Here are some brief takeaways from the panel, including the strategic opportunities that arise from ISO 20022 integration, as well as the difficult but critical truth about the risks of falling behind the adoption curve.

Leveraging ISO 20022 Data Strategically

While the standardized messaging provided by ISO 20022 is revolutionary on its own, integration of the standard will also open up access to up to 30-40% of additional data for banks and PSPs to leverage to their strategic advantage. When asked about exactly how this data can be utilized, and why financial institutions would be wise to view ISO integration beyond mere compliance, our panelists identified at least three strategic opportunities.

First, ISO 20022’s enablement of richer, more comprehensive, and standardized data can allow banks to build out and significantly improve customer-centric services. After using this data to gain deeper insights into customer behavior, transaction patterns, and market trends, these insights can be leveraged toward personalized banking services, targeted marketing efforts, and the creation of an overall more rewarding customer experience.

Secondly, ISO integration can be viewed as a vehicle for introducing new products and services and, in turn, creating entirely new revenue streams. For example, this might be an anti-money laundering service that leverages ISO 20022 data to detect suspicious transactions. Such a solution—and truly any novel reporting and/or analytics service—could then be marketed to other financial institutions, their corporate customers, and other regulatory bodies.

Finally, the technological changes implemented by banks for ISO integration set them up for broader innovation and the optimization of their overall digital transformation journey. For example, these upgraded systems can be leveraged to accelerate the path to real-time payments and API-enabled open-banking capabilities, both of which are becoming particularly important in today’s modern and open financial environment.

Understanding the Implications of Noncompliance

Throughout the discussion, our panelists frequently warned banks about the dangers of being unprepared as deadlines for ISO-readiness approach, however they also stressed that the repercussions of noncompliance go far beyond those handed down by regulatory institutions.

As one panelist pointed out, not being ready for ISO 20022 means an inability to send and receive high-value wire transfers, which would naturally result in a massive disadvantage for virtually any financial institution. Moreover, banks need to consider that falling out of line with an international standard as far-reaching as ISO will give rise to a number of additional interoperability challenges, and frankly may prevent banks from transacting overseas or even maintaining their core operations.

“The interoperability challenges would be significant,” added one panelist. “If you want to transact at all with other financial institutions that are already on ISO, you’re not going to be able to do that, and this will become especially important in the context of cross-border payments.”

Although this might seem like a hard pill to swallow for institutions who have yet to embark on their ISO journey, or who find themselves only at the very beginning of implementation, it can also be taken as a source of encouragement when considered alongside the possibility of capturing the aforementioned strategic opportunities. And while such institutions will need to appreciate the urgency of the situation, the most important thing is to first “take a step back into that strategic mentality,” as one panelist put it, taking into account the advantages that can be gained by tapping into ISO 20022 data, as well as what that looks like in the context of your operation.

For more information on ISO 20022 messaging, stream our webinar, “ISO 20022: The future of payments.”

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The migration to ISO 20022 signifies more than just a technical upgrade; it represents a significant shift to modernize a legacy payments rail. This new standard introduces structured fields for longer names and specific address components for example, as well as a standardized format for extended remittance information. Furthermore, it aligns the U.S. with global payment standards, ensuring interoperability and efficiency across borders.

However, the journey toward compliance is fraught with challenges. The timeline is tight, with testing deadlines set well before the official cutover date. With the clock ticking, banks must act swiftly to ensure their bank is ready on Day 1. The vendor selection process is critical, as banks need partners with extensive ISO 20022 experience and the capability to future-proof their systems.

The consequences of non-compliance are dire. Failure to migrate will render banks unable to send or receive wires, jeopardizing their ability to participate in essential financial transactions. Moreover, the U.S. risks losing its position as a global financial leader, as other economies embrace ISO 20022 standards.

To ensure a smooth transition, banks must adopt a proactive approach to compliance. This entails conducting thorough assessments of their current systems, engaging with vendors early in the process, and collaborating with industry peers to mitigate risks collectively. By embracing the challenges of migration, banks can position themselves for long-term success in an increasingly interconnected world.

In addition to compliance, banks must also consider the strategic implications of the FedWire migration. By embracing ISO 20022 standards, banks can unlock new opportunities for innovation and collaboration. From enhanced data analytics to streamlined payment processing, ISO 20022 promises to revolutionize the financial landscape.

