Volante Insights

Financial Markets News - Q4 2017/Q1 2018

Following the theme of previous newsletters, there continues to be exciting developments in the global payments industry. While the European market waited for the go live of the pan-European EBA Clearing SEPA Credit Transfer Instant (SCTInst) RT1 platform, it was the US RTP system from the Clearing House (TCH) that drew the industry’s attention going live a week earlier.

Working closely with TCH, Bank of New York Mellon led the push for this ground-breaking new payments infrastructure and was the originator of the first live payment over the new network. Volante is excited to be at the forefront of the adoption of real-time payments processing both in the US and across the globe.

With the RT1 system going live, coupled with its connections to a number of domestic real-time payment systems, it enabled over 500 European institutions to send pan-European instant SEPA credit transfers.

In Europe, the push towards an open banking environment continues apace with the UK Open Banking regulations now fully live and PSD2 entering into force on January 13th, 2018. For PSD2 however, European-wide implementation of open access to customer account is likely to take much longer as banks absorb the rules on strong customer authentication (SCA) and standards for common and secure communication (CSC) following final publication of regulatory technical standards by the European Commission in November 2017.

Following EU Parliament and Council review, and ratification likely in March of this year, there will be an 18-month period for banks to implement. Debate continues as to what open banking API standards will emerge as the common “standard” with various industry groups publishing APIs that will adhere to the Regulatory Technical Standards (RTS). However, technical challenges aside, with apparent widespread consumer scepticism of the very nature of financial data sharing, the rollout of widespread open banking services may take some time.

On a similar regulatory note, following a year postponement, the capital markets MiFID II / MiFIR regulations finally went live (January 3rd 2018). However, with only 11 of 28 member states having transposed the regulation into their domestic law, and a number of leading exchanges being given exemptions relating to non-discriminatory access, the adherence and compliance to the new rules, particularly on transaction reporting, is somewhat muddled. It appears that organizations across the industry are still struggling to be compliant with the increased level of transaction scrutiny the regulation requires.

Finally, a word on the cryptocurrency price boom widely reported at the end of 2017. Bitcoin has seen a meteoric rise in 2017 peaking at $20,000 from around $1,000 at the start of 2017 and, despite some correction at time of publication, it’s price has been fluctuating around $10,000 (defying some of the expectation that this was a bubble-like rise). Perhaps more impressive was the boom for Ripple’s bridging cryptographic token XRP rising over 3,000% in value during 2017, becoming the 2nd largest cryptoasset. (Ripple’s efforts to create an alternate mechanism for international payments for banks, as well as their public efforts to work with national regulators and closely with its financial institution users, suggests that it has a chance of eventually surpassing Bitcoin as the leading digital asset).

Though the cryptocurrency boom is largely being driven by private venture and is somewhat unregulated, national authorities continue to investigate how use of a national digital currency could be of value to financial markets. A notable example being the Monetary Authority of Singapore (MAS) working with R3 and a number of vendors to investigate the use of DLT/blockchain tech for interbank payments The chances of DLT being adopted as an established mechanism for interbank payments appears to be much closer.

Realizing the benefits of Open Banking

In 2017, Volante Technologies entered into a partnership with Open Vector, the advisory firm providing open banking consultancy services to some of the world’s largest banking organizations. The partnership is designed to offer banks a joined-up approach for enablement of Open Banking – expertise in advisory and consulting on the legal and procedural aspects of Open Banking through to the agile technical enablement of the bank’s internal systems integration with Open Banking APIs. In this article, Open Vector’s CEO, Carlos Figueredo, shares some of his thoughts around a changing sentiment towards Open Banking.

Growing momentum

One of the clearest observations I can make in the early part of 2018 is a distinct change in sentiment towards the understanding, acceptance and adoption of Open Banking. Clearly regulation such as GDPR and PSD2 have acted as catalysts for adoption in the UK, but the interest we are now witnessing from other regions is particularly telling as they too, realize that harnessing and adopting an Open Banking approach presents opportunities to create new offerings, differentiate competitively and grow revenue.

Increased innovation

While navigating regulation has been a key focus for banks, corporates and fintechs, so too has innovation. It has been interesting to note that it isn’t just the traditional banks that have had to re-visit, revive and enhance their systems but also the more nimble, challenger fintechs as they look to become new entrants into a traditionally bank-owned space. The original aim behind the CMA’s drive towards Open Banking - to share data, introduce choice for the end user and open up the space to fintechs by levelling the playing field somewhat, has required an unprecedented level of innovation which I don’t believe we have seen on such a scale since the introduction of credit cards in the 1950s

Taking a dual approach to your Open Banking strategy

Putting the benefits of Open Banking to one side however, there are still technical challenges when looking to implement an Open Banking strategy; whether your organization needs to flexibly connect to API components; integrate those APIs to the plethora of internal specialized banking processing applications or; whether coexistence capabilities are required. Whatever your challenge, I strongly suggest that your organization not only tools up to overcome these challenges in an agile, rapid and cost effective way, but also ensure you have the right level of access to strategic expertise. Adopting such a dual approach will undoubtedly make your organization’s Open Banking journey an easier one.

Stepping into the future of standardization with ISO 20022

ISO 20022 is a subject that I am very familiar with, having been a contributor to the standard since its inception and having written many articles and white papers on the benefits and challenges around the adoption and implementation of this standard.

ISO 20022 has been around for more than a decade and for most of that period it has been viewed by much of the financial markets as something that is nice to have, but without a compelling event driving adoption. This has now changed and it would seem that the compelling event was the mandating of ISO 20022 messages for SEPA. It may be a coincidence, but it does appear to have been a tipping point. Once a large number of firms were required to adopt ISO 20022 for a specific part of their business, it then became a case of finding areas to reuse the same logic given that much of the processing can then be shared across asset classes.

This is especially true in the payments world where many of the world's payments infrastructures, such as domestic ACHs, have used highly proprietary message standards for decades. Over the past couple of years, many ACH and RTGS infrastructures have, or intend to, migrate to ISO 20022-based messaging. The rapid increase in the creation of Real-Time or instant payments has further increased adoption of the standard with pretty much all schemes adopting it across the world. The standard is also being adopted by many banks as the standard approach for onboarding clients’ payment initiation instructions and cash management requirements.

Within capital markets, adoption is also gaining pace. Investment funds largely migrated to ISO 20022 a number of years ago with respect to SWIFT messaging, followed by T2S also going live recently with an ISO 20022-based architecture. New regulation has also seen adoption with, for example, those emanating from the EU now mandating ISO 20022 as the only allowable message format across all new regulations such as MiFIR, SFTR, MMSR and CSDR.

The pace of change is such that ISO 20022 can now truly be said to be the de facto global messaging standard for the financial services industry.

Standardization of messaging will, at a stroke, cut enormous cost and risk across the whole market by enabling a consistent approach to structuring information, which in itself enables greater STP and agility in onboarding clients, trading partners, and communicating with clearing and settlement venues and regulators. It will not, however, achieve these high objectives unless organizations are able to integrate the data internally and pass it through to the next processing recipient in real-time. This challenge is however, more than simply understanding the basic messages but also the fact that implementations of the same syntax vary given different context such as, which scheme is implementing them. Fortunately, with Volante’s ongoing and proven commitment to providing technology supporting the automation of ISO 20022-based integration in a maintainable fashion that reduces the cost of implementation and ongoing ownership, this goal is achievable for any type of firm.

I have recently updated a very popular Volante white paper I created a few years ago entitled ISO 20022 - A simple guide to a complex subject. Feel free to download this new edition here. I hope this will act as a valuable resource as you carry out work around the ISO 20022 message standard.