Banks today face many challenges. They need to navigate an evolving regulatory landscape, deliver on the potential of Open Banking and respond quickly to changing customer demands. And they need to do so in an increasingly competitive landscape that requires them to co-exist and collaborate with non-traditional competitors to deliver the innovation and convenience that customers crave. It goes without saying that banks need to comply with changing regulation. But if they want to remain competitive, is compliance really enough?

An evolving regulatory landscape

The new ISO 20022 standard for payments messaging, which came into effect in March this year, aims to bring profound benefits. Ultimately, it will enable the end-to-end processing of payments across domains and geographies that currently use vastly different standards and information formats. Although banks aren’t mandated to adopt the standard until November 2025, migrating early provides access to richer, more structured data sets sooner, which will help banks automate processes, increase efficiencies and enhance straight-through processing.

Beyond regulatory requirements, banks should welcome this improved access to quality data. It gives them the power to understand the purpose of a payment, the original source, and who the beneficiary is to provide better payment reconciliations for greater accuracy and operational efficiency, including for combatting fraud. It also brings a better understanding of customer behavior, meaning institutions can build better services and tailor different products to meet customers’ needs. The EU Commission has also proposed new regulation on instant credit transfers in euro. The aim is to increase the uptake of such transfers and facilitate access for consumers and businesses, removing friction from the process. while preserving the effectiveness of sanction screening.

Most of the world’s payments market infrastructures have announced plans to make the transition to ISO 20022 and a number have already delivered this, including CHAPS in the UK, and T2 and TIPS in the EU. The FedNow immediate payments scheme has incorporated ISO 20022 from the outset and Pay.UK’s New Payments Architecture, set to replace the UK’s Faster Payments system, will also use the new standard.

Around the world, some 30 different countries are enabling instant payments making this an important area of growth within the commercial banking space. Yet legacy systems can still be an obstacle to rolling out such services.

With digital transformation reshaping how financial services are delivered and consumed, it is imperative to overcome legacy issues and to have robust regulations and frameworks in place that protect consumers, promote trust, and foster innovation.

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By GlobalData

The proposed EU PSD3 regulation has been drafted with this in mind. It aims to combat payment fraud, enhance consumer rights, level the playing field between banks and non-banks and to strengthen harmonisation and enforcement across all EU member states. It also aims to increase support for Open Banking. A new dashboard, making it easier for customers to manage data access permissions for any given payment institution, will help to facilitate this.

If we bring forward learnings from PSD2, it is not enough for banks to simply comply. As PSD3 helps to empower fintechs to become even more competitive, banks will need to find innovative ways to use, for example, Open Banking to provide better services for customers.

Changing customer demands

It’s not just retail customers that expect more from their banks today, but customers in the wholesale space too. SMEs and corporates are rapidly modernising their businesses and increasing their payment volumes internationally, both in terms of large and small payments. They’re looking for borderless payment models that deliver certainty, transparency and speed and want friction to be removed from payments.

Customers expect to be able to track payments end to end, just as they track the delivery of goods from the moment of purchase through to arrival at their home.

While banks are achieving straight-through processing for the vast majority of payments, customers want increased transparency around any issues that do occur so they can understand where the problem has arisen. Access to richer ISO 20022 data about each transaction should help banks improve transparency and payments tracking for customers.

In order to thrive it is essential to offer an end-to-end service and provide added value to customers along the way. Should a high-value payment to a corporate customer be delayed, proactively offering an increase in working capital, or FX services to address a shortfall in a particular currency, will generally be well received. Similarly, banks can bolt on the specialist expertise of fintechs in areas like fraud detection and anti-money laundering. Ease of integration through open APIs is crucial in delivering such services seamlessly through advanced technologies like artificial intelligence (AI) and generative AI.

Compliance alone is not enough

The fast-changing payments landscape is encouraging banks to actively reassess their technology strategies. The goal is not only to meet regulatory standards, but also proactively leverage emerging technologies to surpass customer expectations and outpace their rivals.

Banks today need modern, open and flexible systems. But they want to be able to consume what they want, when they want without having to take an entire end-to-end package from a software provider if they are not ready to do so. They expect a seamless move from monolithic architecture to containerised architecture and to be given that freedom of choice. Cloud implementations, and Payments as a Service solutions in particular, level the playing field of accessibility to new payments technology. Being cloud-based, such solutions can be evergreen, helping banks adapt to evolving regulation as it comes to market.

Banks are also looking to deploy systems that make it easy to collaborate and incorporate services from third parties. Such partnerships can provide banks with access to specialised expertise, and innovation that unlocks new market opportunities and improves the customer experience. Overall, they need systems that not only enhance operational efficiency and customer satisfaction but also help position them as agile, innovative, and resilient players in an ever-evolving industry.

Olivier Goube is Director of Solution Consulting, Payments at Finastra