Banks have seen dramatic technology advancements across the business, particularly in payments. In this blog, we sat down with Peter Hazou, business strategy leader of worldwide financial services at Microsoft, and Dean Wallace, practice lead for real-time and digital payments at ACI Worldwide, to discuss digital transformation in the financial services industry and five questions to consider when approaching your strategy, including important topics like competing for market share, open banking, ISO20022, and more.

To compete in today's competitive landscape, banks need to modernize their older technology to be agile and data-centric. At what stage are they in this modernization process to your experience?

Hazou: Priorities have shifted in the last few years. Now, nearly all banks are focusing on infrastructural upgrades to their core systems. In the previous, say, 10 years, improving customer experience was the top priority, largely because it was an area non-bank fintech competitors saw that traditional banks were the most vulnerable to disruption. The trend and investments have now shifted to the modernization of the underlying systems supporting these data-centric, front-end user experiences.

Wallace: A few years ago, I would have said banks are struggling with modernization, but as things stand today, I believe many of them are making tremendous progress. A lot of financial institutions are driving forward with improved digital enablement layers to bring new propositions and value to their customers.

When it comes to payments, we see that many banks are working towards the consolidation of payment types into some sort of hub capability. They are removing legacy infrastructure and aiming to build an always-on digitized infrastructure. What do you think about this?

Hazou: Over the years, with the growth of requirements on financial services firms, banks grew by adding features and functionality onto their legacy infrastructures. This layering of ever-larger product catalogs onto older systems created a sprawl of interconnected modules and feeder systems that are expensive to maintain and inflexible for remediation. The resulting complexity is reliable, but at a high expense and with very poor time-to-market in meeting new client requirements. One of the main trends today, especially with larger multi-geographic banks, is to consolidate all of this into new cloud-based payment hubs that are agile and fit to compete in the new economy.

Wallace: Some banks are a lot further on in this process than others. Those that are still behind are often struggling to find their own "niche" in the new world, which is applaudable, but these same banks are struggling with a long-term vision to match their desires, and they tend to overstretch where they want to get to, neglecting some basics along the way: namely, that they need the right baseline in the first place, and that's why they are lagging. The legacy way of thinking is still prevalent among many banks. Dabbling along the way is a good idea: try, fast fail, learn, try the next one, etc. But those catching up need to be careful they don't set their long-range goal on the ideas coming out from "dabbling,” they need to get the fundamentals right first.

With bank budget plans now by and large set for 2021, what do you think the top priorities are for payment modernization?

Hazou: Cutting through a number of forces at play, I would say that agility is the overarching goal. It enables banks to reduce run-the-bank costs through more flexible technology and testing, and it permits banks to prepare for the uncertainties of the road ahead post-COVID-19. We live in a data culture and a digital world where all of the signals that pass through the banking system have value to clients and indeed the bank itself. No longer are payments just about processing widgets, the game has moved on and data insights are the main priority in payments.

Wallace: Banks are investing in real-timewe see this around the world. Many of them already have real-time capabilities or they are planning to launch them soon. Real-time is a catalyst and will have a knock-on effect on how everything else works in the bank. More importantly, real-time enables new digital payment layers and capabilities, such as Request-to-Pay services that many banks are investing in. And once you have the fundamentals right, you can start layering on value-added services: for example, plugging in digital capabilities from fintech or carving out capabilities from vendor partners or from your own back-office asset pool.

ISO20022 is more than a compliance necessity. Where are bank businesses in terms of use case development with their customers?

Hazou: Banks are not thinking broadly enough about the potential ISO standard machine-readable XML payments will bring them in serving their clients and transforming their business models. Big tech and fintech competitors in financial services are all in the data game while banks are treating one of the greatest industry initiatives around data as a compliance activity rather than a fundamental development of their value proposition. This requires thinking beyond yesterday's challenges, like how to better reconcile payments and invoices, and more about how broad sets of connected data can bring real insights and value. Part of this may mean thinking beyond the confines of traditional bank P&Ls, like payment processing, and more about the value chain of activities in both commerce and family life. Artificial intelligence (AI) and machine learning (ML) for financial services allow banks to broaden how they serve clients in open banking economies. To learn more about ISO 20022, read our blog, Harnessing the opportunity of ISO20022 for financial services organizations.

Wallace: ISO 20022 is a baseline need; the mandate is out there, and all banks need to do it before the end of 2022. Banks are certainly busy when it comes to updating their infrastructure for the new requirements. In terms of use cases and the question of how to mine and analyze the data and transform the insights into new customer propositions, many financial institutions are still at the very beginning of that process and still have a lot to do.

How do you think data will change the payments industry?

Hazou: Non-bank competitors recognize payments as merely a medium for gathering data signals and insights, rather than a standalone fee-based business. This is challenging for the traditional way in which banks have viewed their P&L growth since the dawning of transactions banking as a fee-generating product business in the 1980s. Beyond financial crime prevention, which is the first and best use case for data, banks have tremendous client franchises and domain experience in financial services for which data is the central element. Improved risk models based on real-time data and predictive analytics will be the first big step forward. Beyond that, the role of banks as data aggregators and creators of value-added services provides a tremendous and lucrative trajectory in an open banking economy.

