It is EBAday 2050. Hundreds of banking and payments practitioners gather from across Europe to convene not in Vienna, not in Madrid – not anywhere physical. They convene in the metaverse, joining from their desks and their gardens and their summer retreats. Their properties have been tokenised into millions of highly liquid digital assets and their garden trees have been monetised and sold as Non-Fungible Tokens (NFTs). Everything is digital and digital is everything. At least, this is the sort of scene you can expect, according to futurist Rohit Talwar, who gave a thought-provoking challenge speech on the first day of EBAday 2022 – the EuroBanking Association’s industry forum on the European payments landscape.

Whether the above vision is dystopian or utopian, it is based on technologies already emerging today – and ones with significant implications for the payments industry. If Ariana Grande can make millions selling NFTs of a single online concert on free-to-play online video game Fortnite¹ – with many of these transactions made via an in-game wallet – what does it mean for the banking industry? Are banks at risk of being cut out of the payments process at some stage if the rails of value transfer can be replicated smoothly by other industries?

As always, the future is unclear, but what is clear, according to Talwar, is that banks cannot simply ignore these developments. They must first seek to understand them and then – indeed, only then – can they choose a proper course of action, whether it is to embrace or oppose the current direction of travel.

This tension between old and new, and concerns over the proper timing of new product roll-outs, ran right through almost all discussions at EBAday 2022. The flow team summarises the top six takeaways of the event.

Technology continues to drive the future of payments – and how we employ these to unlock the most benefits for the industry was a key topic of discussion at the event.

The technologies underpinning this industry evolution are many and varied, but their contribution is not necessarily equal. An audience poll during the “How technology continues to drive the future of payments” session found that APIs are the most popular tool, with 59% of the respondents seeing them as key to future success (see Figure 2). As the panel noted, speed and transparency are the primary needs in the corporate banking arena – and APIs have a central role to play in delivering the products today’s corporates need.

With the breakneck pace of change placing a strain on legacy infrastructures, providers of Banking as a Services (BaaS) and Payments as a Service (PaaS) have found favour as a means of providing agility and speed to banks looking to keep up with customer demands.

However, the “as a service” concept has its sceptics. Veterans see the trend as little more than a rebrand for the time-honoured practice of “outsourcing” and the panellists on the “Payments as a Service – the next star in banking?” session had sympathy with this view.

Yet, what is new about PaaS compared to old-fashioned outsourcing is the way it is offered, which is more modular and flexible. Both the panel and the audience were in agreement that PaaS can be implemented from as little as one small element – say, EBICS as a service – through to a fully-fledged package where the full value chain is outsourced to a third party.

It is likely that the latter approach will offer the most benefits – freeing up resources to develop and offer new services, while also providing a way out from what may become an endless cycle of developing and redeveloping the in-house infrastructure. At the same time, this kind of implementation can help meet regulatory requirements – perhaps an overlooked benefit among the wider industry, with only 20% of the panel audience selecting as one of the two most important drivers (see Figure 3).

Participants were also keen to discuss the innovations that will enable the next generation of payments – and, in particular, the new technologies that will help resolve the pain points of international payments, such as high transaction costs, long settlement times, and lack of transparency.

With this in mind, it will have been no surprise to industry veterans and debutants alike to see “Digital currencies and stablecoins – maker or breaker of the financial system?” on the agenda. The panel saw much talk of central bank digital currencies (CBDCs) and how they can streamline interbank settlement, not only for payments, but for many kinds of financial transaction.

“A digital euro based on blockchain technology for interbank payments and capital markets payments could promote risk reduction (because you settle in central bank money), reduce liquidity buffers in all the different nostros that banks hold, and facilitate programmable smart contracts with 24/7 capabilities,” explained Manuel Klein, Product Manager, Blockchain Solutions & Digital Currencies, Corporate Bank, Deutsche Bank in a video interview with Finextra TV at the event.³

Yet with the popularity of CBDCs on the rise globally – the American think-tank Atlantic Council places the number of countries now exploring the possibilities at 105, representing 95% of global GDP⁴ – the poll question “Will CBDCs solve the pain points of international payments?” yielded an thought-provoking answer. As many as 76% of respondents said “no”.

Marc Recker, Global Head of Product, Institutional Cash Management, Corporate Bank, Deutsche Bank offered some mitigation here, explaining that the audience response reflects a belief that it is unlikely that CBDCs will solve all of the problems in correspondent banking, while they could still solve some.

“If you had asked this question five or six years ago, the answer would have been different because there were so many pain points to resolve, and we didn’t have a clear path to achieve them. But in the last few years, SWIFT and other industry collaborations have introduced a lot of initiatives that leverage existing rails and fiat currencies and make cross-border payments much better,” he noted.

Whether CBDCs are the best way forward or not, there are several hurdles to overcome before this is possibility – including, managing volatility, connecting CBDCs across jurisdictions and mitigating privacy concerns.

If digital assets and CBDCs aren’t the balm for banks and corporates’ payment pain points, what is? For many of the participants on the panel “Currency corridors and cross-border payment initiatives: concepts, perspectives and designs”, the answer is right under the industry’s nose: it is a question of realising the full value of existing technologies.

"Payments are getting stuck in the system due to asynchronous sanctions processes across jurisdictions. These things need to be tackled"
Marc Recker, Global Head of Product, Institutional Cash Management, Corporate Bank, Deutsche Bank

While industry initiatives such as SWIFT gpi⁵ and SWIFT Go⁶ have improved matters considerably, accurate tracking in real time and clarity on pricing and fees still figure among the top concerns. This is partly because bank and market capability to execute new gpi and Go payments are not yet fully fledged.

