Banking leaders get back to basics for 2024
By Sadiq Javeri, Chief Product Officer – Financial Messaging, Bottomline
Get ready for the year of the dragon. According to the Chinese calendar, this symbol will define 2024 and is characterised by power, nobleness, honour, luck, and success in traditional Chinese culture. The dragon, according to several sources, is a “supernatural being with no parallel for talent and excellence.”
In the UK payments and banking industry, we will need all of that. A challenging set of macroeconomic conditions, continued geopolitical unrest and ongoing regulation changes will ensure that. As we have seen in the postponement of the New Payments Architecture initiative, banking leaders are more concerned with the basics this coming year than expected. The focus will be on gaining efficiency and making as much progress toward digital transformation as possible. With that in mind, I have selected three trends that I think will accomplish those goals as the global payments landscape generates more valuable data and becomes more agile in the process.
The first trend to prepare for is the acceleration of ISO 20022 usage. In short, this is the year to go to ISO 20022 native now that we’ve moved beyond the mandated “connected” phase of ISO 20022 in which the “send and receive” function of ISO messaging requires adaptations of core systems and payment gateways to accommodate ISO standards. ‘Connectivity only’ is limiting and doesn’t allow financial institutions to fully leverage the advantages of ISO 20022 to improve their operational efficiency. By moving to “market ready,” banks can introduce new network providers, new payment rails like instant payments, and overlay services like Request to Pay. By moving to “native” status, banks can get the full benefit of ISO messaging, which includes lower costs via better straight-through processing, improved cash positioning and real-time balance capabilities resulting in tighter monitoring and tracking of transactions, transparency to meet current and new regulations, and payments system stability improvements.
Native status should be at the top of the table for UK banks if they haven’t reached it yet, because of the opportunity it affords them to generate and act on rich and structured data sets. With richer data, banks can develop more sophisticated and tailored financial products and services. This data insight could lead to better customer segmentation, personalised offerings, and innovative payment solutions. The detailed information available through ISO 20022 messages aids in compliance with regulatory requirements. It also helps identify and manage risks more effectively by providing more detailed and valuable transaction data.
Which leads me to trend number two, which is the acceleration of cross-border payments. As a global standard, ISO 20022 facilitates easier cross-border payments and international transactions. Thanks mainly to the great work done by Swift, cross-border payments have increased in speed and accuracy. In fact, Swift announced earlier this year that 89% of payments on its network reached the end bank within an hour. The G20 targets 75% of cross-border payments to be credited to the beneficiary within an hour by 2027. Perhaps next year will see customer expectations meet customer satisfaction in the area of cross-border payments.
If it does, a good deal of the credit should go to the end-to-end visibility achieved in cross-border payments thanks to the latest ISO messaging format. End-to-end visibility, especially in the context of cross-border payments, refers to the ability of all parties to track and monitor the payment’s entire journey – from the moment it initiates until it reaches its final destination. This visibility ensures that data covering the transaction’s status, details, fees, intermediate entities involved, and potential delays are all transparent to both the sender and the recipient. This concept is crucial for navigating the current world of global payments, and it is very evident that ISO 20022 is an integral part of it. And again, kudos to Swift, who has prioritised pre-validation of payments. Pre-validation is a simple concept, but when we look at cross-border payments – or any digital payment for that matter – this simple step is neglected in many cases. When you drill down into why certain payments fail, it’s due to bad data at the beginning. According to Swift data, in 2022, 72% of payment exceptions on its network resulted from formatting errors, account issues and invalid data. Many of these errors could be avoided with simple pre-validation.
Trend number three is the continued momentum behind faster, instant or real-time payments globally. In the UK, the New Payments Architecture (NPA) initiative will be a big part of the infrastructure changes that will drive faster payments adoption. But the postponement of NPA go live hardly means banks should wait to accelerate their usage. I have two reasons for that opinion. First, the rest of the world is going instant. The Eurozone recently adopted its four-point plan to make instant payments more affordable and efficient, and the US has jump-started its efforts with higher payment thresholds and the launch of FedNow in June 2023. We also expect to hear more from The Clearing House’s IXB cross-border real-time payments initiative next year.
The opportunity for banks – and this is why instant payments will be a trend to watch – is that this is not a payment rail built simply for speed. Instant payments are a liquidity tool as well. They allow banks and their corporate customers to retain funds in their account or delay a payment until the absolute last minute and then still make the payment on time. Instant payments are not a strategy unto itself. It is part of a comprehensive liquidity management capability that also features straight-through processing that results from the rich ISO 20022 structured remittance information that can follow with those payments.
Year of the dragon? Maybe. But for me this all adds up to being the ‘year of the customer’. UK banks have done a great job in deploying domestic improvements to the customer experience, such as open banking and confirmation of payee. Now, it’s time to turn our efforts toward the rest of the world, and I believe by adopting ISO 20022 messaging, focusing on cross-border improvements, and embracing instant payments, banks can give their corporate customers what they want and need for a profitable 2024.