Payment Transformations

INTRO  0:08   

Welcome to The Treasury Update Podcast, presented by Strategic Treasurer, your source for interesting treasury, news, analysis, and insights in your car, at the gym, or wherever you decide to tune in. On this episode of the podcast, host Craig Jeffrey joins Kalyani Bhatia, Head of Business Innovation for the Americas & UK Region at SWIFT to expand on payment transformation across the globe. Topics of discussion center around key challenges with payments, optimizing newer technologies, enabling instant and frictionless payments, and more. Listen into this lively discussion. 

 

Craig Jeffery  0:59   

Welcome to the podcast Kalyani. 

 

Kalyani Bhatia  1:01   

Thanks for the invitation, Craig, it’s a pleasure to be here. 

 

Craig Jeffery  1:03   

I am excited to talk about payments transformation at SWIFT and there’s a lot of good stories here. But before we get into what’s changed with payments, and how should we think about it. Maybe you could give the audience a little bit of background about what you’re responsible for at SWIFT. 

 

Kalyani Bhatia  1:20   

So, I head up a team of pre-sale market experts, we’re called the Business Innovation team, we cover the Americas, and UK, Ireland, region, and essentially, we look after topics like GPI, ISO222, standards, and some payments, anything in the payment space is covered under my team. 

 

Craig Jeffery  1:42   

Excellent. Can you give the 10 second definition of each of those like global payments, ISO… 

 

Kalyani Bhatia  1:49   

Sure, so GPI would be our global payments initiative that we rolled out in 2017, that essentially talks about tracking and tracing of payments. ISO 222 is the migration, that’s happening for a lot of financial institutions, through 2025, a lot of the category, MT category 1, 2, and 9 are going to be disappearing and retiring. That’s a major initiative for financial institution community, my standards is where we have all of the standards for all of the market infrastructures the financial control, look at the actual user guide. The actual messages, and test with them on the platform. And of course, instant payments is all about getting old friction out of payments and making things as real-time as possible.  

 

Craig Jeffery  2:40   

Thanks for jumping into those I know so our audience is really familiar with those terms, others that’s a new, new introduction so, you know, as we think about payments transformation at SWIFT maybe we should start with, what are the challenges with payments? You mentioned friction so maybe you could just talk through what are what are corporations and what are banks, seeing as the challenges? 

 

Kalyani Bhatia  3:03   

Sure, so I think the overarching theme that we are seeing is the availability of seamless real-time experiences for consumers feeling expectations for the same level of service and experience in financial services, both in the corporate and retail sectors. Client’s needs are changing, and there’s little tolerance for friction or unpredictability. The growth of digital and E commerce marketplaces and the evolution of real-time payment schemes will lead further momentum in the growth of real time payments. So, if we drill down and look into cross border payments specifically, we’re facing a lot of challenges right now. So, maybe as a quick refresher of cross border payments of payments that originate in one jurisdiction, and its credit to an account in other ones, and they continue to be way more complex than domestic transactions. So why is that exactly? Well, they could bridge the world’s 180 currency system, they could cross time zone, be subject to local currency controls, or have documentary requirements and compliance checks. All of these variables, add friction that can lead to significant delay, costly repairs, and uncertainty about final receipt of funds. Now, the industry has done a lot to remove friction in cross border payments but there’s still a lot more that we can do together to improve. We’ve actually done some in depth analysis on friction at SWIFT, by looking at data captured by the tracking code on our GPI payments, and our data showing that regulatory barriers and capital controls are the most significant friction impacting speed and delivery. Clearly, these are the domain of local regulators, and the banking industry cannot solve this issue alone, what the industry can do though is speed up responsiveness to request for documentation and try to move the path through the process.  

 

Our data also shows us that currency controls are the most significant friction impacting speed. So, if we look at a couple of examples, we exclude countries with capital control restrictions from our analysis, that actually 57% of GPI payments arrive in under 30 minutes, regardless of geography or routing. If we look at transactions between mature markets, with none of the frictions of currency controls, legacy systems are compliance we see significantly higher performance. For example, 72% of GPI payments from the UK to the US, arrive in 30 minutes. Similarly, time zone differences contribute to delay, analysis of the data show that payments following the sun arrive more quickly than those traveling against local operating hours. Improved data standards, notably ISO 2022 will greatly ease the flow and handle a data across the ecosystems and facilitate automation. Finally, I would be remiss if I didn’t mention compliance. In a world experience continuing high levels of financial crime. Compliance based, also represents a significant block on cross border payments. This is an area where SWIFT is already playing an important role by providing mutual noncompetitive services for knowing your customers, sanction screening, and reference data checking that spread the cost of development for the industry. So, Craig as you can see there are a lot of challenges in payment facing the industry today, key reasons why SWIFT has made a step change and our overall strategy, which was approved by our board last November. Our aim is to deliver instant and frictionless payments account to account, anywhere across the world, underpinned by the rich data provided by ISO 2022 moving away from point-to-point messaging and instead moving to transaction management and orchestration. I’m really excited for the opportunity to talk through some of the details with you today. 

