Deep Dive: Digging Into The Short-Term Opportunities For Global Bankingby Zhenya Winter, Head of Financial Messaging Marketing, Bottomline November 29, 2021
Market dynamics in the financial services business rarely come on with an urgency attached. After all, the first Open Banking project in the UK dates back to 2016. Formal PSD2 discussions started in 2013. Therefore, it’s difficult to argue that financial institutions didn’t have advance warning about the changes that had the potential to significantly impact their business.
But this is not the case for the EU banking sector in 2022. Regulations, deadlines and new technology combined make this a year to make or break propositions. ISO 20022 messaging for example, needs to be in place by November.
The Open Banking and Implementation Entity (OBIE) has moved variable recurring payments (VRPs), which are a major benefit of open banking, from January to July. These are calendar deadlines. Any FI taking a casual approach to soft deadlines, like real-time payments and digital transformation is playing with fire. 2022 will be the year that you compete, or regret that you didn’t.
We’ve recently taken the temperature of FIs on a global scale in our report “The Future of Competitive Advantage in Banking & Payments.” It shows that FIs are mostly focused on the core issues: digital transformation, regulation and changes in financial messaging. When we took a deeper dive with a lens on urgency, four key points emerged:
This was, by some margin, the top ranked concern, with 64% of respondents prioritizing digital transformation, which is linked to concerns two and three, real-time payments and cross border payments. No digital transformation, no new payment rails and no cross-border innovation. But some insiders will tell you that a potential problem with this implementation is not technology.
It’s people. The finance leaders that are most responsible for the fundamentals, money coming in and money going out, don’t have an issue with legacy technology. And if finance leaders are prioritizing it, it is challenging to deliver everything on their payments agenda. Overall, however, there’s an understanding within the larger banks that infrastructure needs to be modernized, so problems with buy-in at any level of the organization need to be solved quickly.
As stated earlier, some regulatory deadlines are urgent. In our research, 63.5% of respondents said that RegTech will become more important in the next 12 months. But let’s go deeper into RegTech. My sense is that FIs are seeing RegTech as more than a deadline for business continuity. They’re seeing it as a driver for growth. That’s an important viewpoint, especially when it comes to the ISO 20022 standard.
Let’s use PSD2 as an example. Yes, it caused no shortage of headaches for the marketing and privacy departments. But at the end of the day, PSD2 was about levelling the playing field and giving equal voice to banks, challenger banks and fintechs.
The findings here are a bit concerning. Our report found 13% of banks & FIs have implemented ISO 20022, 15% are mid-way through and 13% have completed the integration. The ISO 20022 testing window opens in February 2022 and slots will be limited. More than half of the banks who responded to our questionnaire need to speed their progress. ISO is a global business standard, it’s not specific to payments. But look at all the dependencies from ISO.
Every real-time system has ISO 20022 as its messaging standard. You can’t fully leverage big data without ISO because you’re using analog messaging. That means that you can’t gain the insights that develop better customer experiences and new revenue streams. It will be nearly impossible to compete in 2022 without ISO 20022.
In our survey, 31% said that the biggest obstacle when sending cross border payments is the cost of “nostro” accounts. A nostro account is an account that a bank holds in a foreign currency at another bank. In Asia-Pacific, for example, the cost of frozen liquidity in nostro accounts and other fees dock the average bank for $1.7 million a year. Some stakeholders have suggested that the proliferation of CBDCs could help solve issues associated with nostro accounts. But that won’t come in the short term. FI’s have faith in collaboration and co-existence.
Look at the US infrastructure for real-time payments. A consortium of banks and payments companies have agreed that they will use two rails: The Clearing House and NACHA. They will have a potential battle when the US Federal Reserve opens its own real-time payments service in early 2023. But it’s indicative of the effort it will take to bring down the cost and increase the transparency of cross-border payments.
There’s a difference between driving innovation and feeling forced to do it. And there’s also a difference between improving the customer experience and being mandated to do it. It will be the FIs that understand the necessity of harnessing innovation to compete in 2022 that will be the winners.