The Data Management Challenge

 Data data everywhere , not a bit to use  can become a familiar story in banks as our sources of data such as ISO20022 information , internet of things (IoT) with every edge device capable of a payment transaction and scads of video, biometric  and other unstructured data. Banks have done a good job of gathering all this data but very few know where it is or how to use it.

Here are the issues:

-Keeping up with storage and use for consumption by analysts and data scientists.

-Why is the data being collected ? Few know why and how it will be utilized and whether it can be even used . But the pile of data keeps growing because we collect everything.

-Lack of process to understand and index queries. Monitoring this growing pile from different sources also requires  indexing the most frequent data. The risk is these data lakes can turn into data swamps without a rigorous process to manage this aspect

Thank you GDPR and CCPA! By making the consumer a stakeholder in the management of their own data  while imposing real costs to banks for failing to obtain data without proper consent, having poor controls on use of data and if they cannot erase it on request , these laws have given banks the opportunity to rethink their data management strategy.

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Data Security in ISO 20222 with Tokenization

 With increasing use of account level credentials being used for facilitating payments it comes with risk of ensuring safety of the remittance information. Compounded by various real time rails and the rise of immediate payments the new payment methods such as wallets, ecommerce, QR code and  other payment methods have increased the chance of fraud . Given lack of delay in the real time rails and that payments are irrevocable, fraud mitigation is taken on a higher priority.

Tokens , which can be thought of as surrogates for the PAN or primary account number have increasingly been thought of  as viable solution to address the risk of not securing rich remittance data. They use the same format numbers as the original transaction so the processing protocols can do their job while the customer experience is not impacted.

The processor receives a transaction from the customer's bank , maps a token value to the transaction and sends it to the issuing  bank for clearance. Alternatively the issuing bank and send both the token and the transaction to the processor who then sends the account information to the acquiring bank for fulfillment.

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Customer minutes and friction as a metric for Banks

 Everywhere we see especially in ecommerce what used to be complicated method of paying for goods and if required getting refunds used to be fraught process. Nowadays Amazon has shown the way with One click ordering and refunds.

This consumer focus to help make their lives easier while interacting with a machine has been rewarded both by customers and the stock markets . What are some examples where banks have made the difference?

- Transaction alerts on the mobile app 

-Customer authentication on the phone if calling from a registered number

-Servicing via chat if customer is on the online banking portal.

These use cases showcase how to reduce friction by reducing "Customer minutes" i.e. time spent by customers to address their issues. Think of how the internal business processes have been rejigged to permit these outcomes.

ISO20022 rich payment messaging data is a building block for enabling these types of friction reductions in business and the real benefit is in terms of better cash flow and the opportunity to innovate on top of the payment message data set.

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Business in the instant payment world

 Many jurisdictions are working on implementing a low value system on real time rails. Built on ISO20022 payment messaging standards, these promise the availability of instant and irrevocable settlement as well as rich data about the transaction such as invoice details.

Some well established business use cases that will benefit from these new capabilities  where payments are available 24x7  as opposed to time delay for ACH and checks are:

-Ecommerce vendors buying and selling online

-Gig economy payroll for workers for payment of hourly wages

-Emergency relief payments that we have become familiar during this pandemic

The benefit to the receiver are obvious-- money in hand instantly. But the business are also needs to step up in managing this sea change such as :

-How will information on the remittance be stored and reconciled

-If you are receiving funds after hours how will this be managed in an automated manner in your AR.

-What approvals will be in place to release the payment noting these are irrevocable and instant.

Think of the improvement in cash flow with these new tools. Also the reduction in time spent reconciling payments. Paying by installment may lead to new and more revenue.

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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

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Banks cede innovation in Retail Payments

 We have seen the great uptick in new methods of payment initiation by the customer. Examples of these are:

-QR Codes

-Request to Pay

-Pay by mobile phone and other devices using Google or Apple Pay

-Buy now Pay Later or Installment Pay.

-EMT or email money transfer

All these new services are can be grouped as Alternative Payment Methods (APMs). These services are possible by layering an Alias Directory on top of the payer, payer's bank, the network, the payee's bank and the payee. Overlay services delivered via the alias directory improve customer experience at all touch points like POS, online commerce etc. . Where the network is a real time rail, account to account settlement is possible much like a peer to peer network thus reducing interchange costs and delays associated with traditional market infrastructure.

Where are the banks in all this? Nowhere!

All of these services have been delivered baring EMTs by non bank actors or fintechs. Why?

These newer players did not have legacy costs recovery to worry about nor to fight "we have always done it this way at our bank" mindset. They also took the customer for granted.

Now these trends are hitting the banks at the core where they have no place to hide: the large corporates demanding these services and if they don't provide these corporate accounts will shop around. 

 The customer payment initiation battle is lost, so what can the banks do ?

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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.

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