Reimagining digital payments in 2022

What’s new in the evolving world of payments?

There was a time when cash was king. Since then, the lightning pace of innovation has transformed how we transact money, and enabled us to purchase items and send payments to someone on the other side of the world in a matter of seconds.

COVID-19 has helped speed up the pace of digitisation, and in turn, the growth of digital payments. Amid global lockdowns, many have turned to making payments through their mobile devices. Businesses too, large and small, find themselves having to go digital almost overnight.

This has given rise to a quantum shift in customer expectations of their banking experience, particularly in Asia, home of financial services disruptors such as Alipay in China, and GrabPay in Southeast Asia. Speed, safety, transparency, and seamlessness in banking services and products are no longer a nice-to-have, but a necessity.

There has also been a big push towards improving cross-border payments through industry initiatives like SWIFT gpi, which was developed to provide a seamless cross-border payments experience for customers and banks. Financial services providers realise that the ability to quickly adapt to changing circumstances while maintaining a high level of service is crucial to staying ahead of the digitisation curve. This is especially so in Asia where the speed of digitisation outpaces most other parts of the world.

Here are a few key considerations for the financial services community in the new year.

Collaboration powers innovation and drives inclusion

The use of open application progamming interfaces (APIs) has been core to many banks’ open strategies. It allows financial services providers to share financial data with other businesses and sectors such as small and medium sized enterprises (SMEs). This in turn lets them co-create and deliver a wider variety of more innovative products and services, in a region that is home to 290 million unbanked individuals.

One of the panel discussions at Sibos 2021 looked at how banks could create structures and payment ecosystems that offer access to different providers and enable new players to emerge. The panel also discussed the role of businesses in creating economies that will thrive and become more inclusive in the future.

Thanks to the extensive digital ecosystems that operate throughout the region, and consumers’ willingness to share data, Asia has established itself as a leader in open banking. As transformation plans become increasingly omni-channel across the financial services landscape, physical presence alone is not sufficient to keep up with consumers’ banking demands.

Banks are also catching on that open banking contributes to a more inclusive financial landscape. Those that were deeply entrenched in non-digital processes have started to review and change their business models. For example, China has launched a new scheme in which the People's Bank of China (PBOC) will provide capital to local banking institutions to encourage them to lend to small businesses. Similarly, the Cambodian government has also launched a co-financing scheme in which the state-run SME Bank will offer $250 million worth of loans to SMEs around the country.

Is your data locked and loaded?

As part of their transformation journeys, many banks have also prioritised a digital-first strategy, and are either in the process of or intending to adopt emerging technologies to drive automation, decrease processing times and mitigate financial crime risks. But for these plans to be realised, they first need to recognise that the key to successful digital transformation is not in acquiring the newest systems, but ensuring the quality and security of data.

As more consumers turn to digital payment platforms, banks must ensure that customers’ data is secure. This will involve managing different standards of security and compliance across different countries and regions.

It is clear that banks are on the right course for the future, but if they want to support an enhanced and optimised payments experience, they will need to collect, analyse, and aggregate richer, higher-quality, and structured data.

Paving the way towards payments standardisation 

One way of achieving this is ISO 20022. The structured customer data of ISO 20022 messages allows financial services providers to gather valuable insights of their customers. This means that banks can understand the customers on a deeper level than ever before, allowing them to innovate faster by providing new and targeted products and services to keep up with the ever-shifting financial landscape. Following this uniform format, banks will be better positioned to eradicate false positives, which helps to reduce their costs and increase their straight through processing (STP) rates.

This is beneficial for banks when it comes to meeting compliance needs in international payments. The requirements to initiate such payments are generally higher, and the rich data derived from ISO 20022 decreases the incidence of delays.

Partnerships – the cogs in the FSI ecosystem

With the opportunity to synthesise data from multiple sources, ISO 20022 will allow financial technology (fintech) companies to collaborate with banks to provide highly customised services to clients, or to explore multiple markets while building on a singular development effort.

However, it is important to note that ISO 20022 migration and adoption not only affect IT systems, but also business rules and process workflows. This is a prime opportunity for banks to rethink their partner ecosystem, and how they can effectively transform their processes and culture to adopt an open banking strategy that is well-planned, efficient, and effective.

The Sibos panel concluded that with customers expecting digital payment services to be hyper personalised, seamless, and transparent, banks must keep in mind that this cannot be achieved by any one institution; instead, it must be adopted in a coordinated way across the payments ecosystem.

In this time of change, banks should consider how they can “create structures with private and public organisations that enable innovation to happen while consumer meets are being met”. They should consider where the gaps in core skills and capabilities are within the bank – regardless of changing customer preferences, regulatory environments, and technology – and how they can fill these.

Banks should also approach efficiency in a logical manner and ask themselves “Is it faster to build [these products and services] ourselves? Or is it faster for one to work with an external partner that brings a unique skill set?”

One small step for banks, a giant leap for the financial services industry

While the payments landscape has digitally transformed in leaps and bounds, the coming few years will be even more defining for the sector as financial institutions work to adapt better to the pandemic. ISO 20022 prioritises data richness over previous industry constraints, engendering an evolution that will catalyse the payments industry by enabling efficient and successful transactions and data driven insights from the global financial industry.

As banks and other financial institutions look to capitalise on payments data to drive value for clients, the key challenge will be to rationalise the current medley of standards and proprietary formats used around the globe in an efficient and strategic manner.

When considering the next step towards better and more efficient banking, it is crucial to note that the standard is not a silver bullet. Simply following ISO 20022 will not be enough to catalyse the change banks wish to experience. Banks need to collectively think about resilience and security, what these really mean to them as financial service providers, and how they will deliver their services and products with these considerations in mind.