Modernising payment infrastructure as digital volumes surge

As the financial services community gathered for the annual Sibos event, the primary focus of discussions this year centred on payments. Thirty-one percent of the 22,000 delegates who attended virtually in 2021 stated their primary focus was payments. It has continued to remain the most dominant theme.

From real-time payments and innovation taking the centre stage in 2018 to payments as a catalyst of change in 2020 during the pandemic, discussions in 2022 focused the industry’s attention on how to collectively maintain and upgrade financial market infrastructures (FMIs) to ensure cost-effectiveness, finality, safety and transparency of payments.

Data from World Bank shows that around two-thirds of adults worldwide now make or receive a digital payment, with the share in developing countries growing from 35% in 2014 to 57% in 2021. In low and middle-income countries (excluding China), over 40% of adults made merchant in-store or online payments using card, mobile or the internet for the first time since the pandemic. The shift towards account based instant payments aside to card-based payments and demand for straight-through processing is driving change within infrastructures on how it may orchestrate and manage the payment.

As interlinking of faster payment systems, emerging technologies such as APIs, cloud and payment standardisation with ISO 20022 is underway, the future impact of digital currencies, especially central bank digital currencies (CBDCs) on FMI continues to pique the interest of the industry significantly.

Scaling efficiently through the adoption of cloud technology

There is an urgent need for more scalable, operationally efficient technology that can truly drive future business value. Legacy infrastructure and monolithic legacy architecture in banks struggle to meet the exponential rise in volumes of digital and real-time transactions and innovate with speed. For example, the volume and value of monthly unified payment interface (UPI) transactions in India surpassed the $100 billion value in December 2021 and reached a record $147.4 billion in October 2022. The volume of transactions on the platform outpaces card payments in the country by nearly eight times. The implication of such significant surges continues to cause system outages across banks.

While such an exponential increase in volumes of digital commerce, payments and customers along with rapidly evolving tech may have created opportunities, these have also created infrastructure and scalability related challenges even for the most capable of payment service providers. “We saw during the pandemic, a really rapid acceleration in the movement towards contactless processing and the payment process. That increased volumes which led to scalability issues”, emphasised Mick Fennel, Head of Payments at Temenos.

“As transaction volumes have gone up significantly, what it means for financial institutions (FIs) is that the existing infrastructure which was there, both in terms of application and technology has become slightly older, or I would say, legacy” explained Arvind Swami, Director for Financial Services, APAC at Red Hat.

As core banking needs to run on agile technology, transition to cloud can enable higher flexibility in processing power, greater efficiencies, faster innovation and the ability to scale technologies such as artificial intelligence. Both Fennel and Swami enthused on how the adoption and trust in cloud technology continues to gain traction among the industry. “The ability to achieve scalability and resilience within payment infrastructure has accelerated by migrating legacy systems to cloud”, mentioned Fennel. However, Swami also took the opportunity to caution FIs that instead of “jumping” on to the cloud, they need to have a very clear and a proper strategy for the sake of regulatory compliance. “We observed in the last two-four years that FIs started jumping on the cloud without having a proper strategy, only to realise that it didn’t result in expected growth”, said Swami.

Conversations around too much dependence on one solution provider was also widely discussed in the cloud migration debate. The industry is looking at ways to ‘not put all eggs in one basket’ where multi-cloud deployment may become the norm going forward. “Financial services industry is now looking at how it can deploy a multi cloud strategy. This is to avoid dependency of a single point of failure where you can go from one provider to another”, added Radha Pillay, Regional Sales Director at SmartStream.

All practitioners affirmatively agreed that looking at multi-cloud warrants consideration of interoperability between multiple cloud providers and portability as far as security and sovereignty of data is concerned.

ISO 20022 as a catalyst for payment infrastructure modernisation

The upcoming implementation of ISO 20022 standards in the high value payments (HVP) space is set to unlock a host of benefits for the cross-border payments – from improved compliance processes to creation of innovative products and services. ISO 20022 strives to create an open, inclusive and innovative payment ecosystem- the premise behind payment modernisation in addition to payment digitalisation. For banks, new standards will usher in streamlined compliance procedures, efficiency and ways to increase margins on payments while for businesses, it promises a host of new innovative services and uplifted customer experience

Fennel views “ISO migration as huge catalyst for not just digitisation but process modernisation as more can be done on sanctions screening using data analytics for instance”. The migration of many payment systems to the ISO 20022 messaging standards will generate further momentum towards API and data adoption, given the potential use of a common ISO 20022 data dictionary for APIs. “Ultimately, the industry is trying to harmonise HVP underpinned by a move towards a common data dictionary and a common language”, he added.

