Harmonization of payment traffic: a Boost to the digitization of Switzerland
In the next few years Swiss payment traffic will be harmonized throughout. This will involve bringing together very heterogeneous set-ups run by different financial institutions and unifying all the old formats, procedures, and payment slips on the basis of the globally recognized ISO 20022 standard. Media breaks will be eliminated, and the payment process will be digitized to make it much more efficient and economical for all market participants. The harmonization initiative is the biggest financial infrastructure project to be undertaken in Switzerland in the last 30 years.
Swiss Post laid the cornerstone of today’s payment traffic in 1906 with the introduction of the postal check service and the first version of the payment slip. From that point on, the population at large was able to open their own post office checking account and make long distance money transfers. The banks followed suit by opening their own postal checking accounts to enable their clients to transfer money to bank accounts via post office counters. After World War Two the Swiss economy flourished and people grew increasingly prosperous. At the same time they had increasingly sophisticated expectations when it came to payment transactions. The decades that followed saw the emergence of a paper-based clearing system that, while cleverly designed, required a large amount of manual work to operate and was therefore slow, uneconomical, and not very efficient. To change this, in 1987 the Swiss financial industry put the Swiss Interbank Clearing (SIC) system into operation.
First automation, then harmonization
The launch of the SIC system catapulted payment traffic and banking into the electronic age. The goal was clear: to automate payments processing systematically and completely. For the last 30 years the SIC has come up to expectations. It’s been an economical, quick, and fail-safe system for making payments and has made the circulation of money throughout Switzerland extremely efficient. However, it has become apparent that merely allowing existing processes to evolve organically will not be sufficient to address the upcoming challenges of digital transformation and the growing regulatory requirements, both domestic and international. Not only this, but the set-up of existing payment systems, with formats from the 1980s, is too heterogeneous and proprietary. The first step, recently completed, was to modernize the technology of the entire SIC system. This creates the basis for implementing the Swiss financial industry’s decision to harmonize payment traffic by bringing all the different payment procedures and standards into line.
Two main drivers: digitization and regulation
The current Swiss payment traffic is unique of its kind. Although Switzerland is a very small country, for historical reasons the banks and PostFinance still operate different payment systems for both credit transfers and direct debits. At present there are more than 10 standards and formats and around 10 procedures (for example, EPO used by PostFinance and DTA used by other financial institutions), as well as 7 different payment slips. The share of electronic transfers has risen to 74% in recent years, but not all these transfers are automated from end to end. The reason is that there are too many media breaks in the overall transfer chain which make the processing of payments slower, inefficient, and prone to error. Billers use accounting software that produces paper invoices that customers then have to enter again manually in their e-banking software. Digital information is put on paper only to be re-digitized by the customer. Given the way business processes are being transformed, this is an outdated way of doing things. Media breaks in the payment process also make it harder to comply with new regulatory requirements. In 2016 the new FINMA Anti-Money Laundering Ordinance (AMLO-FINMA) entered into force. The revision of this implementing regulation was prompted by changes to the international standards designed to combat money laundering and the financing of terrorism. The banks and PostFinance can only execute payments after a thorough assessment. It’s clear that the job of checking more than a billion transfers a year isn’t made any easier by media breaks in the information process.
The Swiss economy is so intertwined with the rest of the world that the positioning of companies in this country within the global value chain plays a decisive role. Efforts to digitize payment processes can’t simply stop at the border. They all have to be aligned with global procedures and standards. Given that more than half of all cross-border payments in this country are made in euro, developments within the Single Euro Payments Area (SEPA) are particularly important for Switzerland. In mid-2014 all EU member states and the countries participating in SEPA moved their proprietary systems entirely over to the internationally recognized ISO 20022 standard; the same applies to countries such as Japan and Australia. For three reasons, this change points the way for Switzerland: an internationally recognized standard reduces the complexity of cross-border payments, facilitates the efficient implementation of regulatory requirements and recommendations, and is the ideal basis for bringing the various different Swiss payment systems together in a single, tried and tested solution.
