The Emerging Payments Landscape

SEMINARIO – CONVEGNOMarjan Delatinne , Business Director, SWIFT

February 2016

Agenda

• The emerging payments landscape • Real time payment trends and market solutions • Correspondent banking competitive landscape• Overview of the global payments innovation initiative (gpii)

Background

Emerginglandscape

High growth of mobile and Internet technology

Ability to do business on‐line,anywhere, anytime

High customer expectations

Set by m‐ and e‐commerce ‐must be simple, immediate, certain with cost transparency

Competition from agile new entrants

New business propositions and improved customer experience, not hindered by existing legacy

Impact of increased regulation 

• Consumer protection• Financial inclusion• Transparency• Financial crime compliance• Credit card interchange fee caps• Regional harmonization

Emergence of new technologies

New technologies, such as block‐chain / distributed ledgers, will facilitate the implementation of 

new payment systems

Threat from cybercrime

Threat is significant and growing ‐banks are having to strengthen 

their security provisions

The new reality of payments has an impact on banks

Real time market trends

RT-RPS CharacteristicsKey features to be supported by an instant payment system

24x7: payments can be sent and received all times of the day, every day of the year

24 x 7 Instantaneous Irrevocability Certainty

Instantaneous*: good funds must be available on the beneficiary’s account in, typically, less than a minute

Irrevocability: once payments are processed, they can’t be recalled

Certainty: payments sent to a beneficiary bank are individually explicitly confirmed (to both payer and payee) or rejected

*The term “Instant Payments” is increasingly used to refer to retail real-time payments

RFP for Eurozone system to be live by 2018

French domestic initiative

Denmark domestic initiative

Spanish domestic initiative

Acquisitionplanned

UK domestic initiative

Canadian payment modernisation

US Faster Payments Task Force and a US Secure Payments Task Force

US domestic initiative

US domestic initiative

Japanese domestic initiative

Singapore domestic initiative

Australian domestic initiative

RT-RPS BackgroundRecent Market developments

Need for at least one solution for the Eurozone according to ERPB

Defining SEPA SCT Inst scheme on request of ERPB

Trend in real time payments is having a profound impact on the payments ecosystem

NETS

Focus in EuropeWhat is their stake in the discussion

ERPBEuro RetailPaymentsBoard

EPCEuropeanPaymentsCouncil

ECBEuropean 

Central Bank

VocaLink

SIA

EACHAEuropean

Association ofClearingHouses EBA

Euro BankingAssociation

STET

Equens

ATOSWorldlineIBM

Redsys

IberPay

ICBPI

SWIFT Whitepaper for Real-Time Retail Payments Systems

The Global Adoption of Real-Time Retail Payments Systems

April 2015

Guidelines for the next generation of Real-Time Retail Payments Systems

July 2015

Correspondent banking challenges

The traditional correspondent banking model for cross-borderpayments is under acute pressure

End customers increasingly demanding

Domestic payments going real-time

Network rationalization

Regulatory intensity and increasing costs

Enhanced value proposition

Disintermediation

Customers and regulators push for better payments service

Banks rationalize their correspondent banking networks

Digital innovators offer new disruptive solutions

A

B

C

Correspondent banking disintermediated at origination

Local bank Local bank

PSP PSP

ACH ACH

GTB GTB

End customer (retail, SME, corp)

End customer (retail, SME, corp)

Correspondent Banking

Cor

resp

onde

nt B

anki

ng d

isin

term

edia

tion

Transfer Agent

Transfer Agent

*Icons are representative example of each model

Front Office

BackOffice

New solutions outperform correspondent banking on all dimensions except on security and inclusivity

54321

4

2

2

5

1

1

54321

4

4

4

5

5

5

54321

4

5

5

4

5

4

54321

3

2

3

3

3

4

54321

3

3

5

1

5

5

Global banks

Remittance banks

Competitive price

Security & compliance

Openness & inclusivity

Convenience & ubiquity

Transparency & predictability

Speed

Dimensions

Better than average across new solutions

Worse than average across new solutions

“1” is lowest, “5” is best score

Disruption is creeping up from C2C to SME and B2B, where mostof the banks’ transaction revenues are

1 Excluding FI to FI flows, 20132 Currently in the B2B/B2C/SME space but actively pushing towards entering into the B2B corporate space (e.g., Western Union Global Pay app)1 Excluding FI to FI flows, 2013

B2B Corporate

B2B/B2CSME

C2CCon-sumer C2C 40

C2B 15

B2C 15

B2B 235

Revenues1

USD billions Banks share Percent

70%

60%

>95%

95%

Disruption in cross-border is creeping up from C2C to SME and B2B … where most of the banks’ transaction revenues are

2

Cross-border payments revenues captured by banks; USD billions“Loss of substantial value in the new world”“Yesterday’s world” “Protect your core and capture new opportunities ”

