PREPARING FOR PSD2: EXPLORING THE BUSINESS AND TECHNOLOGY IMPLICATIONS OF THE NEW PAYMENT SERVICES DIRECTIVE

FROM BACKWATER TO WILD WATER: STRATEGIES FOR SUCCESS IN PAYMENTS TRANSFORMATION

A FINEXTRA WHITE PAPER PRODUCED IN ASSOCIATION WITH VOLANTE TECHNOLOGIESJUNE 2016

01 From backwater to wild water.................................. 3

02 Drivers for change in payments ................................ 4 03 The integration challenge ....................................... 6 04 The requirements of the digital payments age ............ 7

05 How to begin .......................................................... 8

06 Payments transformation made easy ........................ 9

07 Controlling your own destiny ..................................10

08 Conclusion ............................................................12

09 About ...................................................................13

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01FROM BACKWATER TO WILD WATER: STRATEGIES FOR SUCCESS IN PAYMENTS TRANSFORMATION

For decades the payments industry has been a relatively quiet backwater, with “a payment is a payment” a common refrain. Stability and reliability were deemed to be the main virtues of the systems supporting the payments industry. Banks and their corporate clients operated large and complex systems that were focused on processing; innovation and change weren’t often discussed, and payments were not seen as a means of achieving competitive differentiation or client retention.

But ever-larger waves have been appearing in this payments backwater. The impact of transformative technologies in the retail space is spilling over into the corporate payments world and challenging banks and corporates. Consumer expectations of service and speed, fuelled by digital technologies, are now being echoed by corporates. This is happening against a backdrop of rapid change, where new standards, payments flows, payments types and relationships are quickly developing. At the same time, financial institutions must deal with a growing body of complex regulation – regulation which is expanding its remit ever further to encompass the corporate world.

Banks need systems that will enable them to meet their regulatory obligations and their customers’ demands, as well as respond to new business opportunities. They also need to achieve this agility quickly: otherwise in a timespan of just months, systems can become legacy. Corporates also need systems that can grow with them and enable them to reap the opportunities available in the new payments era. Legacy payments systems are simply not agile enough to keep up with the rapidly changing payments environment. The question is, how can banks and corporates achieve agility quickly, cost-effectively and without compromising the resilience of their payments infrastructures?

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04 Banks and corporates face myriad pressures in payments as changes emerge on a variety of fronts. These drivers can be broken down into fundamental issues of responding to external regulatory or technology change, or goals related to improving the bottom line by increasing either productivity or releasing revenue streams more quickly. Simply put, it often comes down improving the flow of information or data in a timely and accurate fashion.

Pressures include:Volumes: Global non-cash payments are doubling every ten years. Non-cash transaction volume reached 358 billion in 2013, an increase of 7.6% over 2012 . In 2014, totals are expected to reach 389.7 billion. Both developed and emerging markets experienced non-cash volume growth, the latter markets steadily increasing their share and outpacing developed markets.

Channel diversity: There has been rapid development of new payments channels during the past decade. Electronic commerce is now firmly established. Worldwide B2C e-commerce sales are estimated to grow to 2,356 billion by 2018, more than double the total in 2012. As banks and other organisations continue to develop new apps to create seamless payments for consumers, the volumes of mobile payments transactions will increase. These volumes will increase further still as the plethora of new payments mechanisms is adopted by corporates as well as consumers. Additionally, alternative payments channels, such as bitcoin, Ripple, PayPal, Dwolla and Square, have also entered the fray.

02DRIVERS FOR CHANGE IN PAYMENTS

Improving the flow of information is often critical

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Clearing: The market infrastructures supporting payments are evolving, with a clear drive to support real-time payments. Around 18 initiatives have been rolled out globally, including Faster Payments in the UK, FAST in Singapore, NIP in Nigeria and Elixir in Poland. Again, this is a trend that will start in the consumer space and spread to the corporate space. Infrastructures globally are also migrating towards XML-based ISO 20022 standards. Payments modernisation initiatives have also occurred on a regional level, such as the Single Euro Payments Area (SEPA) and the Southern African Development Community (SADC).

