How technology can break down the walls around innovation in the financial sector

By Matt Nilles, Senior Director – Global Products & Solutions, Euronet Software Solutions

Change is constant and yet imperative to survival for those of us in the Technology and Financial Services industries. Once an industry that relied on paper balance sheets and reporting, financial services have seen a huge expansion in digital technology since the financial crisis of 2008. The nascent FinTech world grew up after the crisis. These smaller, more nimble companies have introduced a mountain of innovation to an industry that historically moves cautiously – almost glacially – forward.

Legacy financial institutions immediately cast fintech companies as the “bad guys,” and the topic of fintech’s role in the financial services industry can still raise quite a debate. I, for one, view fintech companies as a guiding light to innovation. Gone are the days of being an early majority or late majority innovator. Fintechs have forced financial institutions to invest heavily and move towards early adopters or even as far as innovators to survive.

The need for a data transformation layer has become even more apparent with the rapid and global adoption of real-time payments. 

A major hurdle to innovation in the financial services industry lies in the standardized messaging used to complete transactions. Globally, the financial services industry uses international standards for messaging. These message standards ensure that everyone speaks the same language and streamlines the execution of transactions. In 1987, the industry began using ISO 8583 – the same year Ronald Reagan famously stated, “Mr. Gorbachev, tear down this wall.” ISO 8583 remains the predominant messaging standard used throughout the world today. Did I mention this industry is sometimes glacial?

But with the rise of real-time payments, a new messaging standard, ISO 20022, is the new kid in town. A more robust and dynamic messaging standard, ISO 20022, shows tremendous potential, especially for the industry’s more data-focused players. Regardless of your industry, data is one of your company’s most valuable assets. The ISO 20022 messaging standard emphasizes the focus on becoming more data-driven. The metadata contained within ISO 20022 is far richer than its predecessor, including information about the transaction that companies can extract, apply analytics, and use to better the customer experience.

So why isn’t everyone jumping to ISO 20022? Well, it’s a drastic change for any tech stack, and we’ve begun to see this as a barrier to innovation. While financial institutions are eager to switch to ISO 20022, a legacy system, and the associated actions necessary to migrate to this more robust messaging stops them. Maybe you took classes in grade school to learn a second language. Learning at an early age has its advantages – we have more time, we aren’t coupled to a single language yet, and our brains are open to ideas. Try this later in life, and it’s a much different experience. You become engrained in your native language, you’re far busier, and our brains are now occupied with too much information to allow the adoption of a second language. It’s the same for many financial institutions. Their tech stack has been using ISO 8583 for decades now, and it’s all they know. It’s held together by years of updates and fixes, but it’s stable, and the one constant has been ISO 8583. Imagine breaking down years of work and disrupting operations to convert everything to a new standard. It’s a monumental task.

One method we use to bridge this gap between the old and new is a data transformation layer; this layer has become critical for financial institutions interested in transitioning to ISO 20022. The transformation layer can insulate the existing legacy solution to a new messaging standard during a wholesale migration. This layer intercepts incoming and outgoing messages and translates them to the corresponding messaging standard used on either side of the transaction. As a provider of such a tool, I have had the opportunity to see the reactions of financial institutions when they realize they’re now free to innovate and open to exploring expanded offerings for their customers.

The need for a data transformation layer has become even more apparent with the rapid and global adoption of real-time payments. Only 14 real-time payment (RTP) networks were operating globally just five years ago. Today, there are over 55 networks, with more popping up each year. There is no denying that financial institutions will need to get involved sooner than later. Nearly all the existing RTP networks use, and all future networks will use, the ISO 20022 standard. With a hot trend like RTP and an unmistakable need for help, multiple solution providers have launched tools like a data transformation layer or a gateway (translation + connection) that can quickly get banks connected to networks to generate revenue for both parties.

Change is hard, even if it’s the obvious choice. Change can disrupt day-to-day operations while presenting risk. Investment of time, money, and resources weigh heavily on the decision-makers. The good news is that while technology acts as the catalyst of change, it is also the conduit between your current state and meeting your future goals. The key is to find a partner that can help you achieve your goals of faster and more convenient digital payment methods, ultimately improving your customers’ experience. But at the same time, find a partner who mitigates risks and meets the demands of stakeholders to deliver more significant revenue and margin growth.