• Jamil Ahmed, Distinguished Engineer at Solace


• 02.11.2022 03:15 pm
#swift

SWIFT is the world’s leading provider of secure financial messaging services and the standard method of international fund transfers. Acting as a carrier of messages regarding transfers, as of 2018, around half of all high-value cross-border payments worldwide used the SWIFT messaging network, with SWIFT messages directing the transfer of nearly US$5 trillion worldwide each day.

With its ever-growing ubiquity, it needed to evolve so it can operate at the highest level. In late 2022, it will introduce a mandatory adoption of the ISO 20022 standard for cross-border payments. Set to have a profound effect on how banks and financial service institutions (FSIs) operate, it’s important that all understand how to properly adopt ISO 20022 and remain compliant and competitive.

Transforming Cross-Border Payment Processes

The upcoming ISO standard has the potential to radically change cross-border payment processes. Traditionally, these have been the target of complaints about delays, high costs and a lack of transparency, primarily due to limited sector-wide standardisation coupled with a heavy reliance on legacy systems.

The widespread and soon mandatory adoption of the ISO 20022 standard by SWIFT will bring about improved payment transaction data quality. In addition, it will improve interoperability between international payment schemes. all while reducing resource burden, simplifying processes at every level and allowing faster payment reconciliation.

The new paradigm’s mandatory adoption means that every single financial institution must overhaul how they send payment instruction messages. The process is no small undertaking, and while many financial institutions are already ahead in terms of adoption, others are still in the planning stages. Banks have three years to ensure the migration of SWIFT and a range of Real-Time Gross Settlement (RTGS) systems.

Banks struggling to catch up 

Banks looking to digitally transform and catch up with newer, more agile competitors like neobanks, may be envious of these younger, tech-native institutions. Fintech start-ups have the advantage of being grounded in digital technology, and their systems are created in the cloud with a modern architecture that affords them greater agility and an ability to adapt to market trends and regulations. This allows them greater flexibility to be innovative, and maximise the customer experience, especially across digital touchpoints.

Meanwhile, the legacy tech stacks of older banking institutions mean they often struggle when it comes to digital transformation, especially regarding scalability, flexibility, reliability and complexity. Traditional banks still tend to have manual touchpoints for handling payment data, such as when trying to reconcile missing or incorrect datasets. The fact that multiple steps happen in each and every payment can further complicate and stretch this legacy architecture.

A recent EY report outlined the key technology change required to meet the upcoming mandatory ISO 20022 standards. But rather than be happy with the minimum, this change represents a golden opportunity for older banking organisations to go a level beyond. They can build a tech stack that offers many more advantages and a richer environment than just meeting ISO 20022 requirements.

Every bank is different, with its own unique technical debt and strategy. Therefore it is important that software architects make the right decision when moving forward with their infrastructure. Key questions to be asked are whether a bank should build its own tech stack to meet ISO 20022 requirements, help modernise its payment process or outsource to third-party vendors to opt for complex integrations. Other sticking points include how to deal with the growing need for the cloud, real-time analytics, dealing with volume bursts, lowering value and cost as well as, they would hope, increasing volumes of transactions.

All signs point to EDA

An event-driven architecture (EDA) and an event mesh can help address not only the immediate need for ISO 20022 compliance but the need to modernise as well. Adopted by digital leaders across industries reliant on real-time data dissemination, event-driven architecture is a design pattern used across all industries, particularly by capital markets, retailers and the aviation sector.

The crux of EDA lies in the immediate distribution of information about an ‘event’, meaning any digital update, such as a payment transaction. With EDA, systems and people across an enterprise can immediately react to it. With that, the fundamental building block of EDA is the event broker - an intermediary that helps route data between the two key systems: those that publish the event information and those that subscribe to the information.

Once an event is published, the various applications that need the update subscribe to it. This is where the event mesh comes in. An event mesh is a network of event brokers that distributes information about each event from one application to another, regardless of where they’re deployed or in what cloud. This is a non-restrictive approach that gives greater flexibility to banks and Financial Services Institutions to consume whatever events they want, without complex integrations.

Going beyond payment processing 

An event mesh built with a network of event brokers dynamically routes events across the payment ecosystem, allowing for more efficient and rapid completion of transactions. The technical benefits are obvious; an event mesh simplifies governance, unlocks legacy assets and prepares for open banking. However the benefit to the business is worth noting: it reduces the cost per transaction, accelerates payments and streamlines partnerships so banks can offer products through other businesses or payment providers.

A payment ecosystem underpinned by EDA also offers improved traceability and end-to-end observability. Embedding distributed tracing into an event mesh emits trace events in a format (OpenTelemetry) that banks can use to collect, visualise and analyse in any compatible tool. EDA empowers banks to not only confirm a given message was published but better understand the journey of the message at every stage. The technology platform helps the organisation better detect and react to opportunities or threats in a timely manner.

Recent research shows there is a hunger in the financial sector for embracing event-driven architecture, with more than a quarter, (27%), of financial services companies already having a central team promoting EDA within the organisation.

Event-Driven evolution 

The mandatory adoption of ISO 20022 shows the importance of being able to move information efficiently and quickly, both inside and outside of banking organisations. It also calls attention to the necessary changes required in the sector to accommodate this.

Migrating towards an event-driven architecture is not just a proven approach to help banks and FSIs deliver on ISO 20022, but enable them to manage new and shifting industry standards going forward.