David Brown, head of payments for Asia-Pacific at Finastra shares his thoughts on how the payment landscape in Asia is evolving, the challenges it poses for financial institutions and how they need to gear up for these emerging industry developments
The pandemic has shifted the focus of organisations towards more openness, the way they interact with banks and accelerated adoption of contactless real time digital payments. This in turn has resulted in increased transition towards new business models such as embedded finance through buy now pay later and cryptocurrencies. Meanwhile, more regulators are exploring the potential of central bank digital currencies in streamlining payments and financial inclusion.
David Brown, head of payments for Asia-Pacific at Finastra, shared his thoughts on some of the emerging key trends in payments and how these changes are transforming the financial industry.
He highlighted the challenges that banks face in real time payments, “One of the challenges facing the bank is that they initially did things around their retail systems and now they got to move it to doing it with the corporate accounts, being able to go and deal with these new types of transactions that come in as a ‘request to pay’ type of messages, deal with QR codes or have new channels being plugged in that generate payment messages.”
There are new modes of payments in cross border payments that target to streamline them to be more frictionless and transparent. These include bilateral arrangement across countries, distributed ledger technology in payments and emergence of CBDC. “These also pose challenges to banks. They have to be very open in their ability to be able to plug in different alternatives at the moment, have the logic that they can just easily configure as a business at the moment, which transactions to be directed to which channel of payment and configure accordingly,” added Brown.
He opined that in 2022, the focus will continue towards streamlining cross border payments, adoption of ISO 20022, boosting cybersecurity and using QR codes to scale the payments business especially with the corporates.
Here is the edited transcript of the interview
Neeti Aggarwal (NA): Financial industry has seen a rapid digital acceleration in the last few years. And especially as an aftermath of pandemic we are seeing several emerging trends in technology in financial services. Share with us your perspective on what are some of the key trends you're seeing in the financial services space, as well as from the payments point of view.
There is increased focus on openness, buy now pay later and digital currencies and a strong shift towards QR enabled payments during the pandemic
David Brown (DB): What I would really say has been a key emerging technology in the last 12 months has been openness. Openness has been around for a while, but the pandemic has really forced people to think about how they're connecting to the bank. Everyone talks about the reduction in cash and this has accelerated the movement to digital payments, electronic payments in a number of markets. Because people no longer want to handle cash, shop keepers, and they're not wanting to touch it, it's all sort of changed a bit. So, we've seen certainly a move in that space and to be able to do that you need openness.
Even though it's not strictly as a result of the pandemic, we've seen a bigger uptake in Buy Now Pay Later (BNPL) scheme and opportunities that banks, third party providers are doing out there in the marketplace. This is bringing a change in how people manage their credit. So the way that they would use credit cards in the past, young people are not interested so much in those, they're looking to use the Buy Now pay later when they can. So this is moving some things away from cash. Even though we do see as well a movement away from credit cards overall. But because so much has moved to electronic, they've still had an uptake in many markets in recent times because of the pandemic itself. But I think in the longer term, there'll be a drift away from credit cards.
Also, you see a lot more activity now from the investment side in the crypto markets and digital currencies, but we really feel that banks are going to start providing more services around these types of payments and being able to support them as well as the fiat currencies. I'll talk a little bit more later on about cross border payments because there's definitely been a strong evolution and change taking place there. And also underlying were both the digital currencies and cross border payments. There's been a lot in the space around CBDC. So the central bank digital currency side of things.
NA: We've been seeing so much of focus towards real time payments, you also talked about this embedded finance, which is BNPL. Embedded financing is increasing in payments and there are a lot of fintechs that are coming into this space as well. This gives an additional challenge to banks, because they not only need to provide these new real time payment services, they have to also compete with these new players. What does this mean in terms of the technology, that underlying technology that banks need to be able to provide this kind of real time and faster, seamless payment services to their customers?
DB: Excellent question. A lot has been changing over the period of the pandemic. Just to touch first, I just like to highlight some of the key changes that are happening in the real time payment space. Then I'll talk about some of the challenges that that brings to the banks.
So, when you're talking real time payments, it's not just about being able to do things as a credit transfer or using your phone to make a payment using the email address or the mobile phone number. It's now about request to pay type messages, making it easier for people to purchase things online. We're seeing a number of the real time markets now going through a second phase of adding additional services to their real time payment schemes. Getting to the use of QR code is huge now, people are getting very used to using QR codes and we're seeing a huge emergence of them in cross border payments. So, if you go to Malaysia now, you can pay for things from Singapore by the use of a QR code, so we deduct money out of your account from Singapore to pay for things. Similarly, between Thailand and Vietnam and other countries are moving in that space. You've also got the connection of cross border, real time payment schemes. Its already in Singapore and Thailand, you can go to Thailand, if you're a Singapore resident, and look to pay for something to somebody just to their mobile phone number by doing it on your phone, and the transfer will occur. And they'll get the money in their account straightaway.
