CSM Opportunity for Banks

 Given the huge innovation in payment initiation  for consumers its only a matter of time that businesses would ask banks what options are available for them to participate in the instant payment world.

Its not going to be easy for banks. They will have to take calls that may or may not pan out. One area they can start thinking about is the Clearing and Settlement function. There is a history of lag and costs in this area. However there is sporadic innovation as well. Ripple's cross border RippleNet system has shown the potential for reducing costs in Cross Border clearing and settlement.  Swift GPI is showing a method to introduce transparency and tracking in cross border payment flows.

But these are technology based offerings. Regulators in many countries are encouraging development of new instant payment rails such as IMPS in India . China, Japan, Australia, Canada, USA and lastly EU have plans to set up these rails and are various points in their rollout.

By taking calls on which  technology to utilize and what networks to participate in , banks can offer differentiated clearing and settlement-- based on  countries they want to focus on, speed of settlement, transparency of payment journey, SLA based straight through processing STP to name a few.

However the table stakes in all these offerings will be an end to end ISO20022 message compliant network

Read More

What is LEI?

 LEI stands for Legal Entity Identifier . This is a 20 character alpha numeric code based on ISO 17442 standard. This code helps in identifying the legal entities in a payment transaction. 

For example in Canada all counterparties to the derivatives transactions need to have an LEI. As faster payments and pay mod initiatives kick  in, more market participants including legal companies, their subsidiaries, government departments, charities will be expected to have this code.

The LEI Common Data File Format v.2.1 is expected to record previous legal names, "operating under", "brand name", "trading as". This clarity is expected to reduce operating cost and false positives.

In future once LEIs are incorporated into the business processes substantial cost savings accrue  in verifying entity during loan origination, KYC refresh, credit worthiness monitoring , compliance reporting etc.

Banks can consider using LEI as a business case to step up the ISO20022 modernization effort.

Read More

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.

Read More

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.

 

 

 

 

Read More

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.

 

Read More

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

Read More

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.

Read More