EXCLUSIVE: “Instant Gratification” – Mark Buitenhek, ING and Dome Scaffidi, Volante Technologies in ‘The Paytech Magazine’
The winds of change sweeping through global payments have fast turned hurricane force. And those, be it banks or corporations, that have failed to batten down the hatches by readying themselves for a new world where instant is the watchword, are at huge risk of being blown away by competitors that have.Consider the evidence. The unquenchable appetite for frictionless digital transactions was vividly demonstrated during the sudden and dramatic lifestyle changes forced upon most of us by the COVID-19 pandemic, which supercharged an already high-speed transformation away from traditional financial processes in favour of real-time payments.
Then throw in the continuing rise of cross-border, instant payment rails such as SWIFT gpi for high-value transactions, and the recently introduced SWIFT Go for smaller transactions; the P27 system in Nordic countries; and a soon-to-be introduced pilot for instant payments between the US and EU called IXB, which has been created by a coalition of SWIFT, EBA Clearing and The Clearing House.
Finally, add the glue to bind it all together, which comes in the form of the imminent ISO 20022 standard which is establishing a common model and language through which global payments data can be communicated consistently. So, what will be the impact of all this at a time when bottom lines are coming under increasing pressure across businesses?
Mark Buitenhek, global head of transaction banking at Dutch giant ING, which operates across 40 countries, argues that the pace of demand for instant payments means they will be commonplace, or, as he terms it ‘hygiene’, in two or three years’ time.“Where is this drive for instant payments coming from?” he asks. “It’s not coming from the regulators; it’s coming from the market, our clients, from things that change the business over time. We’ve seen that during COVID, with increased digitisation everywhere, it is e-commerce business where things are going at record speed. You cannot have, let’s say, a customer ordering something on a Thursday morning, it’s delivered Friday afternoon, but then the payment takes another day to get there.
That is incomprehensible.
“So, one of the things that was clear for us a decade ago, is that we would move from, let’s say, intraday processing, to instant payments, and then think in terms of seconds because that’s simply what society needs today. “What’s interesting is you saw at first that the ones that asked for this were consumers and not so much corporates, unless the corporate was an e-comm company and immediately wanted to reconcile something that it had sold with the flow of cash coming in. But in two or three years, in our opinion, this will become purely hygiene, like the internet is hygiene, like a mobile is hygiene.“That’s the way we look at it, and that’s why we started proactively. Instead of waiting for something to come – a regulation or whatever – we are starting to roll this out in our key markets and are doing so across Europe.”
KEEPING THINGS FLOWING
The efficiencies brought about by instant payments are clear cut, says Buitenhek, citing an example where a company can deliver goods as soon as its bank informs it the payment has been received or is on its way, thereby directly impacting its working capital. But he concedes that some of ING’s larger corporate clients are slower on the uptake and are still insisting on using traditional weekly or monthly batch payments.
“We think what will happen is that corporates will also gradually start to understand what the benefits are and what they can do, including around their cash management. If you’re a corporate operating in 15 markets and you have the ability to move your money faster than seconds, that also says something about working capital management and how you do things.
“Everybody is used to the fact that everything is closed during the weekend, but what do you do if you get €2billion in over the weekend? Where do you leave your money? That’s the kind of thinking that s till needs to be developed at most of the corporates, although we clearly see some frontrunners that really get this and are thinking in 24/7 processes. In that sense, it will develop and it will develop rapidly – we see it coming back in our RFPs (request for proposals), where corporates are now saying ‘you need to be instant’.“ And not only instant within Europe, or within a country, but start to think SWIFT gpi (and, for the record, I’m also a board member of SWIFT), and after SWIFT gpi comes SWIFT Go, which is a simpler version of SWIFT gpi, with more strict rules around it so it will go even faster. “It’s only a matter of time, let’s say one-to-two years, before you can move money around the world in an instant – really, in an instant,” says Buitenhek.
However, it’s not only banks’ clients that have to adapt; banks themselves need to as well, and fast. Dome Scaffidi, vice-president of global industry and regulatory affairs at US-based fintech and Cloud payment solutions provider Volante Technologies, is a staunch advocate of the case for banks to use ‘plug-in’ technology from third parties rather than try to upgrade their often decades-old legacy systems to be interoperable, with real-time functionality and compliant with regulation.
Sounding a warning, he says: “All these ingredients are still creating a lot of friction in the innovation of the banks. That is the kind of problem we are still seeing in financial institutions, both as a solution provider and in terms of my experience with regulatory bodies and working groups. This is why this journey to innovation is taking time.”The perils of failing behind, though, will soon become painfully clear, Scaffidi says, with SWIFT about to publish a ‘white list’ of banks that process business payments in a reasonable amount of time. It’s a clear signal that the financial messaging system provider is losing patience with the laggards as it drives to fulfil a strategy to provide instant, frictionless transactions across its network of 11,000 banks in 200 countries. So, what are the benefits to them and their clients of getting up to speed with instant payments?
