The financial services and payments industry is transforming with the shift to digitalization, demand for 24/7 instant payments, and opportunities from the move to ISO 20022 as a global standard.
As often happens, constant change brings the need for greater consistency and control. Regulators increasingly play an active role in normalizing innovation as financial institutions and corporates focus on their core fundamentals, such as friction-free experiences and liquidity optimization.
In a recent conversation, Fiserv experts David Chance, vice president of strategy and innovation, and Andrew Foulds, director of product management for high-value market infrastructures, spoke about these key themes and their potential effects on the payments industry.
Why is liquidity key for treasury departments and what are the benefits for financial institutions and corporates?
Chance: Globally, several key trends are impacting liquidity. First, we are transitioning from a low or negative interest-rate environment to increasing interest rates and cost of capital. And with the move to 24/7 payments, financial institutions don’t have the luxury of an end-of-day cycle. Instead, organizations must manage liquidity to meet the obligations of round-the-clock payments availability. Visibility into liquidity is difficult for financial institutions but necessary to manage these cash flows.
At the same time, regulators are demanding real-time monitoring and reporting. Corporates are asked to manage their cash flows at a fine level of detail, focusing on transactions at the time they come in and go out. Few have the tools to manage that. To remain in business, real-time liquidity management with tighter control and optimization is becoming critical.
Foulds: Financial institutions are tasked with identifying, coordinating and consolidating payments data across siloed systems, partners and correspondents in real-time – and preferably from an easily accessible cloud-based solution. A solution such as that enables financial institutions and their corporate customers to optimize and monetize excess liquidity without adding undue risk to the organization.
Treasury departments and payment operations teams need to efficiently maintain their liquidity buffers, reduce funding costs, and understand when and where liquidity is needed and how it can be sourced. The right technology can help financial institutions facilitate improved, better-informed funding and investment decisions to their corporate customers.
The European Commission said it was going to introduce legislation on instant payments in the second half of 2022. How does that impact financial institutions and the industry as a whole?
Chance: There are discussions about mandating the receipt of SEPA Instant Credit Transactions for all euro payment accounts in the European Economic Area, including the European Union (EU). Currently, financial institutions don’t have to provide an instant payments option. The proposed changes are intended to address the fragmented market for instant payments in Europe and accelerate adoption. Under the proposal, financial institutions would have to provide this receive-only option for corporate and retail accounts.
The benefits of this shift include interoperability between countries, predictability and payments certainty, and reduced risk, among other advantages.
Foulds: The EU does not want to be left behind in the global shift to instant payments. Therefore, the call to mandate instant payments is not surprising. What’s influencing this move? First, the adoption rate by financial institutions is seen as acceptable, but the number of instant transactions is low as a proportion of SEPA payments. Any mandate would be designed to increase adoption.
Second, instant payments will provide an alternative to card networks, currently dominated by U.S. companies. In-country alternatives such as Iberpay in Spain prove that instant schemes can be deployed at a domestic level. But the European policy drive is to link the schemes together to create a pan-European solution.
For financial institutions, implementing instant payments is the easiest part. The heavier lift comes from updating surrounding systems to support 24/7 operations. The EU is comprised of 27 separate countries and therefore many of these payments are seen as cross-border, with associated needs for compliance and sanctions monitoring. Additionally, instant payments affect liquidity, operations, portal accessibility, mobile and personal financial management systems. For institutions with a centralized payments platform, it’s much simpler and more streamlined to manage different schemes.
Financial institutions are increasingly interested in how Fiserv can support them with U.K. New Payments Architecture (NPA). Explain how it will work and why it’s important?
Chance: The U.K. NPA is a proposed way of processing the clearing and settlement of payments made in the U.K. It will replace existing real-time (Faster Payments) and legacy ACH (BACS) payment schemes.
The premise behind the U.K. NPA is to bring the country back to providing a world-leading payments environment. It’s built around the concept of instant credit transfer and reduces risk using prefunded settlement capability. The end goal is to have two payment systems in the U.K.: one for systemically risky transactions through the Bank of England and for all other transactions, U.K. NPA. Currently, the transaction limit for Faster Payments is £1 million pounds, which is expected to move rapidly to up to £30 million under U.K. NPA.
Another key element is providing an environment for innovation through the support of overlay and business services such as request to pay. This allows existing debit services (direct debits) such as the U.K.'s bill payment service to be replaced by request to pay and an instant credit transfer (rather than a debit transaction). The account-holding bank can enable its customers to set up predefined mandates for the bank to follow in automatically making payments.
Foulds: The U.K. may have missed a meaningful payments opportunity with NPA. The NPA project was supposed to deliver a framework for innovative solutions and to open the payments system. Not only has it taken too long, but the scope has diminished along the way. We are now seeing innovation happen outside of the project.
One reason for this descoping could be that a full NPA framework would provide a competitive threat to the cards hegemony. The big financial institutions in the U.K. are being asked to fund the NPA project yet most of them generate a significant amount of retail revenue from their card-issuing services. Inevitably, there will be a lot of pushback.
A Changing Landscape
Financial institutions and their customers will need to be ready to traverse economic uncertainty and a changing regulatory and legislative landscape. Financial institutions that are agile and willing to adapt will remain competitive.