The migration to ISO 20022 also presents an opportunity for banks to strengthen their competitive advantage. By modernizing their infrastructure and embracing emerging technologies, banks can enhance their operational efficiency and customer experience. Moreover, ISO 20022 opens doors to new revenue streams and business models, empowering banks to capitalize on the evolving payments ecosystem.

In conclusion, the FedWire migration represents a watershed moment for the U.S. banking sector. The time for action is now, and banks must seize the opportunity to modernize their infrastructure and embrace the future of payments. Those who fail to adapt risk being left behind in an evolving financial landscape. By prioritizing compliance, strategic planning, and collaboration, banks can navigate the complexities of migration and emerge stronger and more resilient.

To learn more about the ISO 20022 messaging standard, the Federal Reserve’s plans and timelines, and what adoption means for your bank, download the Celent white paper, Staying Ahead of the Fedwire Migration to ISO 20022: Strategies for Success.

The post The urgency of FedWire migration to ISO 20022: Are you prepared? appeared first on Volante Technologies.

In Part 1, we explored the imperative for European banks to embark on payments modernization journeys, focusing on ISO 20022, SEPA rulebook changes, and PSD2/PSD3. Part 2 will delve into the challenges and opportunities that banks face in this transformative process.

Challenges in European Payments Modernization

Challenges in European Payments Modernization

a. ISO 20022 Migration Challenges

The migration to ISO 20022 faces challenges in achieving timely adoption. As of Sibos 2023, just 15% of outgoing messages are in the new ISO 20022 format, highlighting slow adoption rates. Concerns raised by the Bank for International Settlements (BIS) around local arrangements and potential variations in messaging guidelines across borders add complexity to the migration process.

b. SEPA Rulebook Changes

The 2023 SEPA rulebook changes present a timeline challenge for banks and payment service providers. The transition to a new ISO 20022 version requires urgent planning, with both direct and indirect SEPA participants needing to align with the changes. The Council of the EU’s instant payments proposal adds further pressure, mandating banks to provide instant euro payment services without higher fees, creating compliance and operational challenges.

c. PSD3 and Open Banking Evolution

The proposed PSD3 brings additional obligations for financial institutions, including IBAN checks, fraud prevention measures, and open banking interfaces. Timelines for PSD3 enforcement, expected by 2026, introduce uncertainty. As open banking evolves, balancing convenience and security remains a challenge, particularly in commercial and wholesale banking.

Progress and Adoption of Modernization Efforts

European countries exhibit varying degrees of progress in payments modernization. Germany leads in SCT Inst registration, but challenges persist in driving consumer adoption. The McKinsey Global Payments Report suggests that without regulatory intervention, instant payments could constitute 45% of SEPA’s transactions by 2027. The adoption of ISO 20022 and the evolution of open banking contribute to the complexity of modernization efforts.

The Role of Payments-as-a-Service (PaaS)

a. PaaS as an Enabler

PaaS emerges as a key enabler in navigating the challenges of payments modernization. Offering a cloud-based delivery model, PaaS streamlines processes and facilitates cost-efficient management of payments. European institutions demonstrate a strong appetite for cloud-based solutions, with a significant percentage planning increased budget allocations for payments modernization in the next 12 months.

b. Addressing Interoperability and Agility

The need for interoperability becomes paramount in the evolving financial landscape. Institutions leveraging PaaS solutions emphasize the importance of agility and flexibility. PaaS allows banks to start small, redefine productivity, gain a competitive advantage, and find the right partner, as outlined in the recent webinar by Finextra and Volante Technologies.

Conclusion

European banks face a complex landscape in their payments modernization journey, marked by ISO 20022 migration, SEPA rulebook changes, and evolving regulatory frameworks like PSD3. Despite challenges, opportunities arise with the increasing adoption of cloud-based solutions, particularly Payments-as-a-Service. The next steps for banks involve strategic planning, agile execution, and a commitment to innovation. As the financial landscape continues to evolve, the successful modernization of payments systems becomes a critical factor in staying competitive and meeting the evolving needs of consumers.

Final Thoughts

The necessity for European banks to embark on payments modernization journeys in response to digitalization and evolving consumer demands is only increasing. The adoption of ISO 20022 and the SEPA rulebook changes for 2023 pose complex challenges, emphasizing the need for prompt corporate customer engagement.