Growth, %xx%

-150bn+ 40-120bn

ESTIMATE

128 120

30 250

400

272

-38%+20-50%

20-40

Revenue share retention

10-30

2018 if banks don’t act

Revenue share loss

+47%

2018 potential

290-370

New volumes

10-50

New revenues

Margin erosion

Yesterday’s 2018

Yesterday’s growth

2013

Banks should act now, to mitigate the loss of substantial value and to capture new opportunities

Source: McKinsey Global Payments Map

Global Payments innovation initiatives(gpii)

Objective: deliver a better customer payment experience

“Before”Traditional correspondent banking

“After”Global payments innovation initiative

1. Slow, can take multiple days

2. Expensive, multiple deducts

3. Secure and compliant

4. No transparency and predictability on cost and time

5. Convenient and ubiquitous

6. Open and inclusive (global reach)

1. Fast(er) (start with “same day”)

2. Higher efficiency & less intermediaries

3. Secure and compliant

4. Transparent and predictable, with payments tracking

5. Convenient and ubiquitous

6. Open and inclusive (global reach)

Fix key pain points first

Note regarding prices: it will be at sole discretion of each gpii member to decide the pricing strategy vis-à-vis its customers, including other financial institutions

Global payments innovation initiative (gpii)

Global payments innovation initiative (gpii)

Global reachprovided by banks connected

to domestic payments systems

Set of multilateral SLAswith customer at centre

of value proposition

Smart collaboration(e.g. enhanced compliance practices,

optimised intraday liquidity flows)

Embrace innovation(e.g. peer-to-peer messaging,

real time settlement mechanism)

Global payments innovation initiative (gpii)

Bank access channelsDomestic payment systems

SWIFT

Bank access channelsDomestic payment systems

SWIFT

Existing SWIFT messaging

Bank access channelsSWIFT for corporates

Bank access channelsSWIFT for corporates

Accessible by any bank

Differentiate vsnon-gpii banks

Still reach non-gpii banks

Reach any bank

Operational qualityOpen model

Business rule Customer experience

Payments with same day use of funds

• Cross-border payments will appear in the seller’s account the same day the transaction is processed

Transparency and predictability of fees

• There will be full transparency of the cost structure, with no hidden fees. The amount transferred to the seller’s account will be known and be reconciled smoothly

End-to-end tracking of payments

• Banks will send back a confirmation to the buyer that the seller’s account has been credited, leading to less friction between buyers and sellers

Transfer of rich payment information

• Extended remittance information will be transferred unaltered to the receiver, facilitating reconciliation of payments and invoices (initially 140 characters)

Gpii SLA dramatically improves business-to-business cross-border payments experience

The new service will help corporates grow their international business, improve supplier relationships, and achieve greater treasury efficiencies

1

3

4

2

Financial, e-commerce, fintech community

Domestic payments systems

Proactively embrace innovation, along a strategic roadmap

▪ Pragmatic approach, keep customer at center

▪ Time to market is critical: use existing platform + overlay with new business practice

▪ Proactively explore and adopt new innovative technologies (payments status tracking, real time settlement using block chain) along roadmap

▪ 3 areas of innovation: adopt inside gpii+ foster around gpii + leverage innovation in domestic systems

▪ Dedicated engagement, using multiple vehicles: Innotribe, bank labs, industry challenges, FinTech community…

Payment service providers

E-commerce platforms, social networks

3rd party banks

Domestic payments system

Real time payment system

gpiiProactively explore and adopt new innovative

technologies along a roadmap

Examples

Real time payments status tracking

Peer-to-peer messaging

Real time settlement using blockchain

…

API

Adopt innovation inside gpii

Foster innovation around gpii

Leverage innovation in domestic

systems

1. ABN AMRO Bank2. Australia and New Zealand Banking Group3. Banco Bilbao Vizcaya Argentaria4. Bank of America Merrill Lynch5. Bank of China6. Bank of New York Mellon7. Bank of Tokyo-Mitsubishi UFJ8. Natixis9. Banco Santander10. Barclays11. BNP Paribas12. Citibank13. Commerzbank14. Credit Suisse15. Danske Bank

16. DBS Bank17. Deutsche Bank18. Ecobank19. FirstRand Bank20. HSBC21. Industrial and Commercial Bank of China22. ING Bank23. Intesa Sanpaolo24. JPMorgan Chase25. KBC Bank26. KEB Hana Bank27. Lloyds Banking Group28. Maybank29. Mizuho Bank30. National Australia Bank

31. Nordea Bank32. Oversea-Chinese Banking Corporation33. Raiffeisen Bank International34. RBC Royal Bank35. Royal Bank of Scotland36. Sberbank37. Skandinaviska Enskilda Banken38. Société Générale39. Standard Bank40. Standard Chartered41. Sumitomo Mitsui Banking Corporation42. TD Bank43. UniCredit44. UBS45. United Overseas Bank 46. Wells Fargo

