Payments Technology: It’s a People Thing

by Susan Colles, Senior Vice President of Global Product & Channel Solutions, Bank of America Merril Lynch
If you’re looking for an example of fast-track technology progress, you’re in the right place; payments technology is currently buzzing. Here’s a business segment that has changed almost beyond recognition in the past five years, with rapid adoption of ISO 20022 just one example of this. But amidst all the technology it’s easy to lose sight of the equally vital human expertise that is essential to keeping payments flowing. This article examines the interaction between rapidly advancing payments technology and the people who turn these into business benefits.
Today, spotting top technology trends in the payment industry isn’t what one would call a tough call. ISO 20022 leaps off the pages of most industry journals, but so do other related themes. First, there’s file flexibility; once the exception rather than the norm in the banking industry, it has now become a corporate expectation and clients now assume banks will accommodate them on this front. Second, the natural corollary is that banks need to be experts in translating file formats, with multilingual interpretation as a common client requirement.
ISO 20022
ISO 20022 has become something of a poster-child for the payments industry and it isn’t hard to see why. Today it is rare for banks to receive a payments-related RFP that does not include at least some questions about XML in general and the ISO standard in particular. This awareness of the standard is also starting to percolate to smaller organisations. While the majority of ISO 20022 implementations to date relate to major multinational corporate players, we are now seeing middle market organisations (and even some smaller businesses) starting to pick up on it.
This is partly due to companies’ greater exposure to the standard because many of their existing business applications are capable of processing XML files and messages. A further advantage is that the standard is user-friendly, in that it explicitly identifies individual data fields with the relevant tags, in contrast to more cryptic standards such as EDI, where the user has to know the location of the data within a file in order to know what it represents.
One of the factors that obviously has a major effect on the adoption of ISO 20022 is the degree to which ERP, treasury management and other system vendors support it.
Right process, right client
To date, adoption of ISO 20022 has been most prevalent amongst larger, multi-banked entities. With most treasurers having to work with small technology budgets the standard represents a great cost/efficiency opportunity. Clients adopting this model will essentially use a single interface that can accommodate multiple banking partners, countries and payment types. Though implementations of this aren’t trivial and still require careful preliminary planning and often middleware, any internal payment formats requiring translation will typically be fairly well-known.
The situation is very different at the other end of the size spectrum, where many smaller corporations simply do not have the IT resources to coax their existing technology into outputting ISO 20022 messages. Furthermore, the payment formats generated by this type of technology will often be relatively obscure and/or proprietary. These companies therefore look to their banks to do the heavy lifting by taking the file format generated by their internal technology and translating/processing it on their behalf.
That’s quite a responsibility to assume; it requires that bank technology must not only be flexible, but also that bank personnel must be highly expert in translating formats - some of which they may have never encountered before. Furthermore, the client will also be expecting to obtain treasury and reconciliation information back from the bank in a format that they can readily upload to their accounts receivable system for reconciliation or perform treasury cash balance functions.
There’s been a hot geographic trend of late, with demand for this sort of service in Asia-Pacific both strong and growing. This may be attributable to the region’s relatively resilient performance in the downturn, or possibly because few corporations there do not have (or cannot justify) the technology resources to translate their existing payment message formats in-house.[[[PAGE]]]
Missing links
The translation of file formats is, in itself, often an extremely demanding task given the business-critical nature of payments processing, exhaustive testing and fine-tuning that is required. However, a further potential snag is that the proprietary message format the client is using may be missing some of the critical pieces of data required to process it. This often arises where a client wants its new transaction bank to accept payment messages in the format used by its previous provider. It’s usually only then that it emerges that the previous provider allowed data to be omitted from messages because it already had the necessary data (perhaps payee account numbers) stored elsewhere in a static profile. If the new provider cannot access that static data, then it’s time for some re-engineering...
