The Automation Imperative
There has never been a more pressing need to improve efficiency in transaction banking through automation. In this blog, we will delve into the current challenges facing the correspondent banking sector and the power of payments data.
Data requirements imposed by regulation
Regulators are raising the bar in terms of the amount of data that must be included in payments messages and the requirement for banks and other payment service providers to verify that information. The adoption of ISO 20022 by SWIFT and other payment market infrastructures will allow payments messages to carry more data, in a structured format, facilitating additional regulatory requirements. Some examples include the mandatory inclusion of the LEI in UK CHAPs payments from November 2025, purpose of payments codes required in various jurisdictions, and the European Commission requirement for an IBAN-to-account holder name check.
Faster payments
As the regulatory burden increases, the time available for compliance is shrinking. Faster Payments schemes mean less time to screen and correct payment messages. The target for execution of Eurozone instant payments is 10 seconds. In order to stay in the game, PSPs need to achieve higher levels of automation in order to achieve efficiency with speed and certainty of execution.
Profitability
The challenges of maintaining profitability in the payments area may account for the significant consolidation seen in the correspondent banking business.The number of active correspondent banks has declined by 30% over 10 years despite an increase in the volume and value of transactions over the same period.
Payment failures have a significant impact on profitability. Swift estimates 5%-10% of cross border payments need to be reversed or fixed due to data challenges and each one can cost $50-$200 to repair.
Costs associated with payment failures include not only the direct cost of penalties for misdirected payments but also the cost of human intervention to repair payments, the cost of liquidity tied up during investigations and the cost of any damage to client satisfaction caused by payment delays.
However, the cost of regulatory fines in the event of a breach of AML/CFT regulations can far surpass all of these expenses.The Austrian Financial Market Authority (FMA) has recently announced that a fine of €2.1m has been imposed on Raiffeisen Bank International. It appears that RBI is being sanctioned for inadequate AML/CFT checks performed by their respondents on a downstream respondent institution. Regulators are getting tougher on the requirement for due diligence to cover the entire payment chain including the so-called “nested relationships”.
The Importance of Data
The solution to cost efficiency lies in higher straight-through processing (STP) rates which in turn depend on accurate, up-to-date payments reference data for populating, routing and repairing payments messages.
We recommend three key, simple steps to achieve the data quality that will allow for improved STP rates, improved efficiency, better client satisfaction and lower costs:
Let’s take a closer look at this three-step process, one step at a time.
Validation and Enhancement Service
The first step is to deploy a validation and enhancement service that will check creditor, creditor agent or intermediary agent information in order to help you future-proof your compliance with payments regulations, ensure interoperability across payment systems from a data perspective, and reduce the number of failed payments by means of a comprehensive set of quality checks.
These checks should include basic verification such as the format and number of characters in IBANs and account numbers is correct for the relevant country. They should check the existence of the BBAN as well as checking that the country code and currency conform to ISO standards. Similarly for BICs and national clearing codes. Validation tests should go a step further and cross-reference the BIC to IBAN, BIC to National Clearing Codes, LEI to IBAN and BIC and so on in order to validate data coherence, not merely the format of identifiers.
It is important to carry out these checks at the earliest possible stage in the payment journey. Your validation service should also flag or exclude any BIC or other Bank Identifiers belonging to an entity that is on a sanctions list, in order to eliminate as many potential non-STP transactions as possible.
Validation and client experience
A validation and enhancement service can greatly maximise its impact and value for the investment, by becoming an enabler for your clients. Combining calls on a validation API with a lookup API allows you to embed functionality in your client’s portal to auto-fill or pre-populate fields as the information is being entered. As your clients enter information, suggestions can be made via drop-down lists, e.g. the legal name of the creditor agent can be suggested as it is entered and data fields can be pre-populated. For example, the BIC, the national clearing code, and the address of the creditor agent can be provided as the IBAN is entered. Bulk upload files can be screened before being delivered for processing, saving your major corporate clients time and money and allowing them to deliver better service to their clients, in the event this is the source of outdated information.
Not only do you ensure a high level of data quality at the point of entry, but you also relieve your client from the burden of entering readily available data, ultimately improving customer satisfaction and increasing the likelihood of retaining clients.
Smart Routing
The next stage is "Smart Routing", our designated term for methodically selecting the most optimal payment route/SSI based on a bank's network, preferences, and risk policies. These optimised SSI can then be delivered to the payment processing engine in the knowledge that the likelihood of the payment being rejected or returned has been reduced to the bare minimum.
The business rules governing the automated routing selection should adhere to the same principles as a knowledgeable human payments operator at the bank would use. Business rules may exclude potentially erroneous payment routing information or sanctioned BICs. Preferences should be set to reflect the bank’s relationship with its correspondent banking partners and its global network. These enhanced SSIs enable us to effectively send them to the payment processing engine, greatly reducing the likelihood of payment rejection or return.