46 leading banks have signed up to SWIFT’s global payments innovation initiative

Banks can join the initiative at any time in 2016

SWIFT Compliance RoadmapStatus update

SEMINARIO – CONVEGNO, BolognaBen Zaug, Head of Compliance Solutions, SWIFT

February 2016

The SWIFT Financial Crime Compliance Roadmap

Standards

Data repositories

Traffic analysis

Quality assurance

Processing services

Sanctions KYC AML

Sanctions list management service

KYC Registry

Compliance Analytics

Sanctions Testing(testing / tuning of transaction & client systems) AML testing & tuning

Payment Data Quality (FATF recommendation)

Client/Name screening

Sanctions Screening Traffic Restriction (RMA)

LiveMid 20162016/2017Exploring

Sanctions Screening: SWIFT’s hosted screening service

Challenges of small institutionsChallenges of small institutions

Regulatory scrutiny and enforcementof sanctions policies is increasing

Increasing pressure from correspondents to be compliant

Available screening solutions complex and costly to maintain

Increasing challenges for low-volume financial institutions

SWIFT providesSWIFT provides

• Screening engine & user interface• Sanctions List update service with

enhancements• No additional footprint• Centrally hosted and operated by SWIFT• Real time• Simple to configure and use

• Screening engine & user interface• Sanctions List update service with

enhancements• No additional footprint• Centrally hosted and operated by SWIFT• Real time• Simple to configure and use

A fully managed service to screen all transactionsA fully managed service to screen all transactions

Your institution

• Screening engine & user interface• Centrally hosted and operated by SWIFT• No local software installation & integration• Real-time• Sanctions List update service

• Screening engine & user interface• Centrally hosted and operated by SWIFT• No local software installation & integration• Real-time• Sanctions List update service

Sanctions screening over SWIFT

Your correspondents

Sanctions Testing: Overview

29

Automate • Repeat • Compare • Monitor

Definetest objective

Downloadtest files

Processtest files

Uploadhit results

Viewtest results

Formats

Settings

Lists

Exact match testing - evaluates the filters capabilities to match sanctioned names as they appear on the tested sanctions lists.

Risk information match testing - evaluates the filters capabilities to match additional risk information such as BICs and country names.

Fuzzy match testing - evaluates the filters capability to match variants of sanctioned names.

Sanctions Testing: Fuzzy Matching by Derivation

Chart shows filter effectiveness across different fuzzy derivations

• Enterprise risk assessment

• Correspondent risk assessment

• Alignment with risk policies

Risk Assessment

• Compare anticipatory behaviour against country standards

• Periodic reviews to ensure activity is in line with anticipated risk

• Event driven reviews • Retrospective reviews

Customer Due Diligence

• FIU investigations• Country visits • Correspondent

reviews

Investigations and visits

Transaction monitoring

• Pre-calculatedmetrics

• Key Performance / Risk Indicators

Metrics and dashboarding

• Volume reconciliation • Scenario optimisation• System tuning

Compliance Analytics will bring value to…

Compliance Analytics: Overview

Compare relative distribution of transactions by value range

Track value range evolution over time

Spot anomalies in correspondent behaviour

Monitor hidden payment flows & nested activityIdentify countries of origin and destination, and which institutions are involved

Track RMA status evolution over time

• Geographic distribution of RMAs

Monitor correspondent relationships

• RMA relationships in high-risk countries

InvestigationQuality breach identification

Payment Data Quality – Responding to regulatory demands

• Provide assurance that expected payments’ data is present

• Apply one set of commonly accepted rules

• Institution can tune rules based on risk appetite and jurisdiction

• Provide neutral post fact third party reporting

• Possibility to opt into a peer comparison scheme

• Measure improvements via trend analysis

• Alert on unusual trends or behaviour (e.g. good quality gone bad, or systematic bad behaviour)

TestingMeeting regulatory

demands

Monitoring Continuous controls

with

• Identify offenders – By branch – By correspondent – By rule – By risk classification (country,

correspondent)– By currency

• Identify most broken rules– By branch– By correspondent

with

Payment Data Quality – SWIFT offering

• MT103, MT202COV, MT205COV

• Inbound and outbound flows • All entities belonging to the

financial group

Common set of rules managed centrally by SWIFT with input from the community • Shared dummy list of commonly used

not acceptable entries• Shared white list of commonly accepted

entries - synonyms• Rules applied in the flow - No

extraction/storage of fields 50/59 • All rules applied to 50/59 – Filter results

via the reporting tool

• Management information, trends, data mining, data visualisation, basic alerting

• Weekly or monthly reports• Consolidated group level, drill down to

BIC11 • Consolidated rule types, drill down to sub

rule type• Field 20 to trace back transactions• FATF country risk classification to filter

results

Scope Rules Reporting

www.swift.com

SWIFT UGM Athens - 15th December 2015 35