There are also a number of additional ongoing themes being tackled by banks and corporates. New regulations are requiring improvements in the areas of fraud management, real-time reporting, know your customer (KYC), standards compliance, sanctions monitoring and risk exposure monitoring. From a business angle, firms are seeking greater efficiencies, competitive offerings, market agility, improved analytics, stability and reliability, and performance. Their customers, however, can have slightly different priorities, and are seeking greater transparency, access to information, real time updates, flexibility and availability of channels, efficiency of processing and attractive pricing.

One development in Europe which clearly has the potential to push banks and their customers in different directions is the forthcoming revised Directive on Payment Services (PSD2). Though the majority of the public discussion around PSD2 to date has been focused on consumer payments, the principles of account holding entities (banks) being required to make account information available via open APIs to other providers of payment and account information services apply in the corporate world as well. PSD2 adds a dimension both to the demands corporates will make of banks, and the pressures banks face to revamp their payments infrastructures.

1World Payments Report 2015, Capgemini and Royal Bank of Scotland2B2C e-commerce sales worldwide from 2012 to 2018, Statista, 2016

PSD2 adds to the pressure banks face to revamp their payments infrastructures

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06 Data integration is the major obstacle in the way of payments transformation. Payments flows typically occur between processing systems or between internal systems and external parties such as customers, clearing and settlement mechanisms, payment services providers and regulators.

Most banks and corporates will have implemented multiple software applications that enable their business activities. In the case of global organisations, this may amount to many hundreds. Whatever the requirement for an organisation to operate efficiently, the applications have to share information as part of the overall business process. To complicate matters further, no organisation works in isolation, so a portion of that application data must be exchanged with external parties.

To add further complexity, customer behaviour is changing. A decade ago, internet banking had only just started and traditional front, middle and back office systems dominated payments architecture. Now customers use mobiles, tablets and real-time information. The systems that were built a decade ago were good at performing their specific tasks, but it has proved a challenge to integrate these new devices into payments systems.

The result is that each bank has its own systems landscape that has been tweaked in order for all systems to work together. But the question now is can these systems – which took many years to implement – accommodate

emerging demands such as real-time and Open Banking APIs?

In a challenging environment, a technology infrastructure can be make or break for many organisations. Banks and corporates without a payments architecture that enables technology agility will face increasing

costs and slower times to market. In taking a best practice approach to payments transformation, an organisation should consider whether it has

the right tools to manage the changes that are taking place in the payments industry.

03THE INTEGRATION CHALLENGE

It is not easy to integrate new devices into 10-year-old payments systems

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07Banks and corporate central treasuries in the rapidly evolving digital payments age have four main requirements: speed, flexibility, transparency and lower costs, and secure processing and certainty of delivery. In order to meet these requirements, the following capabilities should be considered:

Speed: Rapid on-boarding, standardised products, scalable architecture and ability to adapt quickly to change (for example regulatory requirements, emerging business opportunities, aggressive product creation and launch plans).

Flexibility: Configurable business rules, configurable workflow, special instructions, management information

Transparency and lower costs: Intuitive exception handling, STP and enrichments, regulatory changes, intelligent routing.

Secure processing and certainty of delivery: Resilience, entitlements, real-time alerts/notifications, audit

Such a list is daunting, particularly in an environment where returns on investment are now counted in months, rather than years. It is essential from the outset of any payments transformation project that there is a clear understanding of the reasons for embarking on the project.

04THE REQUIREMENTS OF THE DIGITAL PAYMENTS AGE

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08 There are many drivers of any integration project, whether it is strategic across the organisation or tactical within a line of business. These include many of the requirements described above: regulation, the provision of new services, legacy systems replacement, improvements in customer service, improvements in efficiency and straight-through processing, facilitating geographical or application/data consolidation, or implementing big data technology.

If an organisation doesn’t understand why it is embarking on such a major undertaking and is unable to at least quantify the benefits in terms of cost savings, operational efficiency, increased revenues or customer satisfaction, then budget sign-off is unlikely to be forthcoming. It is essential that not only is there a clear vision of what the project is going to achieve, but also of the criteria for measuring success (both on an ongoing and end point basis).

After assessing all the requirements and arriving at a candidate architecture an organisation has four options: do nothing (if the numbers do not justify the investment), build your own, select a supplier to work with, or combine the latter two. Most product buying decisions come down to cost versus functionality. However, it is equally true that choosing the cheapest product is often a false economy.