Wallace: For years, we have talked about data, but in my opinion, very few banks have a very strong vision in this respect. Banks are beginning to think about it. Many of them are bringing the outside skills in, and we will hopefully see some new ideas and propositions emerging on that front soon.

Additional Microsoft resources

To access additional resources and learn how financial services is transforming digitally using technologies from Microsoft and our solutions from our partners, visit our banking, capital markets, and insurance home pages.

The post 5 questions banks should consider for digital transformation appeared first on Microsoft Industry Blogs.

Emerging global payment standard ISO 20022, put forth by the ISO technical committee responsible for the fields of banking and financial services, aims to create a common language and model for payments data, one that can be applied by any agent in the industry and implemented across any network. As payment data is the lifeblood of the banking industry, this introduction of this standard is a substantial milestone in the digitalization of payments. Though many organizations are approaching ISO 20022 adoption as a compliance exercise, the potential value of ISO 20022 extends far beyond regulatory demands. At the center of this wave of data standardization is an opportunity for banking customers to unlock greater value across payment chains and rethink how they can leverage data to better serve their customers.

What is ISO 20022?

With data being hailed as the new currency, we're seen growing attention to data standards across regions and industries. Data standards govern what data is collected, how it is structured, and what that data means. When widely adopted across an industry, across regions, and across their interacting agents, standards play a foundational role in enabling users to unlock the value by enabling greater automation, delivering new insights, and facilitating more efficient collaboration. Moreover, in industries such as financial services, where trust, interoperability, and compliance are top of mind for customers, standardization can enable greater efficiency for ensuring compliance with information regulations and in preventing financial crime.

ISO 20022 is a machine-readable XML format that allows users to define tags and data types for each component of a message. It will increase the units of data for payment messages from just over 100 characters to approximately 9000 characters, significantly augmenting the amount of data that accompanies and provides context to a payment message. The expanded dictionary of data will enable messages to provide information related to payment roles (debtors, creditors, other agents), business processes (currency, execution and settlement dates, remittances), as well as descriptive data needed for business activities (purpose of payment, type of transaction). Adopting a common dictionary and a common standard is expected to introduce significant efficiencies for domains that manage payment processing systems and regulatory reporting, which have historically operated with vastly different standards and information formats. Herein lies another defining characteristic of ISO 20022: it can also act as an interoperability hub between different standards.

Benefits and current adoption

Of course, the value of standards can only be realized inasmuch as it is widely adopted. SWIFT has mandated that all banks leveraging SWIFTthat is, all actors sending and receiving wire paymentsneed to have adopted ISO 20022 by November 2022 for incoming wires, and by 2025 for outgoing wires. Regional rails, such as those in the UK, US, Canada, Australia, etc., are also following suit and developing mandates to incorporate ISO 20022 as part of their faster payment rails like low-value peer to peer and business transactions. According to SWIFT, already used by payment systems in over 70 countries, in the coming years it will be the de facto standard for high-value payment systems of all reserve currencies, supporting 80 percent of global volumes and 87percent of value transactions worldwide.

We're also seeing many of our own customers incorporate ISO 20022 adoption as part of ongoing investments to modernize legacy systems across their data estate. Including ISO 20022 as part of a broader modernization strategy not only creates paths for financial services organizations to convert to the new standard, it opens opportunities for organizations to assess how to unlock the value of new, higher quality payments data. We're seeing customers uncover opportunities for more transparency, more automation, and new services, all fueled by the richer intelligence encased in the ISO 20022 formatthe benefits extend far beyond compliance.

We can group the benefits of ISO 20022 adoption into three areas: enabling automation, improving compliance and fraud prevention, and improved customer insights.

By standardizing how data is structured and collected, payment agents can streamline invoice and payment processing, requiring fewer manual interventions and enabling faster payment reporting. This can provide value in many ways, automated supplier and buyer invoicing, automated AR and PR reconciliation, AI-enabled repair automation, and accelerated mortgage closing processes, to name a few examples.

In the realm of compliance and fraud detection, standardized data, along with more granular payment data, can provide more information for evolving fraud detection models and streamlining compliance reporting. For instance, customers can leverage new ISO payment information for enhanced rules management and improved root cause analysis.

Finally, with richer intelligence, customers are uncovering new depths of customer insights and analytics around payment activity. Our customers can refine with even greater granularity customer profiles, track activities, and anticipate customer needs or behavior using advanced analytics. Furthermore, managing ISO payments data on a trusted platform, as provided by Microsoft and its partners, can provide competitive analytics while keeping customer data where it belongs and preserving privacy for all parties.

Certainly, adopting ISO 20022 is not without its complexities, as we have seen across conferences and customer conversations. However, with richer data lies the potential for richer services, unlocking innovation and enabling greater collaboration across the banking industry than ever before.

Next steps

If you are interested in developing a strategy for ISO 20022 adoption for your organization, here are some suggested starting points:

• Talk to your Microsoft account team to assess opportunities for new ISO payment data and build a strategy to meet ISO 20022 requirements ahead of SWIFT and rail-driven mandates.
• Download our e-book, 4 ways that forward-thinking banks are using real-time payments to drive innovation.
• Learn more about ISO 20022

The post Harnessing the opportunity of ISO20022 for financial services organizations appeared first on Microsoft Industry Blogs.