 

Craig Jeffery  6:46   

When I heard you say your goals were to meet the challenges of friction, delays, and opacity was faster, easier, and richer information. And you gave a few examples about the cross border TPI payments and some of the speed that you learn there. How is, how is SWIFT going about adding value with APIs for example? You can answer that, either directly or if you want to talk about what the, the board had decided earlier with the platform the payments platform that you alluded to.  

 

Kalyani Bhatia  7:27   

Sure, let’s talk about API. So, APIs are a strategic channel for the SWIFT community. API driven open banking is mandated an increasing number of jurisdictions and SWIFT has significantly invested in API technology in recent years to deliver to its customers, real time flexible access to innovative new products. Adoption and usage of our platform significantly increased throughout this year, with almost 2 billion API calls made by 2020. API services our platform are not only offered by SWIFTT but also by trusted third parties so our community can benefit from a breadth of innovative solutions on our platform. The importance of our API channel only increased moving forward as we expand the range of products and services that can be accessed via this channel. In fact, SWIFT users will be able to interact with our future transaction management platform natively via our API channel, enabling SWIFT community to deliver smarter services to end customers, reach into new markets, and reduce the operational and capital costs of technology. We also have been working with a group of banks and corporates for the last six months to develop a portfolio of bank to corporate APIs in payments treasury and trade. 

 

Craig Jeffery  8:42   

The distinction between the MT message types, and API, maybe it’d be useful to just talk about that a little bit, maybe I can begin, and you can correct or enhance the discussion. So, you mentioned some of the MT message types that the 100’s, 200’s, and 900s are going to be sunsetted in 2025. So, these are the legacy formats that are, these delimited formats, that are messages that would be sent from one party to the next and confirmed, kind of in a very linear fashion and APIs are more real time, it’s Application Programming Interface going back and forth. How, how is this changing what SWIFT is doing? Thinking about because you have mandates in different countries, you’re fully supporting APIs, and yet you have this rich legacy that many, many banks or all the banks, essentially in many corporations are familiar with some of these old linear step messages right, which can support some of the goals that that you talked about. Faster, easier, richer, and the old formats can’t support that. I don’t know if you have any comments on that. 

 

Kalyani Bhatia  10:00   

Yeah, and within our region, our network with 11,000 institutions on the network, and not everyone is ready at the same time to take on these newer technologies and so that was really the crux of the problem and where we’ve established how we’re going to upgrade our existing platform to be able to help the community along on this migration to ISO essentially. So that’s why we we’ve offered some optionality for our bank. If I’m a bank who’s ready to go so right now, when the platform is available next year that bank can continue to send their messages as they as they choose. But if I have a key intermediary or intermediary bank that still wants to stay on MT, they can do so on the platform because we allow from multiple channels, and we will mediate, who gets what based on the option that a bank has chosen. So, a bank can choose to send MT up until 2025, they can send ISO messages right from the get-go. And we’ve also now introduced an API channel. So, there’s multiple channels that they can get access to this data and to your point, is to be able to access that richer data, if it comes in ISO to be able to grab that and take advantage of it right away, Whether that’s through ISO or API, and what we do suggest to our banks that are still staying on MT is make sure that as they’re putting their projects together to do the upgrade, think about also the compliance and regulatory and archiving requirements to make sure that they can take advantage of the richer data, as soon as possible.  

 

Craig Jeffery  11:45   

Here’s part of my understanding because, obviously we’ve talked to SWIFT a number of times, but this idea of, you can start, let’s say you start with an ISO format and an enriched format, maybe it’s coming through in XML you have a lot of data, let’s say you have 20 fields of information that that won’t necessarily go through on an MT format, the older style format. If I start off with those extra 20 fields of information, and I go through a normal linear process, when I stepped down to an MT message it doesn’t have a place for those that information falls on the floor on the cutting room floor, and it wouldn’t get upended as it gets handed off in a linear way one to another.  

