Introduction
In Part 1, we explored the imperative for European banks to embark on payments modernization journeys, focusing on ISO 20022, SEPA rulebook changes, and PSD2/PSD3. Part 2 will delve into the challenges and opportunities that banks face in this transformative process.
Challenges in European Payments Modernization
a. ISO 20022 Migration Challenges
The migration to ISO 20022 faces challenges in achieving timely adoption. As of Sibos 2023, just 15% of outgoing messages are in the new ISO 20022 format, highlighting slow adoption rates. Concerns raised by the Bank for International Settlements (BIS) around local arrangements and potential variations in messaging guidelines across borders add complexity to the migration process.
b. SEPA Rulebook Changes
The 2023 SEPA rulebook changes present a timeline challenge for banks and payment service providers. The transition to a new ISO 20022 version requires urgent planning, with both direct and indirect SEPA participants needing to align with the changes. The Council of the EU’s instant payments proposal adds further pressure, mandating banks to provide instant euro payment services without higher fees, creating compliance and operational challenges.
c. PSD3 and Open Banking Evolution
The proposed PSD3 brings additional obligations for financial institutions, including IBAN checks, fraud prevention measures, and open banking interfaces. Timelines for PSD3 enforcement, expected by 2026, introduce uncertainty. As open banking evolves, balancing convenience and security remains a challenge, particularly in commercial and wholesale banking.
Progress and Adoption of Modernization Efforts
European countries exhibit varying degrees of progress in payments modernization. Germany leads in SCT Inst registration, but challenges persist in driving consumer adoption. The McKinsey Global Payments Report suggests that without regulatory intervention, instant payments could constitute 45% of SEPA’s transactions by 2027. The adoption of ISO 20022 and the evolution of open banking contribute to the complexity of modernization efforts.
The Role of Payments-as-a-Service (PaaS)
a. PaaS as an Enabler
PaaS emerges as a key enabler in navigating the challenges of payments modernization. Offering a cloud-based delivery model, PaaS streamlines processes and facilitates cost-efficient management of payments. European institutions demonstrate a strong appetite for cloud-based solutions, with a significant percentage planning increased budget allocations for payments modernization in the next 12 months.
b. Addressing Interoperability and Agility
The need for interoperability becomes paramount in the evolving financial landscape. Institutions leveraging PaaS solutions emphasize the importance of agility and flexibility. PaaS allows banks to start small, redefine productivity, gain a competitive advantage, and find the right partner, as outlined in the recent webinar by Finextra and Volante Technologies.
Conclusion
European banks face a complex landscape in their payments modernization journey, marked by ISO 20022 migration, SEPA rulebook changes, and evolving regulatory frameworks like PSD3. Despite challenges, opportunities arise with the increasing adoption of cloud-based solutions, particularly Payments-as-a-Service. The next steps for banks involve strategic planning, agile execution, and a commitment to innovation. As the financial landscape continues to evolve, the successful modernization of payments systems becomes a critical factor in staying competitive and meeting the evolving needs of consumers.
Final Thoughts
The necessity for European banks to embark on payments modernization journeys in response to digitalization and evolving consumer demands is only increasing. The adoption of ISO 20022 and the SEPA rulebook changes for 2023 pose complex challenges, emphasizing the need for prompt corporate customer engagement.
We are seeing variations in payments modernization progress across European countries, and PaaS has emerged as a pivotal tool for banking transformation, offering cost-effective cloud-based solutions. European institutions are increasingly looking to implement cloud-based payment infrastructures, indicating a growing appetite for these solutions.
In a rapidly evolving financial landscape, European banks face the imperative of modernization to meet consumer expectations and navigate regulatory changes, with PaaS emerging as a key enabler of this transformation.
To learn more about navigating challenges in European payments modernization, download our whitepaper “What should European Banks prioritise in their payments modernisation journeys?”
