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Better payment innovations mean better payment regulations

Suresh Nagarajan: Senior Director, Global Cards and Payments at SQS.

Johannesburg, 25 May 2017

The global payments landscape is witnessing a significant transformation as it's affected by sweeping changes driven by regulatory initiatives, technology trends and a changing business environment. Although many factors are influencing this transformation, changing customer expectations is of particular importance.

There are several technology trends showing strong development right now. These include the rise in uptake, interest and, most importantly, comfort with IOT (Internet of things) devices; as well as the usage of artificial intelligence within financial services, explorations on distribution ledger technology and the ubiquity of APIs. These developments allow software companies to share specific data with each other, allowing cross-compatibility between apps and devices, without compromising one another's IP.

But, perhaps the most radical and unexpected trend has been the emergence of non-banks such as PayPal, Apple Pay and Android Pay, all competing in the formidable payment services space, says Suresh Nagarajan: Senior Director, Global Cards and Payments at SQS. The evolution of new business models as well as the rise of FinTech and RegTech are leading towards a whole new and unprecedented business environment.

It is important for us to grapple with the regulatory initiatives in the payments space. The payments industry now has to contend with multiple regulatory initiatives at global, national and regional levels. The post-2008-crisis financial services industry is witnessing a flurry of regulatory initiatives across all markets.

We have seen the introduction of initiatives like PSD2 in Europe and Open Banking in the UK, both of which aim to foster competition through - among other initiatives - implementation of faster and immediate payment systems in certain markets. This is all with the aim of bringing in efficiency, standardisation and, most importantly, data protection acts.

Ensuring the safety of consumers' data is critical to gaining widespread adoption and long-term usage. It only takes one security flaw to ruin a reputation and having data protection principles enshrined in regulatory acts is vital to ensuring widespread industry success.

With 20 000+ new regulatory requirements created in 2015, the complete catalogue of new regulations is projected to exceed 300 million pages by 2020 - well beyond the capacity of humans to keep up! The cost of regulatory compliance accounts for 10% of all operational spending of major banks, which totals a staggering $270 billion per year (McKinsey).

The regulators across the globe are driving the payments industry to become more innovative and competitive, but equally standardised and secure. There are more than 30 regulatory initiatives across markets, including initiatives such as Data Privacy & Protection, which is more stability focused when compared to initiatives like Open Banking, which are more transformational and innovation focused.

RegTech, touted as being the new FinTech, serves primarily to reduce costs of compliance with the aid of newer technologies. While FinTech's focus is to provide innovative and ultra-fast financial services, RegTech's focus is primarily a response to huge costs of compliance.

The above trends are changing the payments market in South Africa too. This is evident from some of the key trends and regulatory developments in South Africa, including:

* Customer protection:
* Authenticated collections
* Twin Peak model of financial regulation
* Protection of Personal Information (POPI)

* Standardisation and increasing efficiency:
* ISO 20022 implementation
* Cross-border payments

* Combating financial crime
* Financial Intelligence Centre Act (FICA) regulation

The South African banks have been working tirelessly to meet new regulatory needs; however, they must also now keep a close tab on some of the global developments like the Open API banking platform, Global Payments Initiative (GPII) by Swift, AML/ATF 4th directive and Global Data Protection Regulation. These global trends have a potential to influence the South African payments industry.

As banks prepare to deal with significant transformational changes on multiple fronts, they find themselves hindered by their legacy: siloed payment infrastructure. The legacy systems were not built to handle present day volumes, changing regulatory requirements and integration with newer channels. As the legacy payment systems struggle to cope with pressure on various fronts, huge investments are being made to build newer and faster payment systems.

Payment hubs are increasingly seen as a solution to the complex problems that hinder payment processing. There are many definitions of payment systems hubs (PSH), with varying emphasis on the issues they address in end-to-end payment processing. It can be seen as 'a solution at the centre of payment interactions, capable of invoking services. It owns the rules of payment services integration between payment services and other banking systems.' (Gartner)

The implementation of payment hubs is an expensive and multi-year initiative which needs to be clearly aligned to the business objectives of the bank. There are different approaches to implement payment hubs - be it being deployed at the front-end landing zone, at the bank-end aggregation level, or at the consolidated transaction processing level. Banks need to choose the right payment service hub framework based on their business objectives.

Such transformation exercises are fraught with many challenges and risks - lack of documentation of legacy applications, identification of redundant process, diverse file formats and standards. As payment processing is critical at enterprise level, these transformational programmes have to be carefully planned.

Our recommendation would be to:

* Create a well-defined implementation plan in line with enterprise payment strategy;
* Go for a phased approach rather than a big bang approach;
* Select the implementation approach and products in each phase in line with the business objectives;
* Have a strong domain knowledge and in-depth understanding of the regulatory landscape; and
* Use business process frameworks to accelerate and improve transformation.

SQS's expertise lies in providing independent business consultancy, testing methodology and quality management services across the software development life cycle. SQS prides itself in its strong banking and payments sector experience. Its global network of specialist consultants assist in the delivery of large-scale software development programmes and enable transformational change through strategic-level consultancy, quality management and effective test management within the tightly regulated payments landscape. For more information, visit


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