Switzerland Sets the Stage for Instant Payments

Switzerland Sets the Stage for Instant Payments

by November 28, 2022

Stability. Secrecy. Safety. The Swiss financial system has been the very definition of these attributes for almost 200 years. But like the world’s financial systems, institutions and networks, one very active new factor is knocking at the border: change. And the Swiss are up to it. Let’s take a look at the main factors that are bringing change to business payments in Switzerland detailed in a recent report commissioned by Bottomline from analyst firm Aite-Novarica.

The report covers payment infrastructure changes across a large geography of Europe and, also the UK. Specific to Switzerland, it validates the following major areas that I believe will be the most important to the country as it straddles the line between its independent status and its ability to take inspiration from other global initiatives.

1. The importance of interoperability to ensure the Swiss marketplace can have ubiquity with the global economy, especially their close neighbours in Europe.

2. The drive to modernise domestic payments (Instant Payments, RTGS) by ensuring a state-of-the-art and innovative marketplace.

3. Although Switzerland is in front of the curve when it comes to ISO 20022 (since 2015), further steps are needed to move towards ISO Native to comply with SWIFT’s CBPR+ standard for cross-border payments to ensure the aforementioned interoperability

4. Keeping abreast of the security within transactions such as fraud protection, sanctions screening, IBAN pre-validation etc.

SCT INST PARTICIPATION RATES, 2022

SCT INST PARTICIPATION RATES, 2022

Instant Payments are ‘table-stakes’

Instant payments, in my opinion, are the most positive development for the Swiss financial sector in years due to their proven role as a catalyst for change within that system. Instant payments are mainly used for domestic purposes, rather than cross-border and hold the promise of providing Switzerland with a competitive and innovative marketplace where citizens and SMEs can leverage the speed for improved liquidity and enriched data for transparency. Led by the Swiss National Bank (SNB) and SIX, Switzerland will introduce instant payments starting in 2024. It is proof positive that the country is committed to digital payments transformation, even as its citizens show the classic tendency to use cash. “Instant payments,” says the Aite-Novarica report, “are becoming the norm.” 

Deadlines and more deadlines

SIC has mandated two key deadlines: being reachable via SIC Instant Payment will be mandatory by August 2024 for banks processing more than 500,000 SIC messages annually and will be mandatory for the rest of the marketplace by August 2026. Now, all this will not happen automatically. As stated before, infrastructure upgrades are needed. However, the emphasis should be on reducing the complexity by outsourcing these changes to very specialised third-party providers. This strategy will also help with speed-to-market and ensure ongoing compliance with new industry mandates and regulations. 

This is even more important right now in the face of the legislative proposal by the European Union to make instant payments in euros available to all citizens and businesses holding a bank account in the EU and EEA countries. This according to Reuters is in response to only 11% of euro credit transfers being in the form of instant payments at the end of 2021.  PSPs would have six months to be ready to receive instant payments in euros in the euro area and 12 months for sending instant payments in euros. 

How does this impact Switzerland?  It’s complicated. Switzerland is not part of the EU and seems to be playing both sides of the SEPA issue – as it should. 

I quote Dieter Goerdten, head of products and services at SIX, which is the banking consortium that operates the SIC platform.

“Switzerland is a small economy compared to its European neighbours,”

he told the European Payments Council.

It is dependent on trade and easy access to the European markets. Seamless payment flows are an essential part of this easy access. It is therefore always of keen interest to all parts of the Swiss economy to ensure a close alignment with European payment standards. Consequently, Switzerland is a member of SEPA and continues to implement digital payments based on SEPA rules wherever possible.

Instant payments are also about competitive advantage, and now that the EU Commission has on the 26th of October issued their mandatory regulation for Instant Payments in Euros – which will still need to legally enter into force before being compulsory, you don’t want to be in a situation in the rest of the world where you’re playing catch-up. That alone should move instant payments up the priority ladder. Secondly, instant payments represent a revenue opportunity that will only grow as banks find new ways to leverage it. Thirdly, instant payments are a springboard for digital payments transformation and are quite simply ‘table-stakes’ – If you don’t offer it to end customers and corporates then they are more than likely going to rethink their relationships with your financial institution and switch. 

Managing interoperability

Feedback from the banks gathered at Sibos was that because they have very busy roadmaps there is a real need for banks & financial institutions to be supported by centralised platforms to help with speed, simplification, cost and hitting deadlines. After all, interoperability doesn’t work if some banks are moving at different speeds.

Banks that attended Sibos, and I hope every financial institution in Switzerland, are aware that although the situation is currently in flux, it won’t be for long. They recognised that you cannot just wait and that some legacy systems are not fit for the revolution that is coming. ISO 20022 is the sharp tip of the spear in achieving this interoperability. It’s one standard that works across countries and networks despite there being some variations case by case. We have now also seen ambitious deadlines for ISO 20022 and instant payment capabilities being pushed back (Target 2, SWIFT CBPR+, Canada’s Lynx to March 2023 and the Bank of England is likely to follow suit in the UK too), in response to banks being worried about juggling deadlines within an already busy roadmap. But to be clear the message from SWIFT at Sibos was that even if changing key dates brings a bit of confusion, the emphasis should be on getting the implementation right straight off the bat, rather than rushing the process which could result in potential problems further down the line.  

However, the view at Sibos, and also held by Bottomline, is that the sooner you can fully leverage the advantages of ISO 20022 the better. This should take the form of implementing ISO in several steps. Firstly, ensuring compliance and using translation services where necessary. Secondly, ensure that you are fully leveraging and managing the rich data that will be available through ISO by being able to manage truncations. And lastly, make the full transition to ISO Native where ISO 20022 is integrated across your whole payments ecosystem and you can reap the rewards of optimum operational efficiency.  After all, ISO 20022 is designed to ensure that elusive full end-to-end automation by being the only 100% machine-readable format, allowing banks & FIs to reduce costs and any risks related to manual interventions. 

We aren’t fully aware of all the use cases for ISO 20022 and we won’t find them all out until we have integrated ISO fully, started brainstorming and had a play around. The sooner you start exploring these new use cases the sooner you can gain a competitive advantage over other banks. However, the wider benefits that we do know include – high-levels of transparency, better customer service, and of course, improved operational efficiency.

After all, ISO 20022 provides the standardisation needed for interoperability between traditional domestic & cross-border rails. It is also vital for the adoption of new innovative payment rails for cross-border and instant payments because all of these have transitioned to ISO 20022 too. In addition, the abundant availability of rich data and related (artificial) intelligence will allow banks & FIs to route payments intelligently and to choose the right channel for each transaction, whether it is to drive new coverage in markets or currencies or to optimise the execution in existing markets. In my opinion, the impact that the richer data will have on fraud monitoring & compliance, cash-flow management and of course data and analytics, justifies enough for the fastest transition to being ISO Native and having ISO front and centre of any bank’s roadmap. 

I’ll end with a telling quote from the Aite-Novarica report:

Despite the strong regulatory mandate of the ECB (European Central Bank) and the EU’s appetite for SEPA harmonisation, maintaining a competitive position remains a central plank of policy making. As such, multiple systems will likely continue to exist simultaneously highlighting the need for of course connectivity, but interoperability too.

To read the Europe & UK wide Bottomline sponsored Aite Noverica report European Payments Infrastructure Under Renovation – Impact in Financial Institutions in full click here. Additionally, you can also find the report that is specific to Switzerland and Liechtenstein.

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Featured image credit: Edited from Unsplash here and here