We are seeing variations in payments modernization progress across European countries, and PaaS has emerged as a pivotal tool for banking transformation, offering cost-effective cloud-based solutions. European institutions are increasingly looking to implement cloud-based payment infrastructures, indicating a growing appetite for these solutions.

In a rapidly evolving financial landscape, European banks face the imperative of modernization to meet consumer expectations and navigate regulatory changes, with PaaS emerging as a key enabler of this transformation.

To learn more about navigating challenges in European payments modernization, download our whitepaper “What should European Banks prioritise in their payments modernisation journeys?”

The post Navigating challenges and seizing opportunities in European payments modernization appeared first on Volante Technologies.

The landscape of financial institutions is rapidly transforming, urging banks to embark on payments modernization journeys. European banks, in particular, face the daunting task of navigating through open banking initiatives, API enablement, and the challenges posed by real-time and cross-border payments. In this two-part series, we will delve into the priorities European banks should consider in their payments modernization journey.

Why Banks Should Consider Payments Modernization

Payments modernization is not just a response to regulatory shifts; it is a strategic move for banks to secure and expand their market share domestically and globally. A commitment to modernization includes adopting the ISO 20022 standards, going beyond compliance requirements to leverage the data-rich standard for operational efficiency and market growth. Modernization equips banks with the tools to navigate evolving regulatory landscapes and fosters innovation, positioning them as industry differentiators. Leveraging data for cross-selling becomes imperative in a rapidly changing financial landscape, maintaining a competitive edge and sustaining growth.

European Deadlines Impacting Banks’ Modernization Plans

a. ISO 20022

The migration to ISO 20022 for cross-border payments and reporting began coexistence in March 2023, with support for both MT and ISO 20022 until November 2025. Market practice guidelines, such as HVPS+ and CBPR+, provide consistency in adoption. However, concerns about slow migration persist, with only 15% of outgoing messages in the new ISO 20022 format. The industry faces challenges in ensuring harmonized messaging guidelines for cross-border payments, risking the potential benefits of ISO 20022.

b. SEPA Rulebook Changes

The EPC’s SEPA rulebook changes for 2023 introduce complexities, with the transition to a new ISO 20022 version and obligations for interbank communications. The Council of the EU’s instant payments proposal aims to enhance access to instant payment options, urging banks and PSPs to prepare for changes in the euro currency. The proposed PSD3 introduces checks on IBANs, fraud-related information sharing, and grants fintechs access to EU payment systems. Timelines for PSD3 enforcement are expected by 2026.

c. PSD2 and PSD3

Open banking under PSD2 and the upcoming PSD3 reshape financial institutions. The European Commission’s proposal for PSD3 aims to bring payments and the wider financial sector into the digital age, with implications for IBAN checks, fraud prevention, and open banking interfaces.

Progress of European Countries in Payments Modernization

Assessing European countries’ progress in payments modernization reveals variations. The McKinsey Global Payments Report indicates 12% of SEPA’s credit transfer volume as instant payments, with potential growth to 45% by 2027. Germany leads in SCT Inst registration, reflecting strong adoption, yet challenges persist in driving consumer usage.

Will Payments-as-a-Service Accelerate Modernization?

Payments-as-a-Service (PaaS) emerges as a vital tool, offering a cloud-based delivery model to streamline and cost-effectively manage payments. European institutions exhibit a strong appetite for cloud-based solutions, with 64% planning increased budget allocations for payments modernization in the next 12 months.

Key Factors for European Banks in Payments Modernization

A recent webinar highlighted four key pillars for successful payments modernization through PaaS: starting small and simple, redefining productivity, gaining a competitive advantage, and finding the right partner. These pillars emphasize the need for an agile and flexible approach in the evolving financial landscape.

Conclusion

The imperative for European banks to modernize payments is underscored by the adoption of ISO 20022 and SEPA rulebook changes. As the landscape evolves, PaaS emerges as a key enabler, reflecting a growing appetite for cloud-based solutions. In Part 2, we will further explore the challenges and opportunities in payments modernization for European banks.

To learn more about prioritizing payments modernization, download our whitepaper “What should European Banks prioritise in their payments modernisation journeys?”