Its been around for a while but really grown as well too is SWIFT connecting up to real time payment schemes. So they're trying to get to, as you talked about before, the seamless, the transparent as well the experience. You can initiate a payment that goes across border, but when it gets to the country that it's going to it goes through the real time payment scheme. The overall flow of things can take place from your country, your bank, to the beneficiary in another country, again in seconds to being able to do it.
We've seen one of the big challenges, though and one of the things that's changed leading into the bank challenges has been that this standard in real time payments really focused in on the individual retail type customers. Now it's moving right into the corporate space, and the dynamics are changing. So, one of the challenges facing the bank is that they initially did things around their retail systems and how to support it there. And now they got to move it to doing it with the corporate accounts, being able to go and deal with these new types of transactions that come in as a request to pay type message. Being able to deal with QR codes or having new channels being plugged in that generate payment messages. Some of the banks have a real challenge in adding those new types of dynamics to their current environment that's causing them to go back out and rethink about their payment solution and how they do things. So we see this not only impacting payment systems. Just to sort of take a little bit broader, we do see areas like core banking, the banks channels as well having to expand and also the fintechs and third parties that the bank needs to connect to is also changing much as a result of this.
DB: So the micro payments are going to go through the roof. The people doing it, those people are going to be changing as well. Banks are going to change from sending payments through their batch to clearing systems now and redirecting a lot more of them through their real time payment schemes. Even if the corporate themselves is originating the payment as far so corporate wants to pay their staff after they work on a weekend, because the staff want the money straight away to go out partying or go out that night. They're still sending in the files, but being able to be disbursed single transactions in real time to the beneficiaries as well, which is another area of change that increases that volume.
Banks need to build systems to optimise ISO 20022 data and strategize to plug-in other cross-border channels
NA: You also talked about faster cross border payments and various changes we are seeing with regards to whether it's SWIFT interactions, interoperable networks across countries that are coming up to facilitate this cross border payments. For example, the new messaging standards around ISO 20022 which is being implemented now. How should banks focus on building their technology and processes around it, so that they're not only able to bring their systems to provide faster cross border payments, but also to be able to utilise this granular data that they are able to gather using this new messaging standards?
DB: It's something that we talk with the banks all the time about, it's really is something that's important to them. A number of banks, if you go look at Europe, they've had SEPA since the early 2000s. A lot of banks there have already got into using ISO standards as their underlying way of processing messages. But here in Asia in particular, and even Australia as such, there is still a lot of parties that are not fully utilising the ISO standards. Some of them have brought them in as they've done their media payment schemes, etc. But it's, it has been something that everybody is now aware of, because Swift is doing this move to MX, from the normal MT message types.
All the banks now have been putting their thinking caps on and making sure that they know how to support ISO 20022. So it seems to be the real tipping point. Now, that's got every bank talking about and making sure that they know how to do it, and they've got to make a lot of them do need to make changes. They have taken that opportunity to think about what payment strategy to use. But they also had times having to do tactical solutions to get by for a lot of them. A lot of banks want to be there in the first wave that go live in November next year. On top of just SWIFT itself, cross border payments have a number of clearing systems for the RTGS clearings in a number of countries, which are also changing, there are swift based ones, and they're moving to MX as well. So you've got to go through a lot of work as a bank to make the change to SWIFT. So a lot of the banks next year and I know this comes down to some thinking ahead, they are also very much looking at, that's where they're going to be focusing on next year.
One is you adding these additional third parties like Visa direct, transfer wise (now called Wise), Ripple. And even now banks are starting to say for my cross border payments, I want to be able to cherry pick or choose which particular clearing I want to get these messages across for different types of customers. So even parties like Western Union now, which used to be a straight competitor to banks, and very few banks connected directly to it, they are finding that they're moving into the space of working with Western Union. And Western Union wants to connect into the banks themselves. So we've seen a change there. And there is a lot of competition now in that cross border space. And in many cases, people are looking to at least the underlying data being ISO 20022.
And the key of having that data, as you've touched on before, is what can we do with it. This really helps like a number of bank customers, in particular corporates and that with being able to go and do reconciliation better they know and can match up their payment details straightaway. They can hold payments to later and because they've got the confidence they'll go out and get delivered, but they can also reconcile those back from a bank perspective, they can use that data. And if they've got these payments, even the little micro payments goes through them, they better know what their customers are doing. So they can offer a BNPL opportunity to them when they see you need to pay this bill or this, this activity straightaway up front. So they're really using that payment data, started to get an idea as to what their customers are doing. And therefore, they want as many transactions passing through the bank themselves
Banks are building new services to go and initiate payments as well. You hear of banks, they'll get to a payroll service provider who does it for a number of different companies and say, well, we'll give you these additional services, you can do things in real time, we'll provide you back all this extra information about your business. So this is why you should be making your payments through us, as an example.
NA: So, that means building up your ecosystem around with partners to be to be able to do it?