This type of situation throws a considerable burden on banks’ technology personnel, which is one reason why the expertise and experience of those personnel is mission-critical in a new payment system implementation. Any competent professionals will quickly spot and highlight potential problems and possible workarounds, no matter whether proprietary or common standards are being used. However, even the most expert analysis and implementation takes time, so the temptation to adopt over-optimistic project timelines should be resisted. Where proprietary standards are involved, it is seldom that one comes across a ‘welcomes the format A maps straight to format B scenario’. Even where both client and bank are already using ISO 20022, thorough due diligence and testing will still be required.
The skill level of providers in the area of payment format translation and migration is now regarded by many potential clients as a deal maker/breaker. As a result, client selection processes increasingly include some serious tyre-kicking in this area; in some cases involving rigorous and detailed face-to-face interviews with bank technology personnel. The typical client expectation today is that bank resources will have in-depth knowledge of the various file formats and how they should be populated.
Software support
One of the factors that obviously has a major effect on the adoption of ISO 20022 is the degree to which ERP, treasury management and other system vendors support it. The good news is that many vendors (of treasury management systems in particular) are definitely offering increasing support for the standard - as are the major ERP vendors. Therefore, some organisations may happily find themselves pushing at an open door, with their existing technology vendors already moving in the desired direction and so making a major re-engineering project on their existing payment file format unnecessary.
Right now, both payment standards and payment format migration are looking good.
That said, most vendors still have a way to go. For example, very few ERP systems are currently capable of natively generating an XML file that handles global payments transactions, although the majority have now developed the capabilities to support SEPA credit transfers and direct debits. As a result, a growing number of corporates currently sending XML payments to their banks are using middleware technology, or tools within the systems they have, to extract the data from their ERP or treasury management systems and generate the XML messages.
This situation is probably one of the reasons for the rather lop-sided adoption of ISO 20022 by corporates. On the one hand, they are happy to send banks transaction data in XML format. On the other, they are often rather less keen to receive it back. But this is changing. While the past three to four years have mostly seen a rise in the uptake of XML for payment instructions, more recently corporates have also wanted to start using it for information reporting, bank account data or accounts receivable reconciliation.
Balancing act
One of the most vital factors in getting a standard such as ISO 20022 to stick is striking a balance between functionality and stability. While adding enhancements that increase the functional capabilities of a standard is obviously desirable, this has to be weighed against the practicalities of everyday production use. Corporations do not want to be stuck with a never-ending payments re-engineering overhead because they have to keep up with a perpetually changing standard. Fortunately, this point has not been lost on the ISO 20022 Payment Standards Evaluation Group, which has decided that requests for changes submitted in 2010 will not be released in 2011, but will rather be included in the new version release in 2012.
Backward compatibility and support are related matters that also concern many corporations. For that reason, corporations that have implemented versions of the payments initiation standard published prior to 2009 are highly unlikely to be compelled to migrate to the current versions released in 2009. (The Payment Standards Evaluation Group has no plans to deprecate older versions, but they are ‘archived’ on the ISO 20022 site.) Furthermore, banks have made it very clear that because of the corporate concerns mentioned above, multiple versions of the standard will need to be supported.
Conclusion
Right now, both payment standards and payment format migration are looking good. ISO 20022 has clearly bedded in successfully and its future evolution looks stable. From the perspective of corporates already using, or planning to use the standard, the opportunity to influence that evolution to some extent depends on their choice of bank. Some banks are highly involved in the development of the standard and contribute significant resources and expertise, so are well-placed to influence its progression with client feedback.
For those not intending to natively adopt ISO 20022 in the immediate future, other considerations apply. Format translation capabilities probably top the wish list, and on the plus-side the ability of banks to translate and handle even arcane payment formats has generally continued to improve. In fact, the top banks in this space can now make the translation of proprietary formats to standard ones largely painless from the corporate client’s perspective. Their experience and expertise both in terms of technology and across the whole gamut of corporate business models/sizes will massively influence the speed and efficiency of both their initial analysis and the final implementation.

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