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Payments volume surge

According to Capgemini, payments volumes are projected to rise by a staggering 15% annually over the next five years. This growth rate is approximately 1.5 times higher than what was projected before the pandemic. This surge in payments volume can be attributed to several factors, including the increased adoption of digital payments, e-commerce expansion, and the global push towards real-time payments systems.

The digitalization of financial services, accelerated by the COVID-19 pandemic, has led to a shift in consumer behavior, with more people opting for online and mobile payments. As a result, traditional banking channels, such as physical branches and checks, have given way to digital transactions. This surge in payments volume is forcing banks to adapt quickly to meet the growing demand for efficient and secure payment services.

Payments revenue challenge

In contrast to the explosive growth in payments volume, payments revenues are expected to slow down to a mere 7% annual increase, as projected by BCG and McKinsey. While this growth rate is still robust, it represents a significant discrepancy between volume and revenue growth. To put it in perspective, if everything else remains the same, revenue per payment will drop by 30% in just five years.

The primary challenge for banks is that they need to maintain profitability and growth in an environment where payments volumes are growing at a much faster rate than payments revenues. To understand the magnitude of this challenge, it’s essential to consider the impact on their profit margins.

Cost and margin pressures

Banks are under constant pressure to manage their costs efficiently. If payments volumes are surging, but revenue growth is sluggish, this can lead to a significant margin squeeze. In simple terms, if costs remain the same while revenues do not keep up with the pace of payments volume growth, banks will face a decline in their profit margins.

The rise of fintech disruptors

Another factor exacerbating the situation for traditional banks is the rapid proliferation of fintech companies. These agile and innovative startups are capturing a growing share of the market. Presently, fintechs are capturing about 6% of the total revenue pool, and by 2030, this share is expected to increase to approximately 25%. The fintech sector is not encumbered by the legacy systems that traditional banks rely on, allowing them to be more nimble, efficient, and responsive to market changes.

Traditional banks are facing a dual challenge. On one hand, the overall pie of the payments market is not growing quickly enough to accommodate their existing revenue expectations. On the other hand, their market share is diminishing, and their legacy systems are becoming increasingly obsolete.

What this means for banks

To thrive in this evolving landscape, banks must adapt and evolve their strategies. There are two core imperatives they need to address:

1. Investing in Customer Experience and Product R&D: To retain and grow both revenue and customers, banks must invest in enhancing the customer experience and innovation in product research and development. They need to deliver services that are superior to those offered by fintech companies in terms of speed, quality, and cost-efficiency. This entails creating a seamless and user-friendly digital experience that meets the evolving expectations of modern consumers.
2. Reducing the Cost of Payment Processing: Given the growing disparity between payments volume and revenues, banks must continually find ways to reduce the cost of payment processing. This isn’t a one-time effort but an ongoing journey towards ever-increasing efficiency. It’s about optimizing operations, automating processes, and adopting advanced technologies to streamline payment processing and cut costs without compromising security or compliance.

How Volante can help

Volante offers a range of solutions that align with the core drivers of payments modernization for banks. These solutions address the challenges faced by banks in terms of reducing costs, enhancing efficiency, and enabling innovation. Some of the key ways in which Volante can assist banks include:

1. Platform as a Service (PaaS) and Cloud Solutions: Volante provides PaaS and cloud solutions that enable banks to modernize their payments infrastructure. This allows for greater flexibility, scalability, and cost-efficiency. By moving to the cloud, banks can reduce their infrastructure costs, improve resilience, and enhance their ability to adapt to market changes rapidly.
2. Real-Time Payment Capabilities: Volante’s solutions enable banks to support real-time payments, meeting the demand for faster and more immediate transaction processing. Real-time payments are essential to stay competitive and offer customers the convenience they expect in today’s digital world.
3. Low-Code Development: Volante’s low-code capabilities empower banks to develop and deploy new services and features faster, reducing the time-to-market for innovative payment solutions. This flexibility is crucial for banks looking to stay ahead in a rapidly changing market.
4. ISO 20022 Compliance: As the financial industry moves toward the ISO 20022 messaging standard, Volante’s solutions can help banks seamlessly transition to this global standard, improving interoperability and enhancing the efficiency of cross-border payments.