 

Kalyani Bhatia  12:34   

I listened to the webinar that you ran earlier in the month with my team member Daniel Lynch, and he talked about the telephone game. So that’s the analogy for the point-to- point messaging so I start off, I you know I whisper message to the next person, and they carry it on and on and on and by the time it reaches the end, it’s very different than how it started, right, we were we all remember the game. So, with transaction management we’re now moving to this concept, away from point-to-point messaging, it really hinges on the fact that I’m keeping a master copy in the center, that all of the parties in the payment will have access to, but it’s one version of truth and what that does is if somebody starts it off at ISO I’ve captured all of those 20 pieces of information. The next thing is the chain is MT, and they may not utilize and may not have access to that information, but I’ve still got it in my master copy that single version of truth, so I won’t drop that information, and as the payment continues, I’ll still have that in the payment that you can have access to. Even the beneficiary bank at the end will then have access to that information. So that’s the real, the change in our strategy, going from point-to-point to transaction management and overall orchestration. 

 

Craig Jeffery  13:57   

Yeah, because like the telephone game point-to-point is it’s handed off to another area, they may change it, or information may drop. And when information drops in historical sense it never gets added but in this transaction platform, this engineered database, you can still access it and I think that’s a that’s a key to some of the other enrichment items that that you’ve built into this. If a payment goes through and it’s at the third bank, and something on the compliance side is missing. How does that get repaired in the normal or the traditional world, and how does that get fixed in this transaction platform? 

 

Kalyani Bhatia  14:39   

So essentially what happens is, banks will continue to send messages, as they do today with the sender and receiver in the appropriate block. But SWIFT will redirect that traffic to build that transaction copy and keep that information. So, the reason why we recommend that even MT banks you want to stay on MT think about your compliance. What we’re asking all banks to do is, we talked a little bit about senders that you could send in any of those, you could send a message in any of the channels. Where the differences is on the receiver side, we are asking receivers will be able to get an ISO message, the message via API, and they will get a multi format message with it which is essentially an ISO MX message with an embedded MT. So, then they will need to take that MT and consume it as they would, but they also have the MX portion, to be able to run their compliance and make sure that those are happening, appropriately. 

 

Craig Jeffery  15:48   

Excellent. I guess we’ve already talked a little bit about some of the newer technologies because it’s, you talked about a transaction platform and being able to send it in almost any format and receive it in multiple formats, multiple channels right through ISO API, or through some other options. But how is, how is SWIFT, optimizing these newer technologies? 

 

Kalyani Bhatia  16:17   

So, we actually do play a role in assessing emerging technologies. We’re working with the global financial community to harness these for innovative solutions that can solve industry challenges, operate at scale and payments, and transform the services that our community offers its customers. The platform really that we’re developing is actually a great example of this. So, we’re combining new and current technologies with a change in the approach for end-to-end processing of financial transactions all to further improve the end customer experience. Our enhanced platform will orchestrate interactions between financial institutions and other participants to minimize friction, optimize speed, and provide end-to-end transparency and predictability from one account to another anywhere in the world. This move has the potential to power instant and frictionless transactions between at least 4 billion accounts service by financial institutions across the SWIFT network. The next generation digital platform will use API’s and cloud technology to provide a set of common processing services that banks have historically invested in individually, saving the industry time and money. New and extensive data capabilities will enable the pre-validation of essential data, fraud detection, data analytics, transaction tracking, and exception case management. The planned platform capabilities build upon SWIFT’s successful global payment initiative or GPI, which enables end-to-end tracking on international payments. I like to kind of use the FedEx for payments analogies to describe the service, where we add a unique transaction reference to the payment that you can track and find where it is, anywhere on the payment chain. We will leverage the cooperatives unrivaled industry reach with over 11,000 financial institutions, operating in over 210 countries. We are known for our security, our standards, and responsible innovation, we are governed by the right levels of risks and controls, users will benefit from the capabilities with minimal disruption for backward compatibility. 

 

Craig Jeffery  18:14   

So, you mentioned a couple of things here that I wanted to dig in a little bit, you mentioned tracking this idea of visibility, I mean, I know people are gonna be disappointed that we sent a wire we don’t know where it is, hasn’t been received by our counterparty and now there’s visibility there. How does that tracking work, that, that it provides that visibility through the, through all the handoff points? 

