Introduction to Payments and Transaction landscape

The payments and transaction industry are rapidly changing and constantly in flux due to the introduction of new payment methods, regulations, mergers & acquisitions, and innovative technology. With the advancements in technology, payment technology companies have begun to play a bigger role in the payments industry. While in the past payment processing was simply about facilitating the transfer of funds, the newest players and technologies in the payment processing world are redefining the customer experience and enabling business owners to manage their businesses with ease.

As a result of the increasingly sophisticated advancements in technology and the converging dynamics of both traditional and new payments business models, the payments and transaction services industry is an exciting and evolving field.

The background to the payment industry

The payments ecosystem includes many players that interact with each other during the payment process: issuers and acquirers, credit card networks, payment processors, payment gateways, independent sales organizations, value-added resellers, and payment facilitators. With the growing use of mobile wallets and other newer payment methods, customers expect fast, secure, and simple-to-use payment and transaction methods.

Despite its complexities and diverse institutions and technologies, the payment industry is truly a cohesive landscape that has embraced innovation. The industry’s ability to innovate and bring in innovative solutions is making the whole transaction and payment process as seamless as possible. It encompasses a range of industry sectors and business lines that facilitate and support the secure and timely transmission of complex data, communication, and information-driven transactions. The allied businesses that use payments and data transaction services include, but are not limited to, retail and commercial lending, credit and debit card issuance, payment networks and schemes, merchant acquiring, payment processing, card & POS solution providers, and loyalty & rewards. The card networks, card-issuing banks, acquiring banks, payment gateways, payment service providers (PSP), and independent sales organizations (ISO) provide the framework of the payments landscape.

Digital transactions have been accelerated across peer-to-peer (P2P), business-to-consumer(B2C), and business-to-business (B2B) transactions in 2020 and 2021 even as spending levels normalize. Stakeholders that earn fees to help complete these payments—including acquirers and processors, networks, and issuers—are racing to keep up with changes in the way people and companies transact.

Payment behavior saw changes such as declining cash usage, migration from in-store to online commerce, and adoption of instant payments during the pandemic and these shifts created new opportunities for payments players making the long-term dynamics bright.

Challenges in the payment industry

One of the key challenges is the evolving landscape of technologies and the resultant risks for payment systems. The rapid development and adoption of technology in recent years has brought about greater efficiency and productivity but the pace of change itself can be seen as a challenge.

Payment technologies have evolved rapidly to include a range of modes of payment such as RFID, NFC, and QR just to name a few, apart from leveraging biometrics, open API, artificial intelligence, and blockchain. While such technological innovations demonstrate immense potential, the full impact and resultant risk are yet to be fully understood.

Cyber security is also a fast-growing area of concern, given the sophistication of cyber threat actors and with more consumers and businesses being plugged into digital payments. This is further compounded by the interconnectedness of payment systems which heightens contagion risk. While sources of risks are borderless, the non-extra-territorial nature of most payment regulation and supervision presents a key challenge to effective regulatory oversight.

Concentration risks also require close attention, given the centralized model of prevalent payment systems. Network effects are a double-edged sword. As a payment system becomes more widely used, the implications of operational disruption would also be more far-reaching.

The growing complexity and depth of global financial markets, such as securities and derivatives markets, also have implications for large-value payment systems. Financial institutions and large corporations are facing difficulties in handling multiple types of financial instruments across multiple jurisdictions and across multiple functions within their organizations. There may be a demand for payment systems to support greater sophistication in user functionality, such as liquidity optimization facilities for banks and automated treasury services for corporate clients.

It is now a challenge to preserve trust, safeguard the resilience and integrity of payment systems; apply proportionate regulation to effectively manage risk while promoting innovation; enable connectivity through collaboration towards greater standardization and interoperability, and promote efficiency and innovation through greater competition.

With increasing digitization, cybersecurity incidences have the potential to not only cause significant business disruptions and monetary losses but also undermine the trust and confidence in the global financial system. Due to the interconnectedness of the global economy, cyber resilience is only as good as the strength of the weakest link.

It is a challenge to formulate and promote the adoption of holistic cybersecurity strategies that are constantly enhanced. The issue of complementing this with strong public-private collaboration at both domestic and international levels to strengthen collective resilience also must be considered.

With payment systems becoming more efficient and interconnected, it is also important to prevent their abuse by illicit actors, such as money-laundering and terrorism financing (ML/TF). The availability of instant payments poses challenges to traditional AML monitoring tools that operate on a batch mode, rather than on a real-time basis. Regulations should thus focus on the continuous enhancement of AML controls among industry players, supported by improved AML compliance procedures and more advanced monitoring approaches. This may include the use of machine learning and artificial intelligence capabilities to mitigate ML/TF risk while preserving the speed and convenience of faster payment systems.