Conclusion

The core reason driving payments modernization for banks is the growing gap between payments volumes and revenues. As payments volumes continue to surge, traditional banks must adapt to remain competitive in the face of fintech disruption. To thrive in this evolving landscape, banks must invest in customer experience and product innovation, while also reducing the cost of payment processing to maintain profitability and growth. Solutions like Volante play a vital role in helping banks meet these challenges, offering PaaS, cloud, real-time, low-code, and ISO 20022 payments modernization solutions. By embracing these technologies, banks can not only survive but thrive in an ever-changing financial landscape.

Stream the Payments Modernisation: Derisking and Embracing Innovation Beyond ‘Rip and Replace’ webinar.

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This piece explores the angles of different ISO 20022 adoption methods. We also review new opportunities for collaboration and partnerships between financial institutions, technology providers, and other stakeholders to leverage the benefits of ISO 20022.

The Pros and Cons of Different ISO 20022 Adoption Methods

When implementing the new standard, panelists agreed there is no “one-size-fits-all” approach to ISO 20022 migration.

How a bank approaches migration depends on the complexity of legacy systems and existing architecture, strategic direction, the volume of payments, current regulatory requirements, current capabilities, and where it is in its overall digital transformation journey. Banks must also consider those factors against the timelines for complying with regulations.

Some banks may find it beneficial to start with high-impact areas (payments or customer interactions), while others may find it helpful to prioritize internal processes or compliance aspects. Each bank must assess its unique needs and strategically choose how to begin adopting the standard. That said, the panelists reviewed several of the preferred migration approaches from which banks can choose:

Simple translation and transformation approach – This is a simple conversion of MT or legacy formats to MX to support reporting and confirmation requirements.

Native Implementation – This approach aims for the full adoption of ISO 20022 at once. It is a riskier approach that requires considerable time and resources to fully transition legacy systems to the new standard.

Centralized payments hub – Here, a centralized payments hub orchestrator is the intermediary between a bank’s legacy systems and networks and the SWIFT network. This method is preferred for FIs with complicated legacy systems and can help future-proof payments.

Additionally, banks must choose rollout strategies to accommodate appropriate timing and regulatory requirement considerations. Here, banks may choose between:

Single-phase implementation – This “big bang” approach is ideal for systems that already support ISO 20022 messages and is a good fit for both the simple translation and centralized payments hub approaches. This approach allows banks to realize the benefits of the standard more quickly. They will also have an improved ability to react to market trends or changes much faster than those who take a more phased approach.  

Multi-phase implementation – This includes rollouts to a select subset of messages at a time, allowing banks to implement the ISO 20022 standard in a structured and efficient manner, minimizing disruptions to their processes and overall operations. A longer migration timeline means banks that choose this route won’t be able to enjoy all the benefits of using ISO 20022 until the migration is complete.

Canary release – This approach rolls out changes to a subset of users before a larger rollout.

Harmonized implementation – This approach aligns CBPR+ system release cycles with new CBPR+ guidelines releases and updates.

New Opportunities for Collaboration

ISO 20022 enables new opportunities for collaboration and partnerships between financial institutions, technology providers, and other stakeholders. As the panelists pointed out, better payment data is crucial but is not achievable by one institution alone — it must be adopted in a coordinated way across the payments ecosystem.

With ISO 20022 standardization, everyone can “speak the same language.” Data can move seamlessly within both domestic and international transmissions, ensuring everyone is receiving comprehensive information without truncation. This opens the door to numerous opportunities, including collaboration, innovation, the creation of competitive services, and the reduction of friction and errors.

Additionally, adopting ISO 20022 allows banks and fintechs – which traditionally operate with agile and modern systems – to collaborate and develop new solutions and services. This allows both to expand their reach and enter new markets in different regions and countries.

By working together, all these organizations can leverage the standard to drive innovation, improve efficiency, and enhance the overall customer experience in the financial sector.

Stream the webinar: “Shaping the Future of Payments: ISO 20022 Adoption and Payment Modernization in the Middle East.”

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This is the first in a two-part series summarizing the main points of the panel discussion. This article will focus on the immediate impacts of ISO 20022 standardization and how adopting the standard, combined with modernized payment approaches, can provide banks with more opportunities beyond compliance.

The Immediate Impacts of ISO 20022 Standardization

The migration to ISO 20022 will create a common language for payments worldwide via a modeling methodology to capture syntax-independent data. The result will be a standardization and harmonization of payment messages and data across different payment systems and countries.