05HOW TO BEGIN

TOOLS TO MANAGE PAYMENTS CHANGE• INTEGRATING DIFFERENT DATA FORMATS AND STANDARDS• VALIDATING AND ENRICHING DATA • PAYMENT CHANNELS INTEGRATION• PAYMENTS PROCESSING ORCHESTRATION • PAYMENT HUB INTEGRATION TO INTERNAL SYSTEMS• INSULATION FROM TECHNOLOGY CHANGE (FOR EXAMPLE BLOCKCHAIN AND OPEN

APIS)• TESTING AND DOCUMENTATION• AUTOMATION OF UPGRADES AS STANDARDS CHANGE TO REDUCE ONGOING COST OF

OWNERSHIP

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09Successful transformation projects recognise the need to combine IT expertise with business expertise. Banks and corporates looking for solutions to support payments transformation should focus on tools which enable business analysts to create specification documents for integration functionality which then themselves generate the actual code and documentation required.

This significantly shortens the traditional cycle of an analyst writing requirements and then taking them to a developer for interpretation. The documentation can be useful in two ways. First it can be used for customer specification sign-off in the case of for example a corporate on-boarding to a commercial bank. Second it can be used as an up-to-date system functional definition document for internal and audit use. Often the latter, an important element, is overlooked as a low priority in the heat of the moment of finalisation and implementation, and becomes a potential source of operational risk in the event of future problems.

Testing is simplified too: so what has been created can be very easily simulated and tested to ensure that it performs as designed and intended.

In addition, transformation projects can be greatly simplified by the use of solutions which allow the creation of an integration layer for the management and control of all integration and dynamic changes. The combination of this layer insulating core applications from the complexity of change and the ability for business users to validate, integrate, translate, enrich, process and orchestrate payment messages through configuration rather than coding means banks can evolve their payment infrastructures and accommodate change in a controlled manner.

06PAYMENTS TRANSFORMATION MADE EASY

Banks should focus on tools which empower business analysts

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10 Traditionally, implementing a payments system from a third-party vendor has the disadvantage that changing it can be expensive and invasive. The customer has to request an enhancement from the vendor, wait a considerable time, pay a chunky fee, and then, once it is implemented in the core system, perform extensive regression testing.

There is an alternative approach. It is possible to work with a vendor offering a ‘self-service’ model. The vendor provides training and mentoring during the bedding in of the technology and when necessary – such as when an urgent regulatory deadline has to be met – can step in to help out, but the goal over time is that as the customer’s users become more and more familiar with the solution and move towards self-sufficiency.

In this model, the structure of the solution and the skills needed to operate it in order to create solutions to take advantage of commercial opportunities or comply with changes in standards or regulation can be managed in a business-led approach – rather than through an IT project-based approach. The need for coding is kept to a minimum and for the most part solutions can be created and modified through configuration rather than coding. This – together with the automated code and documentation generation and inbuilt test simulators mentioned above – enables the entire experience to be led by business analysts at the coalface rather than IT and software development departments.

So for example, a tier one bank looking to put in place a core banking system for its entire banking division could use such a solution for mapping all of the API requirements of its third party systems within the integration layer. The core banking system remains untouched - and APIs for Ripple and Open Banking, as examples, are handled in the same way

as other ‘plug ins’ for integration.

07CONTROLLING YOUR OWN DESTINY

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An approach which combines an insulating integration layer (thus avoiding the need to change core systems) with self-service is potentially disruptive and certainly has clear advantages, not the least of which is financial – since the services element of a systems implementation can weigh in at anything from between five and eight times the licence cost.

In short, following this approach banks (and corporates) can reduce the time to onboard and integrate new payment flows, shorten time to market (and revenue) for new services, minimise the burden of managing multiple and changing formats and cut the cost of implementation and ongoing development activity. They can insulate their core systems from the complexity of external change and focus on being competitive in their marketplaces – and in a position to quickly take advantage of business opportunities that they had only considered and not taken action on previously.

For banks, more rapid onboarding of a broader range of corporate customers also becomes a possibility. If onboarding can be business process (rather than technology project) led, with the integration and transformation of potentially disparate data formats performed quickly and cost-effectively, then banks can afford to bring on board corporates they may formerly have thought too small to justify the integration effort, and they can unlock these new sources of revenue much sooner.

