Central banking in the 2020s

As banking continues to move towards instant payments, mainly through account-to-account transfers, and market upheavals like the current pandemic impact banking activities, the entire payments value chain is radically evolving. Tremendous change already has happened in retail banking across many countries, with new developments announced every day. For example, Saudi Arabia recently became the latest country to announce the use of instant payments at point-of-sale by scanning QR codes from a mobile device. Instant payments also have triggered a massive migration to the latest ISO 20022 payment message formats.

Within central banking, change also is happening. Central banks systematically manage the liquidity, clearing and settlement of payments, small and large, through core payment systems such as Real-Time Gross Settlement (RTGS) systems. However, many of these systems run on platforms that are between 20 and 30 years old. Further, they use bespoke message formats and are becoming increasingly costly to support and change. As a result, many central banks are launching modernization programs to replace and future proof this part of their core IT infrastructure.

Central banking systems are vital to every country and region. If an RTGS system goes down, for example, or participants are unable to connect to it, the ability of entire markets to function is at risk. Further, when payments have errors or a settlement cycle fails, it can cause serious consequences for all parties involved. Therefore, when replacing these core systems, central banks typically are very cautious. However, at the same time, they often are very ambitious.

With all this in mind, what does the next-generation central banking architecture look like?

Migrating to a common messaging standard

The single most important aspect of a next-generation architecture for central banks is the migration of all messages to a common standard, specifically ISO 20022, which is the industry standard for payment messages. This is hugely important, as it not only establishes a common payment language, but also supports the transfer of enriched data within payment messages, enabling central banks to analyze the data for routing and accounting purposes, as well as security and fraud control. A common messaging standard also leads to a better understanding of traffic and data flows through systems and networks. 

With the previous generation of central banking systems, processing speed and reliability were more valued than the ability to process additional data. Now that processing power is relatively inexpensive (and systems are better able to leverage data), enriched data has become significantly more important and easier to process. 

Achieving interoperability

Along with the introduction of ISO 20022, it is important for next-generation platforms to be flexible enough to process multiple payment types and support multiple payment schemes, all within a single environment. While many central banks manage multiple environments to ensure robustness and resiliency, the ability to run different schemes within the same environment provides greater reliability.

The concept is that, once all of the systems in a country or region use the same format and standards (ISO 20022 in this case), the central bank could then deploy a single flexible platform capable of clearing instant low-value payment messages in the same way as high-value critical payments are processed through the RTGS channel. 

Likewise, with flexible, high-powered processing platforms, central banks can process transaction batches received from automated clearinghouses in a standard way. They can open up and “debulk” the batches, process each message individually, and then monitor the messages at the end of each batch to ensure proper processing.

Sharing liquidity across multiple schemes

Operating multiple payment schemes within the same environment could potentially mean big savings for participants in terms of liquidity. Sharing liquidity across multiple schemes enables the creation of a liquidity pool with automation possibilities. It also would provide central banks with a view of liquidity across multiple channels, helping to ensure close regulatory control.

Integrating security

The legacy architectures operated by many central banks today require additional security layers over time as new challenges and new types of fraud emerge. This “bolted on” security approach is cumbersome and time-consuming, as well as reactive, which means that vulnerabilities may still exist after the work is completed. In contrast, with modern platforms, security is “baked” into systems as they are developed. This means that protecting systems and data and ensuring service continuation is much easier. In this environment, central banks can develop new fraud controls and processes more quickly as threats emerge and deploy them in real time.

The use of artificial intelligence also strengthens real-time protection from increasingly sophisticated threats, while reducing the ongoing maintenance needs of core platforms.

Conclusion

By deploying a modern universal platform capable of supporting multiple payment schemes and many different payment types, central banks can add a completely new layer of flexibility to their payment infrastructures. This will enable them to respond to new payment concepts, schemes and opportunities much more quickly and achieve greater value. Central banks also can integrate emerging payment schemes to the platforms as required, without the cost of deploying additional technology. In addition, platform reliability also will increase through more advanced security, while also reducing ongoing costs and improving liquidity usage.

Perhaps the most significant benefit will be the ability of central banks to process more rich and comprehensive data. The additional data contained in ISO 20022 messages will enable them to more effectively monitor systems, spot anomalies in processing patterns, deliver enhanced fraud and security controls, streamline back-end accounting, and provide regulators with greater information for compliance purposes.

CGI is working with central banks across the globe to help them build next-generation payment architectures. Feel free to contact me for a discussion about our work or the future of central banking in general.