Scaffidi offers up two main points: “One is the real-time reconciliation, which means we can reduce the cost of a single transaction and avoid a pending transaction waiting for days, so avoiding clients complaining that a credit or debit is not in the right account, or in the beneficiary account, at the right time. “Such transparency is what corporates want to see. So, the benefits and use cases are coming from here; the capability to provide all the information corporates need to avoid delay, to avoid goods not being delivered in the right amount of time.
“The second benefit is very important, and I’m not sure every bank is aware, but we have seen a drastic reduction in the back office, the manual intervention. It is very costly today to have a huge back office that is manually dealing with reconciliation, investigation, transformation, repairing payments, everything that can be avoided, thanks to the new standard. But, again, it’s an investment. As you can see, it’s not only the technology; it’s the right technology, together with the right knowledge.”That right knowledge is expanding into a realisation by the leading few that banks now need to nurture a partnership relationship with their clients or run the very real risk of losing them to competitors that do.
“It’s not only the technology, it’s the way we bank that is changing,” Scaffidi continues. “All the departments of the bank, like business, operational and treasury, need to be involved in this big change.“Real-time liquidity and giving the capability to the clients of the banks – the corporates pooling their liquidity where it is needed – is a must, and that is why many corporates are switching to banks where they can get this feature. But, again, it’s not only the technology; the bank needs to understand that it is not just a financial institution, but a partner to its clients.“Mark gave us a very good picture of what important banks like ING are already doing. There are other banks in the market that are investing, but not all are on the same page. So it means that having the right technology is not enough.
This is why having a solution provider, and the right mentality in the bank, is the right recipe to be successful in the new market, to satisfy clients’ needs. “It’s not just about signing a contract with the service the bank makes available; now the trigger is coming from the client, they want more services, based on the new technology and where the payment ecosystem is going. “In other words, banks need to understand the new business models and where to get new, fresh revenues, partnering with the clients and not just getting revenue for the transaction fee. This is why it’s important today to know the client and what the new standard of technology is making available.”
DEEP-DIVING THE DATA
Analysis of the richer data contained in ISO 20022 – which, incidentally, Buitenhek argues is not just on the horizon but already here, as evidenced by its use in Single Euro Payments Area (SEPA) transactions – is, of course, a key component of banks being able to get a better understanding of their clients and, therefore, developing new revenue streams. And using technologies like AI, machine learning and data aggregation for analysis means its value can be weighed in gold, says Scaffidi.“It means identifying and creating the new business model,” he adds. “The bank is supporting the corporates in their business and, of course, the services can be monetised, so this is where the new business model for the bank is coming from – from the data.”
Looking further into the future, Buitenhek ventures other potential developments using instant payments rails, such as Request to Pay products and also possibly creating a point-of-sale competitor to card payment behemoths Mastercard and Visa.
“Once an organisation has built an instant payments rail – and whether it does this domestically or intra-Europe, or internationally, doesn’t really matter – besides doing an instant payment, it can also start thinking about adding other products,” he explains. “Request to Pay, as an example, to replace direct debit – a lot of consumers still find direct debit less comfortable than having control over a Request to Pay, where you send a message, the customer clicks, and it’s done. And you can do that while you are talking to somebody, while you are chatting with somebody on the phone. It could be in the form of a QR code, where the customer clicks, the transaction is done and everybody knows it is done. “The other one, which is a more strategic discussion that is currently ongoing in Europe, although it’s not going that fast anymore, is that if you have instant payment rails, in principle, you can start using this for payments in any shop, whether physical or online, which means you’ve built the basis for a competitor to card schemes.
“That’s what the European Payments Initiative was about – and, hopefully, still is about – to create that competitor for Mastercard and Visa. Maybe also for the Chinese and other players wanting to come into that market. “This is also a way for the existing financial industry to benefit from something that it still controls, and can bring, with lightning speed, to what we need today. Not two steps closer to what some of the big techs are doing, but jumping ahead of that.”Buitenhek also sees Europe as the world’s pacesetter in establishing an instant payments ecosystem, partly spurred on by the white heat of fintech competition but also for strategic geopolitical reasons.
“Two years down the road from COVID, the level of digitisation across the world has increased tremendously. Where banks or countries were still behind in their thinking or capability, they now see that this is an integral part of what they need to deliver,” he says.“Regulators are seeing this and understanding, also in the geopolitical arena, that we must create one European environment as a stronghold against what is happening in the rest of the world.“There might be others who think differently but I believe that it was clearly visible in the past two or three years – that Europe is stepping up to the plate and moving faster.”