 

Kalyani Bhatia  18:41   

So, we’ve actually asked the community to add in a UETR so, a unique end-to-end transaction reference on all of our GPI payments, they sign up that they want to be part of this global payment initiative, we add this tracker to the payment and essentially what that does, very quickly, is link all of the payments together. So that you can find out you can send “hey I’m looking for this you UETR” or when you’re talking to your other bank. They look I don’t know what happened, what, where, where is it to get stuck in investigations? I’m expecting it to hit today, and you can actually find where it is very quickly in the payment chain, and to help you with where it is. 

 

Craig Jeffery  19:28   

How do you find it quickly in the payment chain? I understand that number, but if it’s a linear process and a number goes through and it’s going through three banks and two correspondence and eventually to the end customer, how would that be reported in the end-to-end world? Is that possible to use that or is that only in the new type of environment.  

 

Kalyani Bhatia  19:51   

So now it’s available today as part of the global payments initiative and we have what we call a GPI tracker. And in the tracker, if you know, which you can access either through a GUI or through API, you can actually say I’m looking for this payment, and it gives you a metro line, really nice, here all the stops that are in this payment, here is where it is today. At each stop, it will tell you as long as you are within the payment chain you can see the data. It will tell you, you know, where is it going, who did it come from, some of the transaction details, you know, what are the fees? What was the amount? And it will actually give you a nice metroline, very visual way, of seeing where it is you can quickly access to it if you want to look through the GUI or again if you want that information for the API. 

 

Craig Jeffery  20:40   

And so, does that show every stop where it’s intersected with Swift, or… 

 

Kalyani Bhatia  20:47   

A very good question, and we’ve actually now made some enhancements to the tracker, where it will show you where it dropped off to, like, say it went to domestic market infrastructure. So, it went off SWIFT, and when it came back on SWIFT will give you that information as well. 

 

Craig Jeffery  21:04   

Excellent. And so, for the corporate treasury people out there, domestic market infrastructure refers to, like some examples where it’d be like the Fed wire system in the US.  

 

Kalyani Bhatia  21:17   

Correct. 

 

Craig Jeffery  21:18   

So that’s the, that’s the broad definition for all the in-country payment platforms exist everywhere. Excellent. I had another question for you to keep asking you, on the pre validation, what is meant by pre-validation that’s an additional service so what does that what does that doing, and how is that enriching the process? 

 

Kalyani Bhatia  21:39   

The pre-validation is another service that we have that really looks at how can I how can I reduce the friction, the stopping points, and pre-validate that payment before it gets out the door. 

 

Craig Jeffery  21:52   

Every error creates a defect which blocks something this, this makes us more likely to make it. 

 

Kalyani Bhatia  21:58   

Exactly so and some of them would be examples would be beneficiary account number, some pop codes, you know by country. So those are some examples of what we’ve identified as large hitters in the friction space that we offer as part of pre-validation. 

 

Craig Jeffery  22:19   

I like the term large hitters, things that cause more defects and problems. I like it. Kalyani, this idea of these changes that SWIFT is doing with this transaction platform versus messages that are going very linearly, adding these other enrich services where you can access it, whether you’re looking at, you use an ISO or API channel to get to it or you’re even if you’re still restricted to using old message types, there’s a lot of changes that you’re advancing the SWIFT platform, a lot of changes and innovation happening at FinTech’s, what is swift doing to make sure that they’re staying current on innovation? What’s happening here to continue to invest in these transformative, these transformative developments. you shared a lot already, but I didn’t know if there’s anything else that you wanted to share.  

 

Kalyani Bhatia  23:21   

Sure. So, innovation has always been part of our DNA, and our platform has constantly evolved over the years to meet the needs of our clients. So, when we first started as a consortium, we helped the industry move from telex to electronic messaging. Then in 2017 we added in this tracking and tracing of payments with GPI, and now we’re moving from point-to-point messaging to transaction management. We’re also adding in APIs, as a channel next to traditional messaging. We co-create with our communities to add new value-added services, solve challenges customers face every day. This purpose led approach translates directly into how we run innovation projects. We invest in a balanced portfolio of industry initiatives, and co-innovation sprints that aim to solve some of the biggest challenges. Like, simplifying the industry’s journey to the cloud, delivering the next generation of real-time standardized API based services, and even reducing fraud and money laundering while keeping costs down. This is what we like to call responsible innovation. We have built a great amount of trust with our customers over the years, which allows us to foster collaboration that diverse set of institutions. We are really proud of the trust we’ve developed with our customers to take this responsibility very seriously. 