This standardization will yield several immediate impacts that touch every corner of the payments ecosystem, including:

Standardized messaging

Adopting this common language allows FIs that are party to a transaction to seamlessly exchange information, ensuring compatibility between different systems and reducing friction and error. This will improve the speed of domestic and cross-border transactions as organizations can easily interpret all messages and take action across diverse international systems.

Streamlined compliance

This common model for financial messages enables more accurate compliance processes and operational efficiency by improving the security and governance of payments while reducing manual intervention.

Better support for straight-through processing (STP)

Messaging standardization means improved data accuracy, greater efficiencies, and a reduction of manual processes. This enhances financial companies’ ability to automate payments from end to end, improving straight-through processing (STP) for domestic and international transactions.

Enhanced data streams

Banks will have access to more detailed and reliable information. The ability to paint a more comprehensive picture of transactions and processes allows banks to enhance analytics, make better-informed decisions, engage in more sophisticated strategic planning, create better products, and improve customer service.

Opportunities Beyond Compliance

While compliance is necessarily a driving force in adopting ISO 20022, banks should recognize and take advantage of the massive business opportunities it offers. Beyond compliance, migrating to ISO 20022 can align with strategic goals, enable operational efficiency, drive innovation, and improve the customer experience.

Interoperable data for more efficient payments

The standard breaks down communication barriers, allowing all parties to receive complete information without truncation. Interoperable data reduces the complexity for both domestic and international transactions.

Improved liquidity management

The standard allows for more detailed and structured information to be exchanged between banks, helping them make more informed decisions about cash flow. Additionally, real-time payments capabilities will enable banks to process transactions more efficiently, reducing the frequency with which they need to hold excess liquidity to cover potential payment delays. Instead, banks can redirect attention to improving earnings.

Advanced fraud detection

Since ISO 20022 uses a standardized XML-based message format for financial transactions, which is more secure than traditional message formats, it is more difficult for fraudsters to manipulate or intercept the data. Leveraging this data for real-time applications means banks can monitor transactions as they occur, quickly identifying and flagging any unusual or suspicious activity.

Conclusion

ISO 20022 provides an interoperable standard that is foundational to the modernization of payments and the proliferation of instant payments. The migration toward this standard will supercharge payments across banking systems and corporations with data-rich messaging that can be exchanged among parties to improve their payments services.

As such, ISO 20022 presents significant opportunities for banks in the Middle East and worldwide to improve their payments services and offer their customers faster, more convenient, and more secure payment options.

Stream the full webinar

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In a recent discussion at Volante’s 2023 EVOLVE conference, we consulted our panel of experts in the world of finance and payments to learn more about the role of customer experiences in unleashing business growth, particularly in the increasingly complex age of payments modernization. Here are some brief takeaways from the conversation:

Knowing and Anticipating the Needs of Your Customer

Recent technological advancements have provided banks and payment service providers (PSPs) with extraordinary opportunities for growth. However, according to our panelists, taking advantage of this evolving financial ecosystem will require many industry players to return to one of the most basic principles of customer experience: knowing and understanding the client as thoroughly as possible.

“I think the first thing that we all need to recognize is the importance of knowing your client,” said one panelist. “Understanding the customer and market you’re serving is key to crafting a solution that is going to meet their needs, and you’ll have to make sure that you’re constantly validating with customers to ensure it really is what they want.”

On the topic of validation, our panelists touched on a variety of ways to check in with customers, including the use of analytics to track which services clients are using, how long they’re spending in different areas, and which solutions are the most successful. However, as one panelist pointed out, this doesn’t remove the need to engage directly with customers, and most importantly to gather the information that not only identifies their desire for a specific product but also allows you to anticipate their needs and build corresponding solutions.

“It’s less about what specific product the customer wants at the moment and more about understanding their overall needs and everyday pain points. I think there are a lot of pain points that may even seem basic, but they’re not that simple to solve, and one way to provide a great customer experience is by taking that information back and determining which products need to be built to arrive at a solution.”

Using Complex Tools to Provide Simplified Experiences

In addition to knowing your individual customer base, our panelists also converged on the need to develop intuitive customer experiences that overshadow the complexities of modern technology, whether it’s the increasing variety of instant payment rails, or generative artificial intelligence (AI) and the utilization of data-backed insights.