LocalClearing

ACH

CustomersBillingFundsCheckFXAccountingReports

ExternalSettlement

External Channels/ source and

target

Ancillary Support systems

Internal Payment Transaction Sources

LocalClearing

RTGS

RegionalClearings &

Memberships

SWIFT

Blockchainbased CSMs

Mobile

Internet

AML

Branch

Cards

ATM

StandingOrders

DirectDebits

Loans Treasury Trade Securities

H2H ChannelHub

Rapid standardization of processes and workflows through business rules controlling payment flows from acquistion to delivery

Managing the integration layer with comprehensive message formats and transformations library including Open API and Blockchain integration

Rapid customer Host to Host onboarding using streamlined guided configuration and access to a rich library of message formats

Insulating core systems from complexity of external change increases agility

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In the current environment, payments transformation is a necessity, but no player can afford to reinvent the wheel to achieve it. Speed, cost-effectiveness and safety must be the watchwords, and in this context it makes sense for banks – and corporates – to seek out partners with the right expertise in financial messaging and payments integration and processing. They should have proven experience of implementing best practice payments architectures, with an insulating integration layer and off-the-shelf plug-ins to handle the ever-growing range of standards, channels and APIs that must be integrated. It should also operate with a business model that does not depend on extracting ongoing services revenue, but rather encourages customer self-sufficiency, with the ability to be cost effectively agile in business through implementing changes in weeks rather than months, or months rather than years for larger payments transformation projects.

Change will continue, but by insulating systems from that change, firms can achieve the agility they need in their infrastructures to successfully navigate the increasingly choppy waters of the payments business.

08CONCLUSIONTarget payments architecture

LocalClearing

ACH

CustomersBillingFundsCheckFXAccountingReports

ExternalSettlement

External Channels/ source and

target

Ancillary Support systems

Internal Payment Transaction Sources

LocalClearing

RTGS

RegionalClearings &

Memberships

SWIFT

Blockchainbased CSMs

Mobile

Internet

AML

Branch

Cards

ATM

StandingOrders

DirectDebits

Loans Treasury Trade Securities

H2H ChannelHub

Rapid standardization of processes and workflows through business rules controlling payment flows from acquistion to delivery

Managing the integration layer with comprehensive message formats and transformations library including Open API and Blockchain integration

Rapid customer Host to Host onboarding using streamlined guided configuration and access to a rich library of message formats

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09ABOUT

Finextra This report is published by Finextra Research.

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Finextra’s unique global community consists of over 30,000 fintech professionals working inside banks and financial institutions, specialist fintech application and service providers, consulting organisations and mainstream technology providers. The Finextra community actively participate in posting their opinions and comments on the evolution of fintech. In addition, they contribute information and data to Finextra surveys and reports.

For more information:Visit www.finextra.com, follow @finextra, contact contact@finextra.com or call +44 (0)20 3100 3670

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14 Volante TechnologiesFounded in 2001, Volante Technologies is a global leader in the provision of software for the integration, validation, processing and orchestration of financial messages and data and payments within financial institutions and corporate enterprises. Volante is dedicated to helping firms manage challenges in this domain with greater ease so that they can focus on the business of being competitive in their marketplace. Volante serves a growing client base of more than 80 financial institutions and corporate enterprises operating in 26 countries around the world, including several of the largest global financial organizations. Many clients use Volante to assist with multiple product implementations ranging from message transformation and integration, through to the processing and orchestration of transaction data and payments. Along with its products, Volante Designer, VolPay Foundation, VolPay Channel and VolPay Hub, Volante constantly maintains a growing library of over 85 domestic and international financial industry standards plugins. These standards include; SWIFT MT and MX, ISO 8583, FIX, FpML, EDIFACT, ISO 20022, SEPA, BACS and Fedwire, and proprietary formats based on XML, CSV and Fixed Width. Volante’s financial message plugins are further augmented by more than 250 prebuilt, customizable, bidirectional transformations to and from these standards. Supported by offices in Jersey City, London, Dubai, Mexico City, Hyderabad and Chennai, Volante solutions are employed by a diverse set of organizations, including buy-side and sell-side capital market institutions, banks (universal, commercial and retail), corporate treasuries, financial industry utilities, clearing houses, exchanges, systems integrators, application vendors and corporate enterprises. By working with a global and diverse client base Volante is able to encapsulate a best practice approach into all its product lines.

For further information please visit: www.volantetech.com

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