EXCLUSIVE: “Change of tune” – Ravi Sharma, UL Solutions in ‘The Fintech Magazine’

The US payments landscape is fundamentally changing, with ISO 20022 helping to bring harmony to a discordant environment. Ravi Sharma from global leader in applied safety science UL Solutions gives his perspective on the impact 

“The times they are a-changin’,” sang Bob Dylan in the early Sixties, capturing a moment of unstoppable social progress in America. Sixty years later, someone should think about writing a similar anthem for the US payments industry – because 2023 will surely go down in history as a watershed year, thanks to the confluence of a series of impactful events. Next summer, the Federal Reserve, the central bank of the US – which is still the world’s single biggest economy – will introduce its FedNow service with the goal of enabling businesses and individuals to send and receive instant payments, 24/7.

2023 will also see the start of the pilot for the Immediate Cross-Border Payments (IXB) initiative between the US and much of Europe, which is backed by The Clearing House in the US using its RTP (real time payments) system, EBA Clearing in Europe using its RT1 system, and Swift, the global secure financial messaging service. And underlying both of these potential gamechangers is another: the ISO 20022 messaging standard, which enables rich data exchanges, efficient end-to-end, straight-through payments processing, and interoperability with other payment systems worldwide.

IXB is based on ISO 20022, which recently became mandatory for the 11,000-plus organisations using the Swift network, and FedNow will also adopt ISO 20022 to define the message flows and formats for the service. FedNow will be the first wholly new payment rail in the US for 40 years and in excess of 110 financial institutions in the US, including banking heavyweights, credit unions and payment solution providers have been involved in a pilot programme since 2021. Both of these instant payment systems hold attractive benefits for financial institutions, businesses and their customers, with the promise of delivering increased liquidity and providing greater transparency around the payment characteristics and journey.

That not only helps in the ongoing battle against financial crime, but also provides opportunities for organisations to offer enriched services, based on that data, especially in the context of open banking. FedNow’s ISO 20022 specifications, for example, will allow payment messages of up to 4,000 characters, enabling granular transaction detail to be provided. But with many financial institutions in the States remaining heavily reliant on the existing ISO 8583 financial messaging system for credit and debit card data, which was introduced way back in 1983, the migration to ISO 20022 will be huge, impacting an infinite number of components and processes, all of which will have to be tested and certificated.

Ravi Sharma, business manager of Public Sector and Advisory Cybersecurity Services for UL Solutions, a global leader in applied safety science, stresses the need for financial institutions to have the right systems in place to be able to manage the hugely increased data flows that will follow from adopting the 20022 standard and making sure they are up to the job.

“Because it is all about data enrichment, and collecting more and more data, even a single syntax error could result in denial of transactions between organisations across the globe,” he explains. UL Solutions recently forged a partnership with dedicated payment testing company Iliad Solutions to offer optional support features for financial institutions and processors implementing the FedNow service and are now actively working with some members of the pilot programme.

“Because it is all about data enrichment, and collecting more and more data, even a single syntax error could result in denial of transactions between organisations across the globe”

The sheer scale of the technology transformation needed by many financial institutions to meet the demands of ISO 20022, including big banks, which have for decades kept adding components to their legacy infrastructure, is such that they are now having to make huge strategic decisions, Sharma says.

“They will all have to either find a way to be able to make their systems interoperable with 20022 or just build a whole new system in order to support this new message format,” he warns. It’s a complex puzzle to solve.

Sharma uses the example of what appears, on the surface at least, to be a simple in-store card payment.

“Look at how many middleware components there are,” he says. “There’s a point-of-sale, which is installed at a merchant location, or an online checkout gateway where you type in your card information and make the payment. From there, the transaction goes to one of the gateways that can translate your message into a language that the merchant’s bank is going to understand. Once that gateway passes it to the merchant’s bank, what we know as acquirers, they need to figure out how to reformat the message and validate it at the same time in a language that the network can understand. That’s when the payment network takes responsibility to perform all the checks, and then, finally, repackage it in a format that the cardholder’s bank is going to understand. And, at the end of that process, there is an approval, or a denial, or a hold. That’s the level of complexity we’re talking about.”

UL Solutions is helping customers steer a safe passage through all of that, providing ISO 20022 advice, testing and certification along the way.

“They still have to go through that change, but we make it as seamless as possible for them by supporting the entire journey of our customers, from strategy to compliance,” says Sharma. “I look after the advisory business of UL Solutions, which is all about education and that has a critical role in this entire value chain. Often a lot of organisations fail to understand that.

“The advisory piece is followed by how we can support them with the technology, how we can support them with testing and certification, using our labs across the globe. And that’s where we look to our partnerships, because the new standard is going to impact organisations in different geographies in different ways.

“We need to make sure that customers can carry on using the technologies that they have been using, with some updates, then provide the advice, so that they can get through compliance, testing and certification seamlessly.

“All the different industry players – payment brands, like Visa, Mastercard, and American Expresses, big banks, acquirers, merchant banks, issuers, gateways – will have to either find a way to be able to make their systems interoperable with 20022, or just build a whole new system, in order to support this new message format.”

The prize of being able to do so and become a fully-fledged member of the instant payments club with the consequential impact on end users cannot be overstated, argues Sharma. It could influence entire economies.

He cites the example of SMEs which typically suffer liquidity problems caused by delays in receiving payments for the goods and services they provide and which can put their entire business models at risk.

“That’s where the risk management factor of ISO 20022 comes in. If we can get these real-time payments, these instant payments in place, for small and medium enterprises, then there’s an ocean of opportunities for these businesses.” And that’s because risk management in the banking system, which can delay or even deny a payment, is dependent on the quality of the information attached to the payment message.

“It is associated with your geographic location, with your address, with your name, with your social security number, your date of birth. This standard can help with that risk management by providing the right data for all the respective components and for all the respective players in the ecosystem. So that’s why it’s going to be a lifeline for small and medium-sized enterprises.

“Payments is a dynamic landscape,” concludes Sharma. “It’s changing pretty much by the hour. As I’m talking, there will be multiple fintech companies working on a new, cool payments app. The only constant in the industry is change.” So, as the inimitable Dylan also sang ‘you better start swimmin’ or you’ll sink like a stone’.

This article was published in The Fintech Magazine Issue 25, Page 54-55