ‘value spaces’ as they undergo transformation programs. To quote the Accenture phrase, payments in the modern digital age need to be ‘instant, invisible and free’. Therefore banks will need to look at other ways to monetise payments and ‘move away from viewing themselves as custodians of data and rather users of it’ noted Vincent Brennan, Head of Group Customer Services at Bank of Ireland.

But how do we get there? Brennan added ‘digital trust is one of the cornerstones of transformation’. Without trust open banking, instant payments and other innovations become fruitless.

For many years the industry has used the old adage ‘a payment is a payment is a payment’ but it looks as if that is not the case anymore – a payment is data is value seems more apt in the 21st century.

Author: Kate Nelson