ISO 20022 is also significant from a future-ready point of view where bringing ISO into the core of payment systems will generate most value from the existing data, added Silvia Mensdorff-Pouilly,SVP for Banking & Payments in Europe for FIS. While being upbeat on benefits of the shift to new standards, she also foresees challenges that the industry will collectively face during the co-existing period as FMIs and participants migrate from legacy MT to data-rich MX format. “It is a challenging project, because like any payment project, it's kind of equated to heart surgery right, or to kind of rebuilding a train station while the trains keep running constantly”, she commented.

Zooming into the cross-over phase from MT to MX, practitioners also discussed the potential issues around data truncation or loss of data in the payment value chain as one party may fail to run new format in order to pass it to next member. To address these issues, need for bringing in structure and standardisation for effective data sharing is required. Here broader data architectures have a central role to play.

Swami emphasised that moving forward, “As banks and companies continue collect and process huge amount of data, the architecture is going to shift to more data centric form rather than remain application centric”. He exemplified that as regulators continue to demand transparency, this will find a compelling use case in compliance and sanctions screening. “Whatever is happening on the financial side, regulators are going to ask for a lot more information and transparency. The only way you can have transparency is through new data”.

By taking advantage of cloud-native rules coupled with the data available in ISO 20022, the industry is able to better identify potentially problematic/fraudulent payment transactions.

Interest in digital currencies at a new high

Interest continues to significantly mount in CBDC initiatives such as the European Central Bank’s exploration into a Digital Euro. Meanwhile several countries such as China, Russia, South Korea and Thailand are conducting pilots for their respective digital currencies. The US released its executive order on digital assets laying the ground rules for building a digital dollar in September. As per data from Atlantic Council’s CBDC tracker, 98 countries are in process of exploring CBDCs of which 11 countries have officially launched CBDCs.

“CBDCs right now are at the point where it's beyond pilot status, whether you have the digital Yuan or whether now every version of respective digital currency form a host of countries is upcoming”, noted ParvAggarwal, Head of Partnerships for WadzPay. “Governments around the world are on a mission to actually drive CBDCs and to make payment systems more efficient”, added Barry Rodrigues, EVP for Payments Business Unit at Finastra.

Collaborative initiative between Bank for International Settlements (BIS) and central banks of Australia, Malaysia, Singapore and South Africa on Project Dunbar are underway to expedite international settlements using a multi-CBDC platform. Recently, the BIS along with Hong Kong Monetary Authority, the Bank of Thailand, the Digital Currency Institute of the People's Bank of China and the Central Bank of the United Arab Emirates successfully completed a pilot where 20 banks in four jurisdictions used the mBridge platform to conduct 164 payment and foreign exchange transactions cumulative to $22 million over six weeks. The transactions were settled directly on the platform. During the fintech festival in Singapore, MAS launched Ubin+, an expanded initiative to advance cross-border connectivity in wholesale CBDCs.

Take for instance the wholesale case; it would provide commercial banks with a digital representation of existing reserves at the central bank. These find application in real-time gross settlement (RTGS) payments system and thus by core banking systems to perform bank settlement and clearing. “Some markets are at limited sandbox trial where the focus specifically is on wholesale case to CBDC for RTGS. That's actually proven to be very efficient”, highlighted Aggarwal.

As digital currencies become reality, development of technical standards to support cross-border connectivity and their interoperability across platforms using DLT and non-DLT based FMIs will drive transformation in infrastructure for payment systems. “It’s no surprise when we talk to banks as our customers, they are looking at ways to participate in digital FMIs while looking at use cases of CBDCs”, said Rodrigues.

Whatever the case or driver of adoption for CBDC may be, central bank’s design choices driven by their policy objectives will determine the scale of payment infrastructure modernisation going forward. “It depends if central bank wants their users to be able to have a more seamless payment experience, or central banks want to have transparency and control or want more programmability”, explained Aggarwal.

Looking ahead

With payments being the massive growth engine for business transformation, infrastructure modernisation will remain a crucial objective for most payment providers. “Most payment providers are on the journey right now to move the tech stack to be more modernised, to be more modular and to componentise as ways for legacy businesses to transform”, concluded Rodrigues as he spoke about the increased consumption of Software-as-a-Service.

“I see banks now looking to heavily focus on modernisation with the end goal for legacy platforms to rapidly bring new services, new capabilities and partner ecosystem support”, said Richard Harmon, VP, Global Financial Services Industry, Red Hat.

It has become increasingly critical for the financial services industry to keep pace with the customer demand and engage them by building data, infrastructure, and technology that are rapidly scalable and secure. Modern payment infrastructure powered by harmonised APIs, cloud-based technologies and enriched data will enable organisations to not only scale, but also thrive as business volumes spike.