The countdown has begun to two major changes to European payments infrastructure. Meeting the deadline for both TARGET2 and ISO 20022 migration will be tough, but worth it says Raphael Barisaac, UniCredit’s Global Head of Cash Management and Global Co-head of Trade
In the heyday of English seaside coin arcades, there was always a penny push machine. You fed your pennies in until enough of them built up behind those perched precipitously on the edge for them to fall into the cash dispenser. There was a heart-stopping moment when the weight of all those pennies literally hung in the balance – until the urge for them to move became irresistible.
Just such a moment has been reached in the accumulation of systems, regulations, standards and reforms edging the eurozone towards a fully-realised, fully- integrated financial infrastructure. It’s been a long time coming, but the payout, in terms of infrastructure resilience, greater efficiency, improved security, access to new technologies and better usability for the EU’s central banks, retail banks and central securities depositories (CSDs), is huge.
The vision for the ‘last mile’ of this journey towards a harmonised system, and an outline roadmap for getting there, was originally set out by Eurosystem, the monetary authority for the eurozone, in 2015, a year after the Single Euro Payments Area (SEPA) – another important milestone in the harmonisation project – became fully operational in all states using the euro.
Eurosystem’s proposal, worked up in consultation with the industry, was to build on the existing Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) and related services that had, at that point, been ensuring the free flow of cash, securities and collateral across Europe for almost a decade. They included TARGET2 (for settling bank-to-bank payments), and TARGET2-Securities, or T2S, (for settling securities). An extension of the service in 2018 would also see the introduction of TARGET Instant Payment Settlement (TIPS, for short), which allows individuals and companies to transfer money directly between accounts in seconds, outside bank opening hours, using central bank money for settlement.
Eurosystem, which is comprised of the European Central Bank (ECB) and the central banks of eurozone countries, was working towards a November 2021 deadline for consolidating T2 and T2S in a single platform and launching a single market infrastructure gateway to make it easier for participants to access and use all its TARGET services. That timeline has now been pushed back to November 2022.
Meanwhile, the revised Payment Services Directive (PSD2) went live in 2019. It was another one of those ‘pennies’ nudging the eurozone towards an inevitable tipping point, as more players entered the market and payments complexity increased. Running parallel with, but inseparable from, all of this was another, much bigger initiative – the rollout of a single, universal, data-rich language for payments messaging, using XML and ASN.1 file formats, not just in Europe, but around the world: namely ISO 20020.
Described by one Bank of America executive as a ‘foundational change for our industry’, it promises to finally make different countries’ payments systems interoperable. That should automatically achieve efficiencies, transparency and, therefore, lead to better compliance.
ISO 20022 will be the adopted language for all the TARGET services in the new, consolidated system – so, the year 2022 will become the defacto deadline for
banks in the eurozone to align under the ISO standard, too.
An enormous amount of work still needs to be done inside banks to successfully migrate their systems and ready procedures for this ‘big bang’ moment, as Raphael Barisaac, UniCredit’s global head of cash management and global co-head of trade, describes it. “Being a project that is regulatory by nature means there is no fall-back. This drives you to an end date failure is not an option. You have to be ready and on time. Pure and simple,” he says.
It’s a hold-your-breath event, but everything leading to that point will have been worth it. “These types of projects are usually very difficult and painful to push through and you only start to see the benefits once the infrastructure is there,” says Barisaac. “On the other hand, we have taken the opportunity to review and streamline our internal processes and systems.
“We are a big group of very successful pan-European banks, with a large retail and corporate customer base in each of the countries where we are present. Collectively, we have a lot of different systems and legacy infrastructures, deriving from a history of mergers and acquisitions. This is therefore an opportunity to say ‘OK, leveraging this new infrastructure, what can we do better?’.
“We have already identified some of the benefits that may result from these technical changes. The conversation then begins to shift towards the additional services that we can introduce, since with an XML-based infrastructure, you are able to create new, value-added solutions in, or very close to, real time.
“In the past, it had to be approached differently, because you needed to convert a lot of formats, which deprived you of cost and efficiency savings, in order to achieve the end result.
“I believe we will see a significant improvement in our existing service level, as well as in the new solutions we are going to be able to provide to our clients moving forward.”
All this fits with UniCredit’s open banking agenda, under which the bank is rolling out an account aggregator feature for internet and mobile users in PSD2 compliant countries by the end of 2021. Already available to customers in Italy, it allows them to not only view accounts held with other providers, but also to make transfers from those accounts across the UniCredit platform. The service will be extended to customers of the bank in Germany and Austria this month.
“PSD2, in this sense, is an enabler for a free market to provide additional value-added services for both corporates and individuals,” says Barisaac.
“We are passionate about it because it allows open banking to really develop and show the type of maturity that brings wider benefits to the entire ecosystem. We are currently experimenting with application programming interfaces (APIs) in the corporate and retail space, looking at how to connect new services that were previously almost impossible to provide.”
He sees the TARGET2 and ISO 20022 migration as being co-dependent. “We call it the XML ISO 20022 journey because it has several pillars. TARGET2 is an important change, driven by the European Central Bank, but, as an industry, we’re already on a journey towards XML migration.”
SWIFT is key to that, even if it will continue to run its legacy MT (message type) protocol alongside ISO 20022 until 2025. “SWIFT’s change to ISO 20022 means that, eventually, the entire financial industry will be fully XML, bottom-up,” says Barisaac.
“This creates a lot of opportunities, including the way that you are able to foresee different types of services related to liquidity and payments.
“It is a very intensive project,” he adds. “The entire bank is working towards this migration, given that there are a lot of infrastructural and internal touchpoints. On the other hand, we have embraced this as an opportunity.
“When you see the light at the end of the tunnel and the possibilities afterwards, that certainly energises the team.”