There’s no time to rest for financial services. The unstoppable wave of innovation and change that the industry is riding is showing no signs of abating, thanks to new challenges and opportunities such as T2+T2S Consolidation, GDPR, PSD2, Instant Payments, open banking, SWIFT gpi, and blockchain. Each topic cannot ignore the others, giving life to a chain of opportunities and creative solutions where new actors on the scene, i.e. fintechs and vendors, will potentially cooperate together with financial institutions to satisfy the industry’s new business and technology demands.
Instant Payments ready to kick off in the Eurozone
The imminent launch of the SEPA Instant Scheme in the Eurozone will most likely confirm that innovation becomes a need only when it is accessible to users in a cost-effective way. At present individual ACHs in the Eurozone are delivering their Instant Payment scheme on either domestic or regional level. However, these systems have revealed a weaknesses in creating a technical bridge between them for interoperability. In other words, two banks both adhering to the same EPC defined Instant Payment scheme but connecting through different ACHs, will not be able to transfer payments instantaneously for their customers. This is disappointing news for an initiative meant to leverage on the principle that no border nor obstacle should exist amongst the EU participant countries.
Additionally, the banks’ strategy is to avoid the need of connecting through different ACHs, giving the effort and the investments forecasted to comply with the SCT Inst technical standards.
On the other hand, the European Central Bank is in the middle of a significant transformation, which started two years ago with the (successful) migration of all post-trading settlement activity into a single platform, best known as T2S. The goal of the “Consolidation” project is to centralise all existing ECB activities into a single platform, while adopting ISO20022 as unique standard, and to strengthen the current offer by adding TIPS, a new platform to process Instant Payments on a 24/7/365 basis.
The real value added benefit that puts all competitors out of the Instant Payments race, is that all positions held on TIPS cash accounts will be included in the Bank’s Maintenance Reserve. As a result, users will be able to access to their post-trading, RTGS and Instant Payments activities through a single gateway. In addition, the ECB is pushing to act as the missing technical bridge amongst all SCT Inst participants who connect through different ACHs, by just opening an account in TIPS.
In other words, ECB will deliver an interoperability model in the EU SCT Inst scenario, if banks adhere to both TIPS and ACHs, and the ACH adheres to TIPS to act as Bank’s Instructing Party. Duality on the Instant paradigm seems to be inevitable and banks cannot miss the chance to bring business value to their customers, building on retail instant payments and open API-based payment initiation.
The evolution of correspondent banking
When BCBS first introduced the Intraday Reporting initiative for both LVPS and Correspondent Banking activities, most Banks had to face the harsh reality of the correspondent-banking world: where is all data? When currency payments are issued through the (long) chain of bookings from one bank to another, where can we find the evidence and, most of all, how do I keep customers on track? The standard practice only implied an issuing of end of day statements due to lack of capabilities or bearing the internal cost of sending intra-day statements.
The existing model has proven to be no longer applicable in the digital age where customers are demanding the ultimate degree of visibility and reconciliation. Many banks have shrunk their correspondent banking agreements around the world by applying a ‘’regional’’ strategy and maintaining relationships only in key locations, mostly dictated by KYC costs. With the introduction of BCBS 248 standards, many banks started managing intra-day notifications, clearing up some of the fog around Nostro accounts activities. On the Corporate side, the SWIFT gpi initiative aims to deliver improved services for end-users including the speed, traceability and transparency of correspondent banking. The gpi has quelled rumblings of exploring new opportunities around the use of distributed ledger technology (DLT) to speed up the reconciliation of Nostro accounts. While GPI seems to have gained concrete positioning, DLT is still struggling to find its spot on the market.
Getting involved in the current market initiatives and contributing to the evolution of the existing business models is crucial for companies like TAS. The results of the latest research conducted with CeTIF (The Research Center on Technology, Innovation, and Finance of the Cattolica University of Milan), involving Heads of Treasury of the most representative Italian Banks, showed that liquidity management has increased its level of efficiency by welcoming new opportunities such as the ECB Consolidation project and a full adoption of ISO20022 standards. Market leaders have already adopted a strategy for the Instant Payment initiative; others are still evaluating how the users will respond to the new trends.
The SCT Inst go live means a big step forward in the retail payments world; bank treasurers will need to rely on technology like never before, especially concerning liquidity forecasting activity. Best practice will be hard to consolidate given the end-user behaviours, and treasury dashboards will need to be equipped with smart engines enabling automatic re-balancing mechanisms on accounts to facilitate funding and defunding processes overnight and enabling real-time monitoring of domestic and cross-border financial transactions across instruments, systems and channels.