A control panel or dashboard for the selection and modification of business rules will permit various different business units across the bank to add or change the business rules governing the selection of the best route without having to involve the bank’s IT department or even a third-party vendor.
For example, the payment operations team may focus on business rules that provide the best opportunities for improving STP rates. Some examples would be to include SSI for CP, FX and MM rather than just Commercial Payments to give the best chance of finding a valid route. The team might set exclusion rules for potentially incorrect SSI data, for example where a beneficiary bank has indicated their own central bank as a correspondent (a common error) or suspect routes where the beneficiary bank has an affiliate that is able to clear a given currency but a third party is presented as clearer instead. An example of preference rules promoting operational efficiency would be to prefer the “shortest route” with fewest intermediaries, to prefer a correspondent located in Hong Kong as opposed to mainland China for CNY routing or to prefer a correspondent of the same group as the beneficiary bank.
The correspondent banking / financial institutions team may set rules to reflect business relationships. This could involve including payments routes dedicated to a specific client group that are not public. Exclusion rules may be set to ensure certain intermediaries are never used and preference rules can set a hierarchy of preferences among alternative correspondents for certain currency corridors, as a whole or on a country by country basis (e.g. for Euro), or to ensure that the bank’s own affiliates are preferred as clearer where available for any given currency.
The sanctions team should have the ability to overlay sanctions policy onto payment routing activity by setting exclusion rules on BICs or National Clearing Codes belonging to entities that are on the current OFAC or other sanctions list, or that belong to entities located in certain countries such as Russia, Belarus, or Iran. The team may also choose to set preference rules to make specific entities or high-risk jurisdictions “least preferred”.
Business rules allow a single optimal payment corridor to be selected taking into consideration network management priorities, operating efficiency and risk policies. When a “Smart Routing” rule set is applied to rigorously curated data that are updated on a daily basis, the chances of a misdirected or delayed payment are reduced, correspondent relationships are managed effectively and compliance with risk policies is assured.
Payment Repair
The third and final step in the process is payment repair. If a payment failure occurs despite efforts to ensure the payment message data and the routing information are correct then it is essential that rejected payments are repaired promptly.
The objective here is to minimise the costs related to payments investigations and the need to contact customers for additional information by accessing the most current SSI information to validate payment details speedily and accurately.
Purpose designed tool
The payment repair lookup tool should have an intuitive and user-friendly interface, allowing operators to quickly access the necessary information and resolve failed payments within a mere 5 seconds. It should also provide easy access to SSI information and payment scheme participation details, allowing users to review available data for efficient and secure payment processing. The tool should be equipped with features that simplify the job of payment operators and expedite the resolution of queries. For instance, if a BIC lacks SSI information, the user should be automatically directed to the Head Office information for that specific BIC. Additionally, any BIC involved in a sanctioned payment corridor should be flagged for quick identification.
Constant evolution
The payments landscape is evolving: the advent of faster payments systems and of ISO 20022 to promote interoperability along with more data requirements means that a payment repair tool must also evolve constantly in response to client feedback in order to keep pace with user requirements.
Research and information
Inevitably there will be situations that require support as well as online data. A data tool provided by a third party vendor should back up the data with a dedicated, knowledgeable research and information team that can work independently or with primary reference data providers to resolve the thornier issues which may arise.
Key to Success: Separate Data from Technology
In order to achieve the highest level of data quality of a payment message at the point of creation, in payment routing and during payment repair, it is crucial to maintain a separation between data and the applications that utilise it. To achieve the ultimate goals of automation, efficiency, client satisfaction, and risk management, it is imperative to maintain a single source of data that can be utilised across the various applications and processes within a large institution.
A single source of truth should be used to validate payments data, to select the best payment route and to repair payments data. The information may use multiple delivery options depending on the application or process - but this is so much more effective than having a different information setup for each application. This may mean a series of APIs embedded into a client portal, daily or weekly file to update information used by the central payments processing hub or an API for entities that prefer not to maintain their own SSI database. Additionally, the same information may be viewed by payment operations team members using a web based lookup tool.
Outsource data management where it makes sense
So-called “static data” in fact is in a state of constant change. Here are a few examples of how much some of the reference data required to validate payments messages is changing:
The burden of monitoring and updating external data can and should be outsourced where possible, saving banks the trouble of monitoring all these changes and freeing up time to focus on the core business of banking and payments services rather than the management of external data.
An effective third party vendor can save time and money by taking in hand the changes in format that may occur from each data source and harmonising the format. For example, SWIFT Ref will restructure the delivery of data files in 2025 requiring a major effort on the part of banks that receive these files to accommodate the new format. A data provider that will adapt to these changes and continue to deliver data in the same format can save massive amounts of IT resources and implementation costs.
