The Age of Open Banking

 Let us pivot for a moment from the back office of ISO20022 payment messages to the front office where the customer meets the bank.  Imagine your legacy bank has worked hard to modernize its payment systems and now carries rich data about a transaction end to end.

What challenges do banks face? Several in fact. 

Sharing Customer Data: Who do I share this data with?  What is the risk to the bank, the customer? How is my API strategy shaping up?  Regulations are spotty at best and cant be depended to course correct us.

Partner: As a bank, I don't know the use cases of the rich data I am bringing, so let me partner with a third party. While I do benefit with customer acquisition is it damaging  my brand? Do I promote my APIs to anybody or restrict it and if so what do I restrict ? Case in point--TD Bank sued Plaid recently. 

Plus and minus points to consider such as how will the data be used by the third party and what risks arise to me as a custodian of this data. Key benefits of my product are a convenient way to compare accounts, some financial services and loans. Will price comparison benefit me or not? Upside is my sales channels and distribution increase. What are the downsides?

Distributor: In addition to my own products as a bank I can resell third party products like mortgage calculators, education and tools around budgeting for example. This leads to better customer journey. But what if the third party leaves and goes to another bank? Case in point--Mogo bank account origination was with one bank and they flipped to another--in this case Mogo is reselling the partner banks' balance sheet leading to some basis points yield but customer information is with Mogo so who has more value?

No easy answers here. Lot depends on the assessment of your capability as a bank to go to the market, what are your strategic goals near term and whether a Partner or Distributor model has buy in of the executives.

 

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Cost and Value in Payments

 Today cross border payments have a reputation for high cost and lack of transparency in the fee structure.

Coupled with a 600 year old system of Vostro/Nostro accounts and Correspondent banks as middlemen the system is opaque as best and takes 5-7 days for settlement to conclude.

Where are these costs coming from? This graphic from Payments Canada will help.

Can fintechs help reduce costs? See this graphic from RBC in one of their pilot studies with Ripple 

Dramatic reduction in costs and speed yes. But real life is not a tech project. SWIFT with its network of 10000 banks, each node in the network has painstakingly negotiated contracts and SLAs , regulations in each jurisdiction have to be understood and compliance has to be managed.

The solution is ISO20022. The vision is end to end payment messaging with rich data to overcome barriers in speed, compliance and processing costs.

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Value of digital transformation

 

Customer onboarding at Visa

Customer onboarding at Plaid

Visa paid $5.3 billion for Plaid. What does this tell us about the potential for digital transformation and embedded finance with ISO20022?

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How to use data from ISO20022?

 

 

The attraction of ISO20022 messaging data is:

-It is unambiguous: the meaning of each data element is known

-It is credible: the origin point of the data is known.

-It is consistent: all ISO messages follow a standard that is universally understood.

 

These factors lend itself to data analytics at scale. Many banks have data lakes and initiatives to use AI/ML to develop insights. The building blocks are in place.

What is payments data?

Data generated by providing payment services such as card payments, mobile payments, debit and credit transfers, ATM transactions etc. The type of information about the persons doing the transactions collected are PII data, sort and account codes, payment date and time as examples. Enriched data that is not necessary for payment processing such as location, mobile device id, cookie for online store, channel, frequency of use are other features that can be incorporated while developing insight from the payment data.

Use case for these analytics

-Internal

Operational efficiency such as cash loading cycle for ATMs, designing reward programs for encouraging a specific banking channel, loan underwriting feeds, better AML/KYC to start with and these can go deeper as the bank becomes familiar with exploiting the use cases and repurpose for other areas

-External

Developing premium products such as integration to corporate ERP systems for real time cash flow analysis, treasury collateral forecasting, sharing purchasing behaviour with customers is helpful for predicting seasonality in purchase, value or impact of a promotion or sale offers. These offerings build deeper touch points with customer and ring fence the customer from competition by fintechs.

 

 

 

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Brief on ISO20022 CAMT Reporting

 

 

Under the ISO20022 payment messages for credit transfers, direct debits and electronic payments will all need to use the same standards, languages, procedure, and format to be compatible. The new format is called CAMT for Cash Management. CAMT ensures the customer a continuous XML process from submission through to the account statement with no disruption and specifically covers Bank to Customer Cash Management reporting

The three most relevant CAMT formats for payment processes are listed below:

• camt.052 – Electronic Account Report

This bank-to-customer account report will provide you with information on all transactions and entries. The camt.052 will enable you to control your cash assets and take advantage of interest on credit balances. This is your intraday information and provides the customer with a near real time view of their accounts. The camt.052 replaces the Swift MT942 Interim Transaction Report.

