In recent times, financial institutions across the world have been looking to upgrade their aging legacy payments systems to enable faster payments processing, data-rich transactions, and real-time settlement. Let us take a deep look at this trend and how SWIFT drives a broader payments modernization strategy.

Why Modernization approach to payments is essential now?

There has been a radical shift to digital payments due to the ongoing COVID-19 pandemic. As demand rises for contactless, faster and secure payment experiences, the need for banks to modernize their payments infrastructure has accelerated. It is now imperative for banks to ensure seamless business operations and fulfill commerce needs.

According to GlobalData, 2.7 trillion transactions will move away from cash to cards and e-payments by 2030. While, modernizing payments is a US$300 billion opportunity, this can majorly be attributed to millennial customers who want immediate execution, transparency, security and an omnichannel payments experience.

Payments modernization is also essential for banks as the industry itself is transitioning to real-time payments infrastructure. Globally, organizations are collaborating to launch real-time payment schemes to support innovation in low-cost multi-currency payments processing. This thrusts upon banks the absolute need to invest in modernizing legacy payments systems in order to achieve interoperability and support the new payment schemes.

There is also pressure from regulatory bodies such as the Federal Reserve, The Society for Worldwide Interbank Financial Telecommunication (SWIFT), European Central Bank, and Bank of England. They have announced that ISO 20022, the new payments messaging standard will become the de-facto standard by 2025 for all payments systems of all reserve currencies. The existing payments infrastructure of banks will not support the new messaging format. They need to upgrade their existing payments infrastructure before the compliance deadline for ISO 20022.

Additionally, cloud-native integrated platforms offered by the Big-Techs and the FinTech start-ups are also disrupting the digital payments industry. As these new market entrants are not completely regulated by the central banks, they have more freedom to innovate in the payments market, thereby, forcing traditional banks to rethink their payments strategies.

Challenges faced by banks on payments modernization

The payments modernization approach has to take a holistic look at the payments value chain. This includes client initiation to clearing and settlement. Banks need to be able to connect to the new payment networks and schemes.

Payment systems are critical parts of the banking ecosystem even though they have always been complex. In recent times, the payments environment has become much more dynamic, creating greater challenges for banks. Complex regulatory requirements, increasing demands to create a consistent customer experience across multiple access channels, outdated legacy systems and an increasingly competitive marketplace all put pressure on banks to evaluate investing on payment modernization. In this environment, banks are challenged to balance a range of considerations:

1.Customer experience

Millennial customers expect to be able to access every bank payment service from any channel, on demand and at their convenience. Customers want consistent experiences across channels, and they expect all fraud, risk management, and authentication activities to be seamless.

Legacy payments architectures are often unable to scale and be responsive to changing customer demands. As new payment channels emerge and gain adoption across the industry, banks will have to integrate these channels quickly and seamlessly to retain and grow their customer base. However, most traditional banks struggle to address this customer expectation given their fragmented legacy payment environments.

2.Innovation

The financial market is quickly moving towards an open-banking model with sharing and integrating through application program interfaces (APIs). This generates a need for payments modernization in order to provide this plug-and-play experience. The need for open, flexible, real-time and easy-to-integrate solutions are critical for banks to be part of the payments ecosystems of the future.

3.Regulations

After the financial crisis of 2008, regulatory bodies have driven further attention on payment activities. Key regulators mandate banks to not only provide end-to-end payments reporting, but also demonstrate end-to-end payment operations that treat critical functions as a business. There is also increased scrutiny on privacy, security, and resolution planning.

Payments modernization strategy with SWIFT

SWIFT stands for the Society for Worldwide Interbank Financial Telecommunication. SWIFT is a secure payment messaging network that facilitates international payments between 10,000+ financial institutions. SWIFT is the primary method of making international payments, but there were some issues that needed to be resolved. These included a lack of visibility over funds once sent, there was high routing fees being charged by intermediaries and payments were sometimes delayed.

To solve these issues, SWIFT launched a new initiative called SWIFT gpi. SWIFT gpi (gpi stands for Global Payments Innovation) was developed to improve the experience of making a payment via the SWIFT network for both customers and banks. SWIFT gpi integrates the regular SWIFT messaging and banking system with a new set of rules. Any bank that joins SWIFT gpi has to follow these rules, which include transparency of fees, end-to-end payment tracking, and confirmation of credit to the recipient’s account. This improves upon the old standards to meet greater demand for speed, and transparency of international payments.

SWIFT outlines four key goals for the new gpi network:

To increase payment speed

Payments will be quicker when made through the SWIFT gpi network through improved communication and higher standards for banks.

To provide end-to-end tracking

The location of funds can be traced in real-time at any point in their journey as all payments will have a Unique End-to-End Transaction Reference (UETR) code.

To improve transparency of fees and charges

The gpi network will require member banks to provide full visibility on processing fees and times, which will enable individuals to make better decisions and allow banks to improve routing.

To maintain consistent data records

Recipients can easily reconcile payments against invoices or orders as SWIFT gpi guarantees that all remittance data that is sent with payments will be unaltered throughout the whole payments journey.

Thus, SWIFT gpi brings speed and transparency to payments while ISO 20022 enables rich data and more efficient payments. These major developments taken together will deliver significant modernization of global payment systems.

Benefits of payments modernization

We have seen so far that if banks are to remain competitive and drive transaction volumes, payment system modernization is a must. Here are some benefits to be considered when pursuing payments modernization:

Regulatory compliance

Payment system modernization can facilitate regulatory compliance due to the fact that modern ISO 20022 messages are able to carry sufficient information related to the payment, which allows the payment processor to carry out tasks such as:

Anti-money Laundering Reporting and validation

Balance of Payment Reporting

Compliance with FATF requirements

Debtor and creditor details

Also, reduction in the amount of cash in circulation reduces the cost of cash-in-transit (CIT) and security required around handling of cash.

Remove friction

ISO 20022 offers interoperability between banks via a standard business language, enabling participation and lowering the barriers to entry. All standards are open and published ensuring clear business communication between participants.

Improved customer experience

Modern customers are becoming increasingly dependent on fast access to value and are expecting same from their banking and finance institutions. As behavior can be monitored, it becomes easier to understand demands and therefore, improve on service offerings. Modernization also reduces costs in the long run, which can ultimately be passed on to the consumer.

Temenos Payments implementation with Aspire Systems

Temenos Payments is SWIFT gpi ready, offering full coverage for gCCT, gCOV and gSRP rulebooks. Temenos Payments is already compliant with Swift Confirmation, thus enabling banks to remain compliant, embrace new payments services as they appear, and provide an engaging customer experience. Aspire Systems is a trusted global services partner of Temenos. Aspire helps clients to implement Temenos Payments and enables them to customize as per requirements. Aspire helps banks of all sizes from, traditional banks to NEO/Challenger banks, with consulting, strategizing, customizing, implementing and testing of the best-in-class payments solution in compliance with ISO 20022 standards.

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