DB: It comes back to the point I said before about openness. So you need the ability to plug in new players, and you need open API's open banking capabilities, to be able to drive and do that type of thing. Which again affects your back end systems to be able to support all this variety of technology and ways the transactions need to take place going forward.
NA: The other trend that has gathered speed in last 12 months is around CBDC and adoption of DLT as a technology in the payment space and the use of cryptocurrencies. How these has been changing. Share with us your thoughts around how these frameworks are developing especially the challenges this poses towards interoperability, unequal and fragmented regulations around these new mode of currencies and what it needs at the end of a financial institution. How it needs to build its own capabilities, looking at a future maze?
A lot of people and parties are investing and looking into different ways to do things. You talk about the CBDC as one of the things that we're seeing. Let me go back to what I talked before about the Prompt pay and Pay now doing the exchange between Thailand and Singapore. And then you want to connect to the Duit now from Malaysia, and India is connecting with UPI. A lot of these are all bilateral connections. And where's the standard? What do you actually do and how can that work if you just connect in two countries up and when you start connecting up multiple countries? Some of the opportunities that some of the central banks are looking at around how they can do it through the CBDCs, to actually support that as a way to help move that connection forward, and trying to set the standards there. Again, this is what you're seeing to pull in. Now, Ripple has been trying to establish a lot in the DLT space. They have been around for a while and have been successful in setting up certain niche areas where the payments can move around to doing that and trying to adopt standards for that. But it's still something that no one solution out there covers at all at the moment. That's a real challenge for the banks. They at the moment have to be very much open in their ability to be able to plug in different alternatives at the moment, have the logic that they can just easily configure as a business as to at the moment. I want to be directing these sort of transactions via Ripple and these sort of transactions I will go through CBDC or just continue to use SWIFT for these other sort of transactions. But as time changes being able to just adjust that through a configuration as they move forward, rather than having to keep rebuilding things and changing things on their back end side of things.
NA: We are seeing this increasing trend towards cybersecurity risks, there is also a greater need for fraud prevention and crime controls. So how do banks build up their capabilities around it? How do they address this one particular challenge towards cybersecurity and fraud?
DB: what we're seeing with our banks, and what they're doing in this space is, they know that they can always get the solution to everything in one place. Most banks reevaluating their fraud space and doing changes and replacements in the area of fraud in recent times, especially as you said, about real time payments, and trying to capture these payments, stop them before they go out the door based off history of the customer, etc. So they're now plugging that and having to put them not something that used to be really hard, attached to their card management systems and how they did their credit card payments. But now having that on a much more open scale, being able to do it for different types of transactions, plugging into the more general payment system and solutions. So the banks are wanting to have the flexibility to quickly put in a new provider, they also obviously are seeing some providers don't keep up with changes and standards and be able to swap them out and put in somebody else to go and do it.
There's a lot of things obviously happening around the use of QR codes and the security associated with them to help keep them secure. So there is a huge amount of activity in this space. Some of them are attached to the backend payment solutions, somewhat attached to the front end channels, how they've got to interact with the customers in real time as to making sure that they're a valid person, but use of tokens, etc. That comes into play with identifying, the whole identity side of things, is something that I know a lot of parties have specialising in now and doing things on as a payment solution side of things.
In 2022, most banks will focus on ISO 20022, real time payments as well as cybersecurity and identity verification
NA: Give us your perspective on what are your expectations for 2022, especially around how the payment trends are likely to evolve. We'll be seeing evolution of COVID-19. So, how the geopolitical landscape is evolving how the payments trends, and as a consequence, the technology trends? How are they how do you expect them to change in next 12 months or so?
DB: I'm going to break it into two parts, I think the next 12 months is actually going to be dominated for a lot of banks. They are going to have a huge focus on putting in place the SWIFT MX changes, going back to that ISO 20002, making sure that they're at least tactically putting in a more strategic solution to be able to support the SWIFT, the RTGS clearings, any changes to immediate or real time payment schemes out there, over the next 12 months. For a lot of them there's a big focus on consolidating what they've got, and how they will do that, because of the industry go lives. But in parallel, and it will not stop, is going and looking at these trends and the changes and getting out there. Making sure that they can use QR codes and be able to scale up the immediate payments business, get it to their corporate system. I think there'll be a large push to getting corporates to use payment schemes a lot more over the next 12 months. So that's not going to slow down.
And as you touched on before I mentioned about the security, cyber security side of things, dealing with identities, a lot of activities in that place. Even just give a nice example is what SWIFT is doing with their pre validation service. In that it means that when you go to do a payment message, you are checking that the end beneficiary is valid, does have an existing account at the end bank. They're able to do some security checks across that as well. So it's meaning that when the payment itself happens, that is going to happen a lot more seamlessly, and there's a lot more confidence, the payments will actually get there without any stoppage in a really short period of time. So it is really an exciting time in payments with all these different activities happening.
NA: Thank you, David.