• camt.053 – Customer Statement

This bank-to-customer statement provides you with the required information about your entries. With camt.053, you have detailed, exact, and organized information on all entries for your prior day. The camt.053 is an alternative to the MT940 Customer Statement Message.

• camt.054 – Bank-to-Customer Debit/Credit Notification

The camt.054 format provides you with specific account debit and account credit information on all transactions entered on your account. The reports in camt.054 allow you to carry out the processing of individual transactions entered on your account as a total figure. The camt.054 replaces Swift MT900 Confirmation Debit, and MT910 Confirmation Credit messages.

Form payments to reconciliation the business process is enhanced in CAMT. CAMT reporting enables consistency, moving towards a standard where banks populate the information in a specific and defined manner since there are specific tags to report specific information.

 

 

 

 

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Case for ISO20022 migration

 

Its not about a technical specification and the fact that a lot of data travels with the payment in ISO20022.In making a business case for migrating to ISO20022, its very hard to sell to executives why a change of this magnitude is desirable. I collected a couple of data points both for the bank and its customer to showcase why this migration is desirable.

 

For Bank:

Banks have a very complex legacy architecture that has served them well for most part. However, the cost of servicing failed STP payment transactions is becoming prohibitive.

In Singapore for example a 60% STP rate is the norm. What is the norm for your bank? Is it acceptable? Factor in costs for false positives in sanctions screening. The business case can be built around these two cost factors as a starting point.

 

For Customer:

An Insurance company for example can expect 400 invoices to be paid in 10 payments. If the bank can provide enriched data about these invoices and payments the reconciliation effort is substantially reduced. The reporting around this information can be built into the value proposition.

 

What if the bank does nothing?

Over time the legacy infrastructure burden will render the bank unable to compete even if there is time available to migrate to ISO20022. The bank may have to start somewhere, perhaps look at message translation options as a starting point.

 

The way to build the business case will be in terms of operational costs, customer servicing and mandate timelines coming from bodies like SWIFT and country specific modernization deadlines.

 

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ISO20222 and Straight through processing (STP)

The main benefit of ISO20022 rests on the fact that it will allow higher STP throughput. Let’s peel this onion a little bit.

What we know:

-The ISO 20022 standard defines a methodology for the development of financial message standards.

- It relies on UML3 (Unified Modeling Language) models representing financial business processes, flows and transactions in a neutral notation.

-These business transaction models are then subsequently converted into physical messages in the desired syntax, like XML (eXtensible Mark-up Language).

- ISO 20022 defines the methodology for encapsulation business transactions and the data dictionary that is required to support those transactions. For example, a financial message can be completely compliant with ISO 20022 but be expressed as fixed width record layouts or API-based constructs such as JSON.

 

So what?

UML offers a standard way to visualize a system’s architectural blueprints and associated components like actors and activities.

What it means is:

-Take a business process such as a payment or securities instruction between parties.

-Break it down into the flow of information between the parties and/or systems (the actors)

-Think of an instruction sent (an activity), followed by status updates, a notification of settlement and a final end-of-day statement.

-Next,  break down into the components that define the information required, for example what is a currency, what is an account, etc.

Conclusion:

The result of the exercise is that you end up with a “Repository” of base business definitions that underpin all compliant messages that adhere to the standard. The advantage of this is that anyone who wants to create a compliant message is at liberty to call the elements what they like, but by linking them to the base types in the repository you can be sure that all parties involved in the processing of the message will have a common understanding of what a currency or account is and what its format is. This represents a major building block for effective inter-organization STP (Straight-Through-Processing) of information.

References:

www.volantetech.com

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Compliance a Concern for Banks migrating to ISO20022

As ISO 20022 becomes more prevalent as a message standard of choice, banks are wrestling with the compliance risks that come with implementing this standard.

