Banks’ ‘big bang’ moment

Change is coming:

TARGET2 and ISO 20022 migration will, in effect, happen at the same time for many banks

The countdown has begun to two major changes to European payments infrastructure. Meeting the deadline for both TARGET2 and ISO 20022 migration will be tough, but worth it says Raphael Barisaac, UniCredit’s Global Head of Cash Management and Global Co-head of Trade

In the heyday of English seaside coin arcades, there was always a penny push machine. You fed your pennies in until enough of them built up behind those perched precipitously on the edge for them to fall into the cash dispenser.

There was a heart-stopping moment when the weight of all those pennies literally hung in the balance – until the urge for them to move became irresistible.

Just such a moment has been reached in the accumulation of systems, regulations, standards and reforms edging the eurozone towards a fully-realised, fully- integrated financial infrastructure. It’s been a long time coming, but the payout, in terms of infrastructure resilience, greater efficiency, improved security, access to new technologies and better usability for the EU’s central banks, retail banks and central securities depositories (CSDs), is huge.

The vision for the ‘last mile’ of this journey towards a harmonised system, and an outline roadmap for getting there, was originally set out by Eurosystem, the monetary authority for the eurozone, in 2015, a year after the Single Euro Payments Area (SEPA) – another important milestone in the harmonisation project – became fully operational in all states using the euro.

Eurosystem’s proposal, worked up in

consultation with the industry, was to build on the existing Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) and related services that had, at that point, been ensuring the free flow of cash, securities and collateral across Europe for almost a decade. They included TARGET2 (for settling bank-to-bank payments), and TARGET2-Securities, or T2S, (for settling securities). An extension of the service in 2018 would also see the introduction of TARGET Instant Payment Settlement (TIPS, for short), which allows individuals and companies to transfer money directly between accounts in seconds, outside bank opening hours, using central bank money for settlement.

Eurosystem, which is comprised of the European Central Bank and the central banks of eurozone countries, was working towards a November 2021 deadline for consolidating T2 and T2S in a single platform and launching a single market infrastructure gateway to make it easier for participants to access and use all its TARGET services. That timeline has now been pushed back to November 2022.

Meanwhile, the revised Payment Services Directive (PSD2) went live in 2019. It was another one of those ‘pennies’ nudging the eurozone towards an inevitable tipping point, as more players entered the market and payments complexity increased.

Running parallel with, but inseparable from, all of this was another, much bigger initiative – the rollout of a single, universal, data-rich language for payments messaging, using XML and ASN.1 file formats, not just in Europe, but around the world: namely ISO 20020. Described by one Bank of America exec as a ‘foundational change for our industry’, it promises to finally make different countries’ payments systems interoperable. That should automatically achieve efficiencies, transparency and, therefore, lead to better compliance.

ISO 20022 will be the adopted language for all the TARGET services in the new, consolidated system – so, the year 2022 will become the defacto deadline for banks in the eurozone to align under the ISO standard, too. An enormous amount of work still needs to be done inside banks to successfully migrate their systems and ready procedures for this ‘big bang’ moment, as Raphael Barisaac, UniCredit’s global head of cash customers in Italy, it allows them to not management and global co-head of trade, only view accounts held with other describes it. providers, but also to make transfers from

“Being a project which is, by nature, those accounts across the UniCredit not internal but regulatory, means there is platform. The service will be extended no fallback. This drives you to an end to Germany and Austria this month. date, and it has to work. Failure is not an “PSD2, in that sense, is an enabler option. You have to be ready. On time. for a free market to provide additional Pure and simple,” he says. value-added services for both corporates

It’s a hold-your-breath event, but and individuals,” says Barisaac. “We are everything leading to that point will have passionate about it because it allows open been worth it. banking to really develop and evolve into

“Infrastructure projects are usually the maturity that provides value-added very difficult and painful to drive through, services for the entire ecosystem. PSD2 and you only start to see the benefit enabled the free market to enter into once the infrastructure is there,” says areas that before were quite complicated. Barisaac. “On the other hand, we have We are experimenting with application taken the opportunity to review our programming interfaces (APIs) in the internal processes and systems, and to corporate and retail world, looking at how streamline some of them. to connect new services that before were

“We are a fairly big group of very almost impossible to provide.” successful pan-European banks, with a He sees the TARGET2 and ISO 20022 large retail and corporate customer base. migration as being co-dependent. That means we have a lot of systems and “We call it the XML ISO 20022 journey, infrastructure, deriving because it has several from our different legacies, There is pillars. TARGET2 is an from a history of mergers and acquisitions in the last decade. This is an no fallback. This drives you to important infrastructure change, driven by the European Central Bank, opportunity to say an end date, and and the most important ‘OK, what can we do better, using this new infrastructure?’. And we it has to work. Failure is not an pillar, but, as an industry, we’re already on a journey towards XML migration.” have already identified option. You have SWIFT is key to that, some of the things that derive from the technical changes. Then you can to be ready. Pure and simple even if it will continue to run its legacy MT (message type) protocol alongside start to think about the ISO 20022 until 2025. value-added services you can introduce “SWIFT’s change to ISO 20022 means using this technology. Because, with an that, eventually, the entire financial XML-based infrastructure, you are able to industry will be fully XML, bottom up,” create new, value-added solutions in real says Barisaac. “This creates a lot of time, or very close to real time. opportunities, including the way that

“In the past, you had to approach it you are able to foresee different types of differently, because you needed to convert services related to liquidity and payments. a lot of formats, which deprived you of cost “It is a very time-consuming project, and efficiency benefits, in order to achieve the entire bank is actually working the end result. I believe we will see quite towards that migration, given that it is a lot of improvement in the existing service touching a lot of infrastructural and level, but also in the new solutions we are internal applications. On the other hand, going to be able to provide to our clients.” we have looked at this as an opportunity.

It fits with UniCredit’s open banking “When you are in the middle of this agenda, under which it’s rolling out an project, it’s very tough. But when you account aggregator feature for internet and see what the end looks like, and what mobile users in PSD2-compliant countries you can generate after it, that creates by the end of 2021. Already available to a lot of energy among the team.” ■