 

Craig Jeffery  24:34   

So, Kalyani, what’s the value of the SWIFT network, especially if you’ve added these services? Where do bank see that? And where do my corporates see that? 

 

Kalyani Bhatia  24:45   

So, actually before I joined SWIFT, I worked at Deutsche Bank for 18 years, in cash management. Coming from a bank, big banks like that, we used to spend a lot of money developing our own systems, maintaining them, upgrading them. And the value of SWIFT to our 11,000 institutions, especially now with the upgraded platform that we’re going to be offering next year, is we’re taking a lot of these services and products that banks typically do individually, and you know they pay for individually and work on individually. We’re moving those into the center of the platform. So, things like pre validation, sanctions screening, data analytics, transaction tracking, all of those items that banks would have normally done themselves, we’re bringing in to the center. And then, standardizing them. So, the access to all of the banks will be the same and then if I think about corporates, what we’re really starting to see is more and more banks are then taking these what we call mutual services, bringing them into their electronic banking platform, and then making those widely available to their corporate clients. And that I think is the power of the network, and why corporates are going to be just excited about the platform, as well as our financial institutions. 

 

Craig Jeffery  26:11   

Interesting. So, the traditional what’s the value of a network, it’s the size of the network. It’s what you can do on the network. And so, some of this is, it also makes more banks, able to offer better, more rich services, across the whole of the corporate community. It’s not just the trillion-dollar banks who, who can do everything. Now it’s 11,000 banks globally that can leverage this network and, and all of their customers. What does a banking payment professional need to think about, given that there’s so many changes taking place now from requirements for API, this, this focus on faster payments be increasing the sanctions and compliance arena and you mentioned fraud, those are, these are all massive concerns all with a significant number of changes. What, how should they be thinking? 

 

Kalyani Bhatia  27:09   

So, these are clearly exciting but challenging times and can be a bit overwhelming, individual institutions cannot solve all of these challenges today. The industry really needs to unite and collaborate and innovate to solve industry wide challenges, and build solutions that are mutually beneficial to all, like we just talked about in the previous example. The move to digital also involves a change in company culture. That’s not just involving a technical transformation that requires a mind shift involving agile cooperation models and products that are easy to implement. We’ve spoken a lot about moving to API’s, not only are they easier to implement have a lower tech footprint, but they also play a transformative role in creating digital customer experiences. Another topic ISO 20022, which will enable richer and more structured data in the creation of end-to-end digital processes, quality data enables payments to happen faster and more seamlessly, makes compliance more effective and efficient and facilitates business growth. High quality payment data is also essential for AI, machine learning tools, to be able to work effectively and derive insights and values from large datasets. You also need to ensure you have a strong payments infrastructure for an effective approach to cybersecurity. Organizations need to ensure on an ongoing basis they are putting in place strong detection measures. This includes real-time monitoring, alerting, and blocking of suspicious outgoing payments and implementing independent daily reporting. Finally, we have to look at risk management, specifically using active station data for counterparty risk management, whatever route an organization takes, it is vital to confirm that they are only doing business with trusted counterparties. 

 

Craig Jeffery  28:55   

I always think of how do banks stay unique and relevant if many of the services become standardized and I think it’s got to has to involve whatever rich data they can do additional services, quality of execution and probably more, but let’s move on to any of your closing thoughts or comments. We talked about innovation the new payment transaction platform that SWIFT has, we talked about, new terminology like UETR as a tracking code, pre validation. Any final, any final comments. 

 

Kalyani Bhatia  29:41   

You know I hope we’ve given your listeners some insights really on how exciting this transformation is that’s happening in payments, and how SWIFT has responded with our kind of updated strategy and now our upgraded platform that will be coming next year to facilitate the community with really bringing transaction management and orchestration, as a concept, moving away from point-to-point messaging, and also helping the community with the ISO migration, which is going to be key to be able to take that rich data, and the use cases for that for the bank is limitless. We don’t even know yet because we haven’t been able to get our hands on that data to see what we can do with it but, you know, I’ve really enjoyed our conversation and look forward to continuing the conversation. 

 

OUTRO  30:31   

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