EXCLUSIVE: “In parallel worlds” – Christian Luckow, Danske Bank in ‘The Paytech Magazine’

While it sounds unlikely, combining agile methodology with a deadline-driven waterfall approach worked well for Danske Bank in meeting existential demands on its core payments system. Christian Luckow, the man who leads the teams, explains

Spare a thought for the Nordic banks. They managed the ‘big bang’ migration to payments messaging standard ISO 20022 by Europe’s real-time gross settlement system TARGET2 in March. But – unlike their colleagues further south, who could catch their breath before Swift begins its transition to the same standard in November – they were already knee-deep in another structural change.

The project, called P27, would have created the world’s first integrated region for real-time domestic and cross-border payments in multiple currencies. ‘Would have’ because the plug appeared to have been pulled on it in April.Both the adoption of ISO 20022 and the creation of P27 for Denmark, Finland and Sweden, was in response to the demands and expectations of businesses and consumers who want and require instant, safe and cheap digital payments, especially in the cross-border space.

The pressure of demand for digital payments is exemplified in Sweden where cash was used for only eight per cent of business transactions by the end of 2022, according to the Copenhagen School of Business, while 95 per cent of the country’s 15-to-65-year-olds have downloaded mobile payments app Swish, which is co-owned by a majority of the country’s banks.

Managing wide-ranging structural programmes like ISO 20022 and P27, while still keeping the wheels on the banking bus and an eye on future developments, like central bank digital currencies, has made for a challenging few months, admits Christian Luckow, who leads Danske’s Core Payments tribe as well as its innovative Payments Centre of Excellence. And it got even more challenging when P27 withdrew its clearing licence application from the Swedish Financial Supervisory Authority,. leaving no clear indication of what – if anything – will happen next.

“This actually means we are even busier now, as we have to connect directly to the central banks instead of through P27,” says Luckow. “The ‘simplification’ that P27 was supposed to bring is not happening – at least for now.”

Instead, besides ISO 20022, the Danish and Swedish central banks’ implementation of TIPS will drive additional complexity and effort for Luckow’s teams. That’s not to say he isn’t excited about the major advantages that ISO 20022’s MX-based messaging will have over the existing MT text system.“The challenge [with MT] is that the data in many cases has to be interpreted,” he told an audience at a Banking Renaissance event earlier this year. “That means more data gets caught up by anti-money laundering checks and by missing data elements. So, straight-through processing goes down, leading to a worse customer experience. If instant payments are not working, we get complaints. The issue is that we are getting more and more volume.”

Speaking outside of the conference, he tells us: “Especially in Denmark, instant payments have been around for quite a while, and are very heavily used. Instant cross-border payments is what people are expecting now. Customers have kind of said ‘why can I make a payment to my sister in the next town within a second, but if I want to make a payment to my sister who lives in Sweden it takes two days? It doesn’t make any sense. It’s only 30 minutes away, across the bridge?’. Which I think is a fair question. But, as you can imagine, with different legislations, different jurisdictions, it’s not easy to do anything cross-border,” says Luckow.

“We have very firm deadlines and the stakes of us not delivering are massive. But combining with a methodology that means you’re constantly moving, constantly improving, works really well”

Regardless of what happens now to P27, he has no doubt that the standardised and data-rich formula of ISO 20022 payment messages will eventually be a true game changer. At Banking Renaissance, he cited as an example the challenge Swedish banks currently face in processing batch payments of salaries at precisely a minute after midnight, as decreed by Swedish law.

“Imagine the amount of payments that have to happen at the same time because of that legislation. Today, that’s difficult to fit into a payment standard because it’s plain text files, and, if you introduce a data element, everybody has to use slight modifications. Whereas, with ISO, because it’s MX-based, you can essentially add optional components, which means the standard can be much more widely used than the ones we use today, and we can start adding much more specific data elements – such as remittance details. That essentially means it’s going to be a lot easier to reconcile payments with invoices. I come from invoice financing, so, for me, this is a godsend and I can’t wait for it to be widely used!”

Then there are the clear advantages to do with compliance.

“There is so much more legislation, a lot more focus on fincrime. That means we are kind of getting dragged in the opposite direction, in terms of being able to service our customers to the level that they are used to,” he says. ISO 20022 can help streamline that, particularly when it comes to identifying the origin of a sender whose payment has gone through multiple banks before reaching the payee’s. Digging for that data among MT messages to meet compliance, means the customer may well be kept waiting for the payment to clear.

Notwithstanding these and the many other advantages of everyone adopting ISO 20022, the variable speeds at which multiple actors move towards it over the next two years will almost certainly create its own problems, particularly on the Swift network, says Luckow. It’s a situation acknowledged by Swift, which has created a workaround that allows banks to fetch any data missing in the conversion between the old and new formats in order to perform sanctions screening and other tasks.None of this stuff is easy, but it’s made even more difficult if, like Danske Bank, you’re maintaining a 20-year-old core operating structure while introducing a

modernising agenda, each demanding very different ways of thinking and working: the waterfall versus the agile approach.

“It’s a very complex environment to work in,” Luckow told Banking Renaissance. “We have part of our business that basically runs on the mainframe… but then we have our fully agile development centre that does everything the way that we now know we should be doing things. Sometimes those two overlap.”

And that’s precisely what they did to great effect in the implementation of ISO 20022. Luckow’s teams managed to reconcile the ‘create fast, fail fast’ methodology of fintech ‘agile thinkers’ with the ‘waterfall’ approach of traditional rigid deadline programme management. And even Luckow was surprised at how well these two apparently antithetical approaches worked together in practice.

“We have established that the agile mindset works incredibly well [in a waterfall environment],” he explained. “We just have to do it slightly differently because we don’t have the luxury of developing things and fixing them on the go. We’re using the agile methodology to still move us forward in the sprint, do incremental improvements, but with a fixed deadline: it has to work by that date, no ifs or buts.

“I think our employees, once they got used to the idea, have quite enjoyed it because one of the challenges that we found as an incumbent bank with agile was ‘if I can always keep reiterating, if I can always be improving, what is the urgency to actually get something done?’

“Here, we do have very firm deadlines and the stakes of us not delivering are massive. But combining it with a methodology that means you’re constantly moving, constantly improving, works really well.”

Later, he tells us: “We’ve had to change mindset. We’ve had to look at it a lot more strategically, in terms of when so much is changing at the same time, how can we do that efficiently? It also means knowing what we should not be focussing on right now, and then go back to it later.”

Luckow reckons it will take three to four years for the payments industry to stabilise after such a seismic change as ISO 20022. Once it’s fully functioning under the new regime, though, the standard will ‘enable so much more’, he adds. “Then we can start focussing on the actual customer value again.”

This article was published in The Paytech Magazine Issue 14, Page 10-11