As one panelist noted, too much time today is spent explaining the inner workings of real-time payment networks, despite most customers caring less about what these services are than the actual value they deliver. “When we determine which product will be beneficial, the question is how do we effectively within our channels provide the most common experience, so that customers don’t need to know if it’s being settled by FedNow or RTP. Because they ultimately shouldn’t care; your front end should be masking all that.”

Similarly, as customers come to trust financial institutions with their data, and even become excited about advanced tools like generative AI, the challenge is using data to deliver actionable insights in a way that customers can easily trust and understand. “We’ve had customers tell us directly, ‘I don’t know about treasury or cash management; you’ve got my data, so just tell me what I need to do,’” one panelist shared.

After all, the inherent complexity of insight generation is ultimately irrelevant to the value it can create for business owners, whether to determine when payments should be sent to stay on track with payroll or to provide a comprehensive overview of a company’s financial health. “These are the things our customers really appreciate,” said one panelist, “we just need to figure out how to harness it and turn it into products that our customers want.”

Learn more about Volante’s EVOLVE event.

The post Elevate and accelerate: Unleashing business growth through exceptional customer experiences appeared first on Volante Technologies.

Regulation Driving Instant Payments Evolution

Instant payments are gaining momentum in Europe as people look for convenient ways to send and receive money quickly. However, pan-European adoption has been slow for several reasons, including an absence of corporate use cases, cost, and a lack of interoperability between domestic schemes.

Subsequently, the current adoption rates of instant payments can vary drastically by region. Austria, for example, has the second-largest number of payment service providers (PSPs) providing services for instant payments; however, the volume of transactions falls below 14%, the European average.

While the Single Euro Payments Area (SEPA) allows customers to make digital euro payments (credit transfers and direct debits) to anywhere in the European Union (EU) and some non-EU countries, it has limitations when it comes to instant payments. 

Many banks within SEPA countries utilize SEPA Instant Credit Transfers, which enable settlement within 10 seconds for payments of up to €15,000. The drawback for users is that these instant payments are more expensive than regular credit transfers, there is an amount limit, and not all banks offer the instant transfer option.

This is where the newly minted regulation by the European Council and Parliament may force headway for instant payments. The agreement requires “mandatory provision of instant credit transfers in euros and access to central bank payment rails by non-bank e-money institutions and stablecoin issuers.” More specifically, it stipulates that payment service providers that provide standard credit transfers in euros – including banks – must offer the ability to send and receive instant payments in euros at no extra cost.

Adoption Will Ultimately Depend on Several Factors

The recently released 2023 McKinsey Global Payments Report underscored the potential uptick in adoption due to regulatory intervention, indicating that instant payments – which currently constitute 12% of credit transfer volume in SEPA – could rise to capture a 45% share of SEPA’s 23 billion annual transactions.  And while regulatory changes are expected to drive usage, other challenges remain.

Panelists were quick to point out the risk of fraud, especially with the rise of instant transfers in a post-pandemic world. Banks will likely be reticent about pursuing instant payments to that degree until current fraud challenges are solved.

Beyond fraud, the adoption rate will depend on customer education and trust in the system, service availability, and expanding corporate use cases. The panelists pointed out that, since its inception in 2017, close to 90% of SEPA Instant Credit Transfer use cases have focused on account-to-account (A2A) payments and remittances. This underscores the importance of building up value-added services on top of this ability – and finding additional use cases for corporations.

While regulators may push the adoption of instant payments, there still needs to be a customer-centric mindset shift to increase adoption.

Corporate Use Cases Lacking

Corporate use cases came up more than once during the discussion, with panelists agreeing that these use cases are foundational to broader adoption. In response to McKinsey’s 45% projection, one panelist noted the limited number of corporate customers currently using instant payments due to the national amount limit. With close to 80% of the volume supported by corporations, there will need to be better use cases to increase adoption and volume in tandem.

Payment service providers must find ways to embed themselves within corporate client ecosystems in areas that depend on instant payments. A future-forward approach that utilizes APIs to make instant payments part of the value corporations can deliver is fundamental.