 

For the last 40 years a name and address in Swift MT consisted of 4 lines of 35 characters each. MT focused on concise information as opposed to clarity since it was developed in the days of low bandwidth and leased data lines were every expensive. In addition, over the last few years there has been the requirement of AML screening against sanctions lists and enhanced KYC including more information about LEI, names and addresses of beneficiaries. Further, the MT formats only support a Latin syntax whereas the rise of Asian character sets like Chinese are required nowadays.

 The ISO 20022 message definitions specified by payment providers include more data than the corresponding MTs used in cross-border business. If an ISO 20022 instruction is converted to MT for a cross-border leg, there is a risk of data being dropped or truncated. This creates compliance concerns because dropping data in end-to-end payment processing is unacceptable. Incomplete data, truncated data, false positives around sanctions lists all lead to increased regulatory burden for banks. The cost of investigation of errors and customer service grows proportionally. 

Banks must consider several thousand man-days of effort to ensure the data flows seamlessly. Some areas they will need to look at:

 -Legal Entity Identifier reference look up database 

-Source data for KYC with more accurate data capture at payment origination point. 

-High value system gateway updates 

-Updates from clearing system need to have a process to manage and apply the changes periodically

-Support of ISO20022 data, XML middleware, storage, and security

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Understanding ISO20022 Message Types

 

So what is the fuss all about? Currently the transaction related information is sent in legacy formats (e.g. SWIFT MT) and that is expected to change with the use of ISO20022.

Let us look at the different message formats and where they are used in ISO20022. These formats will cover debit, credit, mandates, settlement, investigations and statements to name the key ones. In ISO 20022’s naming scheme, message type is described with four letters followed by three sets of numbers.

 

Message Type:

Pain.001 or Payment Initiation—this depicts a credit transfer message. It can also be used for payment of salaries and checks. Other message versions are also being published by ISO.

Other message types include Camt (Cash Management and Reporting) and  Pacs ( Payment Clearing and Settlement)

The tables below summarize the different types of message formats

 

Customer and Bank
Payment	Pain.001	Pain.002	Pain.007	Pain.008
Mandates	Pain.009	Pain.010	Pain.011	Pain.012
Overlay Services
1.       Request to Pay	Pain.013	Pain.014
2.       Enhanced Data	Remt.001	Remt.002
Payment Reporting	Camt.052	Camt.053	Camt.054

 

 

Interbank Payments
Payments	Pacs.002	Pacs.007	Pacs.008	Pacs.004
Settlement	Pacs.009	Pacs.010	Pacs.002
Reporting, Admin	Camt.052	Camt.56	Admi.0nn
Investigations	Camt.029	Camt.030

 

 

Now that we understand the different message types lets look at this chart from SWIFT to see how a legacy MT message is mapped to an ISO20022 message.

 

This is the first challenge:

-To understand what systems are impacted by the new standard

-How to map the legacy message to ISO20022.

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What is ISO20022?

 

ISO 20022 is the latest international financial messaging standard to exchange transaction information between the players in the financial ecosystem. With the growth in Internet Protocols and XML this standard was derived to capture the benefits of these new technologies. It was first released in 2004, so it has been around for while and well accepted. Around 200 FIs globally are considering implementing, in addition to market participants like SWIFT, Ripple and Visa to name a few.

 The standard allows users and developers to represent financial business processes and underlying transactions in a formal but syntax-independent notation. The business transaction models can be converted into physical messages in the desired syntax. ISO20022 can be used across various business domains, communication networks, and the infrastructures of financial institutions, clients and suppliers. This flexibility provides many benefits for financial institutions to improve transaction efficiency while reducing costs and exposure to risk.

The benefit of ISO20022 messaging to SME and large enterprises is reducing the effort and difficulty of matching customer payments to invoices, increasing accuracy of cash flow forecasting and better visibility into collections.

Banks that can help customers provide these details around their transactions will provide differentiated services leading to higher revenue generation. In future they can utilize the data gathered from these payment transactions to understand the customer’s business in finer detail and offer predictive insights.

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 Welcome to my blog.

Here I will endeavor to post in brief some of the key issues facing the payments industry as banks modernize their financial messaging infrastructure. These are the common themes: ISO20022, APIs, Open Banking. In future posts you can see updates on current thinking on how to approach the major aspects and some more detail of what needs to happen at the frontlines.

I hope my content helps executives at banks and product managers who are not payment experts to get a birds eye view of the effort and opportunities in this journey.

Stay tuned!

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