But, as Recker explained, “We as an industry also need to tackle the so-called non-technical pain points of cross-border payments. The sad geopolitical developments since mid-March have seen payments getting stuck in the system due to asynchronous sanctions processes across jurisdictions. These things need to be tackled.” Other issues that continue to frustrate include cut-off times and batch processing, which can hold up payments between different time zones.

When it comes to status tracking and fee transparency, the impending implementation of the ISO 20022 messaging format is expected to help solve issues, improving banks’ ability to provide clear payment information that will accelerate screening processes and increase transparency over fees. Progress is expected from November onwards when a number of key infrastructures, including Target2, EBA Clearing and SWIFT, will migrate to ISO 20022.⁷

Meanwhile, issues such as batch processing and cut-off times are also being targeted. EBA CLEARING and The Clearing House, for instance, are running pilots for their Instant Cross-Border (IXB) solution, which aims to link Europe and the US’s domestic instant payments system in order to facilitate real-time payments between the two jurisdictions.⁸ Early tests have already seen a euro-to-US-dollar transaction completed within 11 seconds, demonstrating that the current infrastructure has the potential to compete with CBDCs when it comes to speed in the cross-border space.⁹

With FIS Global reporting that up to 72% of countries around the world have already implemented real-time payments systems locally,¹⁰ the session “Instant payments and request to pay – on their way to mainstream?” posed a natural question. Before the panel could have their say, the audience gave a first indication, with the majority (54%) saying “Yes, but it will take two to five years”. The takeaway? While the potential is clear, there are still obstacles to overcome.

Chief among these is perhaps the lack of use cases, with the panel suggesting that the industry needs to move beyond frameworks and look at how these can be converted into useable business cases.

But that is not to say that no use cases are available. Erwin Kulk, Head of Service Development and Management, EBA CLEARING, noted that invisible payments constitute a compelling use case for request to pay, which, in combination with SCT Inst and APIs can be used to trigger automatic payments in lieu of smart contracts or other digital-asset-based methods.

It remains to be determined, however, to what extent and in what circumstances, invisible payments – i.e. payments that are triggered in the background, automatically and without any customer intervention – will make sense for consumers. Certain elements of friction, such as notification of execution, will likely still be desired, while certain scenarios will be better served by invisible payments than others. For instance, it might suit a consumer to pay for a pizza with an invisible payment, but they will want to see a car payment.

Have you heard of the Digital Operational Resilience Act (DORA)? If the poll carried out right at the start of the panel session “Building operational resilience” is to be believed, the answer is probably “no”. A startling 68% of respondents – and, lest we forget, they were all attending a session on operational resilience in banking – confessed that they weren’t familiar with the regulation. Yet the act, which banks will likely be expected to comply with in the next two years,¹¹ is directly relevant to the payments and wider banking business.

DORA builds upon and ties together several existing IT requirements for banks and, most notably, requires not only banks themselves, but also the technology vendors in their wider ecosystem to comply. Its aims include harmonisation risk management approaches in the sector, creating a mandate for instant (and harmonised) reporting, improving the resilience of the whole ecosystem, and encouraging the sharing of information among industry participants.¹² DORA is expected to come into effect in the summer of 2024.

What will the implementation of DORA mean in practice? While the final details here are still being refined, questions are already being asked about how far banks will need to go to ensure resilience as technology becomes an increasingly central part of the overall risk equation. In general, participants in the session expected to see increased diversification of critical suppliers. For instance, with an eye on cost control, most banks currently use only one of SWIFT and SIA to connect them to EBA CLEARING’s payment systems, but the reality may be that two or more providers are necessary to ensure full resilience, allowing for the risk that one goes down.

Therefore, Nicola Coyne, Member of the Board at the Euro Banking Association and Head of Immediate and Low Value Payments at Barclays stressed that it will be important for those managing the implementation of new standards to think carefully about their comms plan, ensuring they educate the whole bank about what they are doing and why it’s important. At the same time, in view of what is expected to be a short timeline, getting off to an early start will also pay dividends, with only two investment cycles likely to stand between now and the implementation date.

While the pace of change has been relentless over the past few years, many of these topics and initiatives will take time to mature and look set to be fixtures for next year’s event, which will take place in Madrid from 6 to 7 June 2023. Before then, however, there is much to be done to continue driving forward improvements in the payments landscape and to ensure the industry is ready for an unpredictable but highly compelling future.

The EuroBanking Association payments conference, EBA Day 2022: Bringing digital payments to the forefront took place 31 May and 1 June 2022 at the Austria Center Vienna (ACV), Bruno-Kreisky-Platz 1, Vienna

Sources

¹ See https://bit.ly/3xIGUp8 at forbes.com
² See A new era for payment validation at flow.db.com
³ See https://bit.ly/3MNw85c at youtube.com
⁴ See https://bit.ly/3QinHC4 at atlanticcouncil.org
⁵ See  SWIFT gpi: a progress report at flow.db.com
⁶ See  SWIFT Go: Low value payments rethought at flow.db.com
⁷ See  ISO 20022: How companies and banks can benefit at flow.db.com
⁸ See https://bit.ly/3QvvdtB at ebaclearing.eu
⁹ To hear more on cross-border payments and the role of correspondent banking, watch  Dean Sposito, Head of Institutional Cash Management, Western Europe, Deutsche Bank in a video interview at with Finextra TV
¹⁰ See https://bit.ly/3QvvCMD at worldpay.globalpaymentsreport.com
¹¹ See https://bit.ly/3MLwedG at ukfinancialservicesinsights.deloitte.com
¹² See https://bit.ly/3aSte1M at deloitte.com