Collaboration is Key

Panelists also agreed on the necessity of collaboration moving forward. For larger banks, partnerships with fintechs – which are inherently more innovative and customer-centric – will enable faster adaptation to market changes. On the other side, banks have established trust with customers via their ability to send payments in a safe, secure, and fast way – trust that fintechs can leverage to build value-added services on top of instant payments infrastructure.

Small and mid-sized banks also stand to benefit from collaboration – both with fintechs and with larger banks. From a resource perspective, smaller banks will find the path ahead challenging. The pace at which regulations are emerging and technology is evolving will be a hindrance to banks that don’t have the financial or personnel resources in-house. Outsourcing can be advantageous for profitability and from a strategic standpoint.

Broader, more affordable access to instant payments as mandated by the European Council and the European Parliament will undoubtedly drive greater adoption. However, banks and other PSPs have more work to do in developing value-added services that appeal to the masses, including corporations. If PSPs can successfully develop critical infrastructure with the right functionality, these instant payment rails will help drive the next generation of payments opportunities.

Stream “Outlook on Instant Payments in Europe” webinar

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Things started to look up in the second half of the year as interest rates stabilized and valuations recovered in the fourth quarter. However, the failure in November of Citizens First Sac, a bank with $66 million in deposits, showed that smaller institutions were not immune to the contagion. Community lenders are the bedrock of US banking, so it is not surprising that the event prompted nervous discussions about the overall health of the sector.

In this blog post, I’ll explore the significance of this event within the context of the broader banking landscape. Despite concerns about the sky falling on American banks, I’ll argue that such isolated incidents are not indicative of systemic danger but rather a testament to the robustness of the regulatory framework in place.

Survival-of-the-Fittest in banking

Bank failures are an inherent part of the survival-of-the-fittest dynamic within the U.S. banking sector. The system is designed to allow weak banks to fail while safeguarding the vast majority of depositors. The twin backstops of systemically important financial institutions and federal lenders of last resort provide a safety net for the financial system. When a bank like Citizens First Sac experiences a smooth transfer of ownership, as seen with its acquisition by Iowa Trust over a weekend, it validates the effectiveness of the system’s checks and balances.

Historical perspective

Taking a historical perspective, Pew Research reveals that, outside of major crises like the 80s Savings and Loan (S&L) collapse and the 2000s financial crisis, bank failures have averaged just over five per year. The recent failure of Citizens First Sac brings the total to five for 2023, aligning with historical norms. This consistency underscores the system’s ability to manage and absorb the failures of individual banks without triggering systemic risks.

The need to stay vigilant

While the number of bank failures may be within historical averages, it is crucial not to become complacent. Some high-profile institutions faced bankruptcy in 2023, endangering over $300 billion in assets – the third-largest bank run since 1940. This emphasizes that it’s not just the frequency of failures that matters, but also the scale. Thus, banks and regulators must remain vigilant, addressing issues such as poor lending practices, lackluster risk management, and insufficient balance sheet discipline.

The role of real-time payments and ISO 20022

In this context, the role of payments technology, particularly real-time payments services like FedNow and TCH RTP, and the ISO 20022 messaging standard, comes to the forefront. Real-time payments, when coupled with ISO 20022 messaging, offer immediate 24×7 funds transfer with a wealth of embedded data in each transaction.

It’s essential to note that these technologies won’t prevent banks from failing, as institutions with weak fundamentals are bound to face consequences. However, they do empower consumers and businesses by providing greater control over their funds. Additionally, the introduction of real-time payments and the adoption of ISO 20022 create an opportunity for financial businesses to evolve past their weaker peers by delivering higher quality payment services.

Consumers and businesses, armed with the ability to control their funds in real-time, will naturally gravitate towards institutions that offer superior payment services. This paradigm shift represents the latest chapter in the survival-of-the-fittest narrative, where adaptability to technological advancements becomes a key factor in a bank’s longevity.

Conclusion

The failure of Citizens First Sac, when viewed in the broader context of U.S. banking history, highlights the resilience of the system, not its weakness. Bank failures are a natural occurrence, and the regulatory framework in place is adept at handling them without jeopardizing the entire financial sector. Real-time payments and the ISO 20022 standard add a new dimension to this landscape, offering both consumers and institutions an opportunity to thrive in an era where adaptability to technological advancements is paramount. The sky is not falling on American banks; rather, they are evolving

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