In the payments industry, providers are racing to explore new transaction flows, reach new subsets of consumers and businesses, and embrace new devices and transaction technologies. So not only are there different standards to deal with, but also multiple maintenance issues associated with aligning systems with each new standard and its update. Corporate payments would undoubtedly benefit from the adoption of a single, comprehensive message standard.

As the complexity of treasury reporting requirements grows, corporate treasurers are increasingly looking to adopt industry-wide financial messaging standards that allow them to communicate electronically with their banking partners, while improving efficiency in their payments and foreign exchange (FX) functions.

Migrating to a standardized messaging platform is a huge challenge for firms. It is therefore vital to have the right foundation that can support diverse operations as they work today and enable migration to new standards in a controlled manner.

Participation in the SWIFT community is mandatory for many financial services organizations now. The SWIFT requirements are multi-faced and numerous aspects of compliance in the SWIFT framework are a challenge too. For decades, the formats supporting high-value and cross-border payments have been fractured.

The lack of common business terminology has been a key challenge across payment types, which ISO 20022 is solving through a globally accepted standard for financial messaging. Lack of interoperability due to different standards and formats have resulted in significant delays and inefficiencies in processing payments.

Global adoption of ISO 20022 is accelerating with several high-value payment market infrastructures already live and more planned to go live by 2023.

Institutions and individuals now expect simpler, more transparent payment experiences. Banks need to keep pace with changing regulatory and compliance obligations. Non-traditional entrants offering mobile payments and e-wallets threaten the traditional base of banking services. All these factors drive the need for greater agility including modernized payment systems, improved operational efficiency, and reduced costs. Against this background, payments and transaction service providers face operational challenges including:

• Managing complex regulatory and technological changes 
• Delivering faster response time for clearing and settlements 
• Providing exceptional security and continuous availability 
• Improving operations and influencing the development of new services 
• Scaling vertically and horizontally to match unpredictable workload peaks 
• Anticipating and meeting transaction growth with uninterrupted services 

How FTM helps overcome these challenges influencing the payment system

IBM Financial Transaction Manager software integrates, orchestrates, and monitors financial transactions. It delivers consistent processing across multiple payment types, enabling financial institutions to converge their payment operations onto a single platform. FTM provides run time environment and management for payment situations or processing based on user/customer, and a message standard and support to the payment industry. FTM facilitates a dashboard, integrates/orchestrates, and monitors financial transactions. 

Financial Transaction Manager for ISO 20022 High-Value Payments V3.2.4 offers the ability to process ISO 20022 high-value payment types. With the FTM, financial institutions can process Target2 and Euro1 ISO 20022 payment messages, following the High-Value Payments Plus (HVPS+) specification, through a single ISO 20022-compliant platform by using a common Internal Standard Format (ISF). Deployment, available in a public cloud, hybrid cloud, and multi-cloud is powered by Red Hat OpenShift.
Financial Transaction Manager for ISO 20022 helps financial institutions with the migration to ISO 20022 for payments and supports the interaction with the Eurozone real-time gross settlement (RTGS) systems, Target2 and Euro1. FTM supports the RTGS User Detailed Functional Specifications (UDFS) 2.1 for message flows and the HVPS+ message specifications. It reduces the implementation time and cost of an ISO 20022 migration project and the time to market for new and enhanced services besides helping in real-time fraud detection or other cognitive and AI services.

Financial Transaction Manager provides the capability to integrate and unify financial transactions in various industry formats (including ISO 20022, SWIFT, NACHA, EDIFACT, ANSI X12, and others). By using Financial Transaction Management solutions, financial institutions gain visibility into message processing, balance financial risk, and facilitate effective performance management. 

FTM provides a SWIFT messaging interface that holds all SWIFT Interface certifications and offers support for all SWIFT MT and MX messages so that payments traverse alternative payment networks without back-office changes. FTM also helps launch a new SWIFT Bureau payment processing service that helps businesses expand operations cost-effectively and comply with financial regulations and serves as a highly secure, reliable platform, with full scalability for future growth (as seen in the use case to ensure full compliance and on-demand real-time payment services in a bank).

FTM supports the shift to the global ISO 20022 message standard (refer to the case study of a transaction management service provider launching a new SWIFT Payment Bureau service) to provide a single platform for all payment processing operations that ensures compliance with the ISO 20022 standard. FTM works across channels and payment networks to help enable predictive insights, improve the organization's customer reporting, and reduce operational risk in the payment environment.