Bottomline: Hungry for change – but is transformation indigestion threatening banks’ competitiveness?
Banks have a lot on their plates. Since 2008, the regulatory and compliance portions, in particular, have been generous, with mounds of open banking changes and lashings of real-time payment messaging adjustments.
A compelling interactive report from Bottomline would suggest that those financial institutions that don’t select the right digital tools, will still be chasing peas around the bowl when various compliance deadlines arrive. And they certainly won’t be on the front foot in terms of competitive advantage.
To diagnose the problems, Bottomline took a novel approach on industry surveys. Treasury, anti-fraud, operations and product experts, including C-level executives, were asked a series of questions on their company’s payments modernisation strategy. The answers offer a real-time benchmarking comparison across 311 businesses in 34 countries, from the US to Europe and Asia. Among several items on the multiple-choice menu are instant and cross-border payments, migration to ISO 20022 messaging, and open banking.
“We felt banks and financial institutions (FIs) could benefit from comparing their strategic priorities, product roadmaps and plans for future innovation with their peers,” said Zhenya Winter, author of The Future Of Competitive Advantage In Banking And Payments report. “In the process, they could discover which technology trends the industry is prioritising and align with them.”
More than one telling revelation has emerged so far from this exercise.
The first is that while the vast majority of the original respondents – 64 per cent – said digital transformation was the biggest focus for their business, around a quarter admitted they were ‘somewhat’ or ‘highly sceptical’ that their company could successfully deliver on its modernisation strategy.
Another finding raised concerns about banks’ ability to meet the imminent milestone dates for ISO 20022 payment messaging migration: 25.5 per cent had not even started the preparation process, 23 per cent had only just begun planning, and 11 per cent were still looking for information on how to move forward. While the focus in the west has been on SWIFT’s ISO 20022 deadline in November 2022, the report points out that other critical payment infrastructures, including Target2, MEPS+, CHATS, CHAPS, RITS, BahnNet, as well as PhilPass and Chips & Fed, are all on the same pathway.
“The responses show that many banks may have underestimated the complexity of the migration,” observed Winter. “Bear in mind that SWIFT currently has 17 million payments messages exchanged every day. With numbers set to increase dramatically and imminently, it would be a brave bank or FI that chooses to ignore this scale and reach.”
She continued: “This shift [to ISO 20022] will represent the ‘new norm’ for high-value payments supporting a predicted 80 per cent of the volume and 90 per cent of the value of transactions by 2025. A lack of compliance to ISO 20022 deadlines will lead to a dent in competitive advantage and disruption in business continuity.”
Conversely, ensuring business continuity was the top priority for almost a quarter of respondents.
The report also revealed an apparent contradiction. The attitudes towards the technology that would help banks and FIs achieve the ISO deadlines and leverage the business opportunities afforded by regulatory compliance.
While almost 64 per cent of respondents said they believed RegTech would become more important in the next 12 months, hitting compliance and regulatory deadlines was only ranked sixth out of eight priorities for their payments businesses. Adopting new payment rails, such as real-time payments, and creating new revenue streams using digital overlays vied for the number one slot.
There was also something of a disconnect when it came to cross-border payments. Many complained about pain points that included the cost of maintaining multiple Nostro accounts, lack of speed, and the limited visibility banks and FIs could offer clients into the cross-border payments journey. In Asia Pacific, which dominates the global payments revenue pool, each bank, on average, runs 58 Nostro accounts, which incur an annual maintenance cost of more than $1.7million, said the report.
“This is because fees accumulate at each step in the process, including correspondent bank and third-party service fees,” explained Winter. “This is also connected to the 9 per cent of respondents who highlighted trapped liquidity in the system.”
And yet the report said that the main channels used to make international payments are still leveraging legacy methods that can be both clunky and expensive.
“Using separate accounts, coupled with poor visibility for traditional rails (such as non-SWIFT gpi), makes it difficult to optimise liquidity. Therefore, it is of paramount importance that innovative players start exploring new strategies that leverage multi-lateral platforms,” added Winter.
Multi-lateral platforms will likely become a commercial imperative. In October 2021, McKinsey forecast pressure on both fee and processing margins would continue in many regions, while it expected recovery in interest margins to be ‘slow and moderate at best’. It went on to say: “These combined forces disproportionally affect incumbent players reliant on traditional revenue streams, such as card issuers and banks holding significant commercial and consumer deposit balances, and thus spur a need to rethink payments revenue models and identify alternative paths to value.”
But one solution, which only 32 per cent of banks and FIs were working on adopting, according to the report, was to outsource their payments support and thus relieve some of the business indigestion caused by transformation.
“Best-in-class solutions are SAAS-based, subscription models,” said Winter. “This approach avoids expensive capital expenditure outlay and prevents unnecessary delay in adopting new services. The payment workflow should include extra controls and checks. For example, a ‘net sender cap’ to ensure all the money moving through this service is fully funded by the sender before making any financial transaction. These extra technical features guarantee that the service is accredited and fully auditable by regulators and independent audit organisations.”
Any inconsistencies in survey responses might come down to one very telling statistic: when asked ‘what are your company’s greatest barriers to the adoption of real-time payments?’, 38 per cent said an already busy roadmap made it hard to prioritise projects.
“Banks and FIs have a great deal to accomplish from a regulatory and industry compliance point of view with ISO 20022, SWIFT CSP, Confirmation of Payee, PSD2 etc.” said Winter. “Additionally, COVID-19 has led to a rapid increase in the use of digital payments, and so educating customers has been front and centre since 2020. However, the benefits of real-time payments are over-arching as real-time rails are used for all modern payment transactions, from SWIFT gpi to digital overlays such as Request to Pay.”
Winter added that there is plenty of support in the market from solution providers, as well as central infrastructures like PAY.UK, EBA Clearing, TCH, Singapore Fast, etc, to help with strategy and best practice roll out to ensure speed to market without disrupting existing operational efficiency. This exercise shouldn’t be a project taken on by only one part of the business such as IT or operations, but rather split across multiple functions internally.
Winter goes on to say: “Outsourcing support will address the concerns of two audiences: 1) those worried about the cost and hassle of implementing a new payment rail; and 2) those concerned with ongoing compliance headaches. Both can be more confident about driving this initiative as it is the solution provider’s responsibility to ensure they take away the pain of integration and ensure that you are future-proofed by automatically complying to ongoing regulation.”
Click here to read the full report and take part in Bottomline’s interactive benchmarking survey.
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