The migration of financial messaging to ISO 20022 presents a golden opportunity for Central Banks to modernise their Real-time Gross Settlement (RTGS) platforms. Being built on ageing technology stacks that are inflexible and costly to maintain, many RTGS platforms are not fit to meet the demands of today’s global, digital, 24/7 interconnected economy. But, to truly deliver on the potential opportunity for payment innovation, there are five key drivers Central Banks must address as part of their platform renewals.
While Central Banks are taking action to modernise their platforms and provide native support for ISO 20022, however, too many banks remain focused on only changing their technical interfaces. These banks do not understand the full breadth and impact this global RTGS renewal will have on the future of payments and will not be prepared to handle the level and scale of change required.
RTGS platforms are the beating heart of a country’s financial market infrastructure and pump the economy’s lifeblood – the national currency – through the veins of the banking system. Taking the United Kingdom as an example, approximately £685 billion worth of transactions are processed via RTGS each day.
Open-heart surgery to replace such a vital organ for the economy is not a decision Central Banks take lightly. Replacing an RTGS platform causes significant disruption and cost for banks operating in the local market, yet countries including Canada, USA, Europe, the UK, and Singapore, have all started programmes to replace their RTGS platforms within similar timescales - all aligned to the ISO 20022 migration. But, is ISO 20022 the only driver for change?
Looking back over the last two decades, the evolution of the global financial system has been dramatic. Many of today’s RTGS platforms were designed and built at a time when the internet and the technology that supports it was just in its infancy.
Today, the global economy is digital, interconnected and runs 24/7; central bank RTGS platforms are not, although they do operate in real-time – so that’s something!
Over the years pressure has been growing on Central Banks to improve interoperability, provide broader access, extend operating hours, improve liquidity management tools, and offer higher resilience. Now, with the need to significantly uplift their platforms for ISO 20022, the opportunity has finally arrived for central banks to invest in Next Generation RTGS platforms built on modern technology platforms that can meet these demands. Let’s take a closer look at the five key objectives Central Banks will keep in mind when building these new Financial Market Infrastructure platforms.
1. Interoperability
Massive shifts in technology have provided opportunities for integration that were simply not feasible two decades ago. Today Open APIs enable FinTechs, BigTechs, payment service providers, and banks to integrate and innovate. Together they have already engineered globally connected financial ecosystems, which continue to evolve at an exponential pace.
Older RTGS platforms were never architected with this kind of connectivity in mind. By migrating to ISO 20022 and introducing open API technology, central banks will help to further reduce the burden of integration among different platforms in the global financial ecosystem. For example, the Bank of England has been actively discussing the use of APIs for their renewed RTGS platform.
2. Broader Access
Ecosystem platforms such as Grab in Asia, Plaid in the US, or FORM3 in Europe bring exciting payment innovation to the financial services market, benefiting consumers and the economy. But they are not banks, and therefore, in the past, they would not have been allowed direct access to central bank money via the RTGS platform.
But times have changed, with examples of both RTGS and retail payment infrastructure access for non-bank financial institutions. Allowing access for these kinds of market participants reduces the cost of payments for payment service providers and increases the oversight by regulators of their operations. It creates competition, which benefits consumers and drives market efficiency. It also provides fantastic opportunities for partnership, co-creation, and innovation to create new business models and revenue streams.
3. Extended Operating Hours
Today’s global economy works around-the-clock, with consumers transacting online night and day. With the global rise of 24/7 instant payment schemes, which require pre-funding (for example, TARGET2 and TIPS), many banks have started to ask central banks to consider extending operating hours for their RTGS platforms to help them lower their overnight credit risk and optimise liquidity. Some jurisdictions like India are leading the way – last December, they moved their RTGS platform to 24/7 operation.
Banks need to be thinking about how they can manage around the clock operations and whether their core banking solutions are capable of dealing with extended operating hours and reduced batch and backup windows. While workarounds are possible, they are costly, complex, and add significant operational risk (no bank wants to find itself in the headlines when things inevitably go wrong).
4. Optimisation of Liquidity Management
With large volumes of digitised historical data, the power of elastic compute capacity, and advanced data analytics and AI capabilities, banks can predict and manage liquidity better than ever before.
RTGS platforms can further extend this capacity by providing real-time and historical data APIs to enable these algorithms to do their magic and support the automation of collateralisation operations. By doing so, banks will be able to automate their liquidity management workflows, reduce operational risk and optimise the cost of liquidity. For example, the Bank of England is planning on introducing the concept of “atomic settlement” with a capability they are calling synchronisation, which promises greater speed, efficiency, and transparency of settlement.
5. Higher Resilience
In recent years, several cybersecurity incidents have highlighted the potential scale of this threat to the financial services ecosystem. Additionally, a number of high-profile outages of critical financial market infrastructures, including both TARGET2 and Fedwire, have highlighted the need for higher resilience.
As central banks worldwide open their platforms to non-bank financial institutions and the broader financial ecosystem, they also need to take serious measures to ensure their platforms remain resilient, robust, and secure.
In the coming years, the entire global banking community will be laying the foundations for the future of payments. It is a future that includes many emerging solutions and technologies that threaten to make our existing concepts and ideas redundant – for example, alternative settlement platforms based on DLT (Distributed Ledger Technology).
The systems and platforms that both Central Banks and banks are building as they prepare for the ISO 20022 migration must be architected and designed with the agility to cater to this emerging future. Financial institutions must think beyond the impact of ISO 20022 alone, and carefully consider how each of the five areas we have outlined will impact their business, operations, and technology strategies.
The future of payments may not be here yet, but the decisions being made now are deciding how soon that future will arrive. When it does, will you be ready?
RedCompass Labs helps financial institutions handle the breakneck pace of change in payments, market evolution, technology innovation, and regulatory requirements. We offer workshops on topics including ISO 20022 and Request-to-Pay to clarify the impact of these major payment changes on the Future of Payments. We pride ourselves on enabling our clients to maximise the opportunities that emerge from change. RedCompass Labs has a long history of developing pragmatic recommendations, solutions, and strategies that work. Feel free to get in touch to book a workshop, if you need support for the adoption of ISO 20022, or wish to integrate innovative opportunities into your payment strategy.