EXCLUSIVE: “Change of tune” – Ravi Sharma, UL Solutions in “The Fintech Magazine”
The US payments landscape is fundamentally changing, with ISO 20022 helping to bring harmony to a discordant environment. Ravi Sharma from global leader in applied security science UL Solutions gives his perspective on the impact
“The times they are a-changin’,” sang Bob Dylan in the early sixties, capturing a moment of unstoppable social progress in America. Sixty years later, someone should think about writing a similar anthem for the US payments industry – because 2023 is sure to go down in history as a watershed year, thanks to the confluence of a series of impactful events. Next summer, the Federal Reserve, America’s central bank – which remains the world’s largest single economy – will introduce its FedNow service with the goal of enabling businesses and individuals to send and receive instant payments, 24/7.
2023 will also see the start of the pilot for the Immediate Cross-Border Payments (IXB) initiative between the US and much of Europe, which is supported by The Clearing House in the US using the RTP (real-time payments) system, EBA Clearing in Europe using its RT1 system, and Swift, the global secure financial messaging service. And underlying both of these potential game changers is another: the ISO 20022 messaging standard, which enables rich data exchange, efficient end-to-end, direct payment processing and interoperability with other payment systems worldwide.
IXB is based on ISO 20022, which recently became mandatory for the more than 11,000 organizations using the Swift network, and FedNow will also adopt ISO 20022 to define the message flows and formats for the service. FedNow will be the first completely new payment lane in the United States in 40 years, and over 110 financial institutions in the United States, including heavyweights in banks, credit unions and payment solutions providers have been involved in a pilot program since 2021. Both of these instant payment systems have attractive advantages for financial institutions, companies and their customers, with the promise of delivering increased liquidity and providing greater transparency around payment characteristics and travel.
It not only helps in the ongoing fight against financial crime, but also provides opportunities for organizations to offer enriched services based on this data, especially in the context of open banking. For example, FedNow’s ISO 20022 specification will allow payment messages of up to 4,000 characters, making it possible to provide detailed transactions. But with many financial institutions in the states still heavily dependent on the existing ISO 8583 financial messaging system for credit and debit card data, which was introduced way back in 1983, the migration to ISO 20022 will be huge, affecting an infinite number of components and processes, such as all must be tested and certified.
Ravi Sharma, business leader for public sector and advisory cybersecurity services for UL Solutions, a global leader in applied security science, emphasizes the need for financial institutions to have the right systems in place to manage the massively increased data flows that will follow. from adopting the 20022 standard and making sure they are up to the job.
“Because it’s all about data enrichment and collecting more and more data, even a single syntax error can result in the denial of transactions between organizations worldwide,” he explains. UL Solutions recently partnered with dedicated payment testing company Iliad Solutions to provide optional support capabilities for financial institutions and processors implementing the FedNow service and is now actively working with some members of the pilot program.
“Because it’s all about data enrichment and collecting more and more data, even a single syntax error can result in the denial of transactions between organizations worldwide.”
The sheer scale of the technology transformation needed by many financial institutions to meet the requirements of ISO 20022, including large banks, which have been adding components to their legacy infrastructure for decades, is such that they now need to make major strategic decisions, Sharma says. “They all have to either find a way to make their systems interoperable with 20022 or just build a whole new system to support this new message format,” he warns. It’s a complex puzzle to solve. Sharma uses the example of what appears, at least on the surface, to be a simple card payment in a store.
“Look at how many middleware components there are,” he says. “It’s a point of sale, which is installed at a merchant, or an online payment gateway where you enter your card information and make the payment. From there, the transaction goes to one of the gateways that can translate your message into a language that the merchant’s bank will understand. When that gateway sends it to the merchant’s bank, what we know as acquirers, they have to figure out how to format the message and validate it at the same time in a language that the network can understand, that’s when the payment network takes responsibility for doing all the checks, and to finally repackage it into a format that the cardholder’s bank is going to understand. And at the end of that process, there’s an approval, or a decline, or a hold. That’s the level of complexity we’re talking about.”
UL Solutions helps customers manage a safe passage through all of this, providing ISO 20022 advice, testing and certification along the way.
“They still have to go through this change, but we make it as seamless as possible for them by supporting the entire journey of our customers, from strategy to compliance,” says Sharma. “I take care of the consultancy activities of UL Solutions, which is about education and which has a decisive role in this entire value chain. Often there are many organizations that do not understand it. “The advisory part is followed by how we can support them with the technology, how we can support them with testing and certification using our laboratories around the world. And that’s where we look at our partnerships, because the new standard is going to affect organizations in different geographies in different ways.
“We need to ensure that customers can continue to use the technologies they’ve been using, with some updates, and then provide the advice, so they can get through compliance, testing and certification seamlessly.
“All the different industry players – payment brands like Visa, Mastercard and American Expresses, big banks, acquirers, merchant banks, issuers, gateways – will either have to find a way to make their systems interoperable with 20022, or just build a whole new system to support this new message format.”
The prize for being able to do that and become a full member of the instant payments club with the consequent impact on end users cannot be overstated, Sharma claims. It can affect entire economies.
He cites the example of SMEs that typically suffer from liquidity problems caused by delays in receiving payments for the goods and services they provide, which can jeopardize their entire business model.
“That’s where the risk management factor of ISO 20022 comes in. If we can get these real-time payments, these immediate payments in place, for small and medium-sized businesses, then there’s a sea of opportunity for those businesses.” And that’s because risk management in the banking system, which can delay or even refuse a payment, depends on the quality of the information attached to the payment message.
“It is linked to your geographic location, to your address, to your name, to your social security number, to your date of birth. This standard can help with that risk management by providing the right data for all the respective components and for all the respective actors in the ecosystem .So that’s why it’s going to be a lifeline for small and medium-sized businesses.
“Payments is a dynamic landscape,” Sharma concludes. “It changes quite a bit from hour to hour. As I speak, there will be several fintech companies working on a cool new payment app. The only constant in the industry is change.” So, as the inimitable Dylan also sang ‘you better start swimmin’ or you’ll sink like a stone’.
This article was published in The Fintech Magazine issue 25, pages 54-55
