When it comes to payments, data formats mean everything. They are used to exchange information between banks and corporates, and are essentially a common language through which payments can be made. Before the single euro payments area (SEPA), there were many different data formats in place to process payments across different national and European clearing systems, just as there are numerous languages spoken throughout the region. With the implementation of SEPA, a common set of data formats was introduced to allow quick and efficient payments. This is essentially an Esperanto for payments. Not everyone is happy with the proposed messages, yet the deadline for their use is quickly approaching.
The industry has settled on mandatory ISO 20022 (XML-based) payment standards messages and usage rules. This was agreed by the European Payments Council (EPC), an organisation which is made up of banking representatives from across the continent. There was an expectation that the banks would ensure the messages being developed for SEPA would account for the needs of their corporate customers. After all, it is in the interest of the industry to ensure they produce the products and services that suit the needs of those they serve.
SEPA rules stipulate that all payments from corporates to banks must be in XML Payment Initiation (PAIN) formats, although banks can offer translation services through to 2016. The bank then receives the payment and creates an XML Payments Clearing and Settlement (PACS) message for clearing and reports back to the corporate as a cash management (CAMT) message. This works perfectly for the banks, but corporates are facing serious challenges when it comes to the remittance data length fields and end-to-end reconciliation of credit transfers, as their back office systems have been integrated with the legacy payment formats.
The fundamental issue is that the XML messages don’t allow the corporates to include enough information. If we think about the message in terms of a printed invoice, you would expect details of the work undertaken, the contact details of the client, their address, perhaps a purchase order number and VAT details, in addition to the bank account codes and value of the invoice. Yet the information that can be included in the XML PAIN message is shorter than a tweet – less than 140 characters. When it comes to reconciling payments, the information that many corporates need just can’t be included.
The result is that corporates will now have to update their enterprise resource planning (ERP) systems to use XML PAIN messages. The sheer scale of investment required to make this work for businesses such as BP, EDF and other multinational behemoths is staggering.
While SEPA was pitched to the industry as a cost effective and efficient way to make payments throughout Europe, in reality – because of the choice of payment instrument – the time and money required to make it work will be significant. It also comes at a time when the entire eurozone grapples with recession, gross domestic product (GDP) having contracted by 0.2% between April and June 2012, with further declines expected for Q3 and Q4.
To add insult to injury, there is no alternative. Legislation stipulates that from 1 February 2014, banks will no longer be able to process batch payments delivered in any format other than XML PAIN.
Given this situation there is now a stand-off, with both sides waiting for the other to blink. Will the corporates fall into line and do as they are told – whether they like it or not – and invest in their ERP infrastructure, or will the politicians back down? Neither outcome seems likely. Businesses across Europe are cutting costs, not investing, and the politicians want cheaper cross-border payments for consumers, over which they can’t back down after such a slog to get where we are today.
Dealing with the Inevitable Through Payments Hubs
So, as the unstoppable force of SEPA meets the unmovable object of corporate strength, something will have to give. It’s unclear which will win out. Either way, technology investment will need to take place at some point and the banks can make it easier for their corporate customers by offering end-to-end payments systems and services that make dealing with SEPA easier and fit neatly with their ERP systems.
Financial institutions have, to a degree, created this issue, but there is also an opportunity for them to be part of the solution by helping corporates create new direct debit mandates. With the average corporate making thousands of payments every day, moving all these to the new mandates is a huge undertaking.
But to achieve this, the bank itself requires a payments system agile enough to handle all payment types, in any message format, from any channel. That in itself requires investment. Over the past 30 years, banks have invested billions of dollars in creating a payments infrastructure that covers each business unit, channel and service. But as systems and platforms have multiplied throughout the organisation they have become a victim of their own success: siloed and less than the sum of their parts and, ultimately, unable to cater for the needs of their corporate customers. In many cases simply maintaining the status quo has become time and resource intensive. But given that there may be revenue streams from corporates looking for support with SEPA migration, the returns could be worth it for this reason alone.
This is where the concept of payment hubs comes in. A hub is a central platform that breaks down the internal, vertical barriers to integration that plague complex legacy infrastructures. So instead of each channel, payment type or business unit being served by its own individual payment system, a mature hub (or set of hubs) provides a central processing service to feed all channels and all payment types.
Hubs work by processing input data from all wholesale and retail channels and then routing it intelligently to the relevant downstream application, such as cheque clearing networks, automated clearing house (ACH) networks or demand deposit account (DDA) systems. At the same time they provide a single feed to all centrally managed utilities such as risk management, settlement and reconciliation, and customer services, as well as value-added capabilities such as data analytics and product enhancement.
There is no single hub design. Hubs may take a number of forms, including front-end collation of data, middle office reporting and customer service, or back office processing and settlement. But regardless of form, hubs have an essential characteristic that underpins them all: they can enable business agility and therefore support corporate customers and their SEPA requirements.
Creating a hub inevitably involves transforming how payments are managed in a number of ways. The first step is often to collapse the system silos that separate business, operational, customer service, risk management, and fraud prevention. They can then be consolidated into operational units that provide optimal support to payments that are received through any channel. Services and capacity are shared up and down the enterprise and across units, reducing resource requirements and improving the ability to anticipate change.
The challenge of course is that for many institutions, the existing payment infrastructure is so entrenched, so pervasive and with so many touch points throughout their operations that creating an accurate map of what is already in place is daunting enough. The idea of pulling it out and replacing it is almost inconceivable.
So perhaps one of the more significant advantages of a payment hub model is that it need not be the result of a massive, ‘big bang’ replacement project. It is not a question of completely retooling the entire payments infrastructure, or ripping out the entire edifice and starting again. Banks implementing a phased, measured approach will realise success and enable a gradual renovation. It is more of an evolutionary than a revolutionary process. But without taking the first step, the likelihood of banks being able to meet all the demands that SEPA will place upon them from corporate clients and others are diminished.
It’s safe to say that industry players have known about the SEPA XML message problem for a number of years – it is not anything particularly new. But with neither the politicians nor the corporates looking ready to back down on the issue, a solution needs to be found and the banks can step into the fray to help. That will require investment in new payment hubs and new services enabled for customers to help them move to SEPA.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.