A step into the digital future
Any attempt to seamlessly digitize payment processes will only succeed if the processes, instruments, and payment slips that have grown up over more than 100 years are all replaced and simplified. This will involve replacing all proprietary bank and postal account numbers with numbers in IBAN format, the international standard. Once electronic payment traffic has been harmonized the e-billing process will also be substantially simplified, and ultimately payment slips will be replaced by the payment part of the QR-bill. The new Swiss QR code contains all the relevant payment information, and can be read as before or scanned with any smartphone. Many sections of the population and the business world have adopted the trend to mobile and e-banking, and payment traffic will see a continuation of the trend.
End-to-end legal compliance
ISO 20022 will replace all the formats previously used for processing payments between corporate customers and financial institutions. Payment information will be transmitted in a new text-based data format and captured in data fields allowing considerably more characters than the formats presently used. This means that in addition to details of the beneficiary, it will also be possible to send the name, account number, and address of the party initiating the payment to the beneficiary’s bank, which will then be able to carry out the full checks required by the FINMA Anti-Money Laundering Ordinance.
Boosting competitiveness and competition
The Swiss financial industry is aware that as a result of harmonization all private companies, the public sector, non-profit organizations, associations, and ultimately private individuals as well, will have to modify their payment processes. The changeover to a standardized system will help create more favorable economic conditions for large and small businesses, which in turn has the potential to boost the economy and help make Switzerland an even more attractive place to do business. Harmonizing systems and formats will also lead to more competition among the banks, which will benefit their clients.
An investment in the future ...
Under ISO 20022, all payment and control processes are seamlessly connected, and following the switch to the new message types will be substantially more efficient. This will also be an opportunity for organizations to optimize their cash management, which will reduce the cost of capital. A study conducted by consulting firm Deloitte1 on behalf of the Swiss financial industry indicates that annual process and capital costs will be CHF 271 million lower following the changeover to the new system. CHF 197 million, or three-quarters of these savings, will fall to private companies, and CHF 9 million to the public sector. Financial institutions themselves will save CHF 65 million a year, but will contribute CHF 550 million, the lion’s share, of investment costs. The private sector can expect to have to pay one-time costs of CHF 500 million, which it will be able to amortize within around 2.5 years; the public sector’s costs will amount to CHF 80 million.
... and in the economic potential of Switzerland
The costs of this investment are put into perspective when you consider the importance of payment traffic for the economy as a whole. Payment systems make a key contribution to Switzerland’s economic output by supporting the entire range of domestic and international business processes. Every year, payments worth around CHF 39 trillion are processed via the interbank and customer payment systems. This means that the equivalent of 60 times Swiss GDP is transferred via the financial industry’s infrastructure. The investment entailed by the harmonization of payment traffic will facilitate the efficient fulfillment of existing and future regulatory requirements and the process of digital structural change taking place in many areas of business and society. Harmonization will thus also help ensure that Switzerland can seize its opportunities in an ever-more digital world.
Closing the digital economic cycle
Already in the past the Swiss financial industry repeatedly served as a driver of digital change and brought innovations that have helped companies penetrate new fields of business. This started with the first ATMs in the 1970s which allowed 24-hour availability, continued with account cards with magnetic strips and microchips for cashless payments at the point of sale, and was followed by e-banking. In recent years the entire flow of money in many different areas has been adapted to changing lifestyles and ways of doing business. The financial industry has always managed to implement technological change in stages rather than bringing things to a standstill. This tradition continues with the harmonization of payment traffic.
Responsible structural change
Aware that payment transactions are of key importance for all sections of the population, after harmonization has taken place it will still be possible to make payments by mail and at the post office counter as before. Even after the introduction of the new QR code it will still be possible to read all the information necessary for a payment without technical equipment. Swiss financial institutions are working at all levels to ensure a smooth harmonization, and are actively supporting their clients with the changeover by providing information, training, one-to-one advice, and support to corporate clients in the form of practical tools such as example cases and test environments. The Swiss financial industry wants to actively help shape the future. But the transition will only succeed if it’s carefully geared to different lifestyles and corporate models. Progress can be brought about responsibly by providing guidance and support to as many stakeholders as possible as they take the step into the digital age.
1 Deloitte (2016): Study into the impact of payment system harmonization in Switzerland