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Building Operational Resiliency in Payments

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Although IT resiliency has long been a common theme and practice for financial institutions, the rapid digitalisation of financial services is underscoring its importance.

Over time, the financial system has become progressively more connected and in turn the risk of operational disruption more acute. As a result of threats to financial stability, resiliency has become a key focus for regulators. Most recently, in the EU and UK, the introduction of new rules will soon require financial institutions to take a more prescriptive approach to operational resiliency, by understanding how they provide their business to their clients, including operational risks and how prepared they are to manage them when disruption strikes.

The problem for banks is that while modernising payments architecture is operationally disruptive, it is key to meeting growing customer needs. Equally, outsourcing services or relying on third-party providers can enable agility but it also has the potential to create Service Level Agreement (SLA) challenges. And although API convergence, Open Banking, and 24×7 system availability are opportunities to embrace innovation and connect with customers, they demand higher levels of IT resilience than ever before.

Atul Verma

As banks lift and shift the legacy systems and applications that process payments to respond to the demands of the digital economy, what are the key considerations when it comes to their resiliency frameworks?

Developing a payments strategy

Before embarking on a digital transformation programme, banks need to really understand the tapestry of their existing payment systems and how any changes could impact resilience. This requires a clear vision and roadmap for legacy payment applications. While developing a strategy can be a tricky equation, as challenges around cost and complexity will mean tactical changes along the way, having a clear roadmap in place from the outset will make it easier for banks to analyse, estimate and mitigate risks.

Determining ‘High Availability’ requirements

Functional and non-functional requirements are usually documented very well during the design and development phase of a payment application. Operational ones, on the other hand, tend to receive less attention. Considering all incumbent banks and financial institutions have legacy systems, BaU operations and support processes in place, it is very important to consider the ‘as-is’ functions and inputs from these areas. In fact, a very well captured operational requirement is a key driver for ensuring ‘high availability’.

Designing a highly available payments system requires an assessment of all interfacing applications, their complexity and affinity with the business. This in turn helps to determine SLAs. As payment processing systems are highly modular in design, it also helps to assess the requirements for each application and then categorise them into a critical graph to define the highly available environment that is needed. This in turn makes it possible to fine-tune the payment application and set the priority of execution and further processing, for example: Order Management → Payment Execution → Gateway → Scheme.

Governance and risk management

In the wake of the pandemic, banks are building flexibility into their products and services to adapt quickly to changing customer needs and market dynamics. This is moving resiliency beyond the traditional parameters of fault-tolerance, technical failure and fail-overs, to include processes and people. It is also emphasising the important role technical authorities play in ascertaining the resiliency of payments applications before they move into production. Every business needs IT to support its goals, and the design and development of payments applications must be aligned with overall strategy.

Furthermore, payments have high risk areas which should be understood, assessed, monitored and communicated to Governance boards early in the design phase. Any unidentified risk may affect the operational resiliency of the application, so regular assessment of actions and controls should also be carried out, and a strategy in place for any known and / or accepted gaps.

Service and incident management 

Banks’ payments processing environments are a complex patchwork of systems and integrated applications.  Some of which are operated outside of a bank’s own network, usually through a cloud service or third-party vendor. When any critical application is hosted on a shared resource or server, capacity planning is an important tool to avoid critical issues caused due to a lack or misconfiguration of resources. Having SLAs in place with such third parties is therefore paramount for maintaining quality of service.

Incident management is another key consideration. Payment applications are always designed with high availability, usually with ‘zero’ RTO and RPO requirements, and so incident management plays a crucial role in fixing production issues. Although banks have traditionally focused incident monitoring on infrastructure health, monitoring and alerts must be enabled at the application, transaction, infrastructure, and network level of the payments stream. This is particularly important for low latency applications to meet the requirements of the UK’s Faster Payments Service (FPS), and other real-time payment schemes around the world. It can also provide valuable insight into trends over time which can be used to proactively avoid SLA breaches and incidents in the future.

Finance

Crypto’s tipping point

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Chris George, Senior VP of Product at Somo argues that Crypto needs to improve its scalability to be taken seriously

Cryptocurrencies are no longer the exclusive domain of high risk financiers or tech Bitcoin jockeys, willing to ride a niche and volatile asset for good or ill. Today, neobank and mainstream banking apps alike offer crypto banking, helping them trade in Bitcoin or Ethereum from as little as one dollar(https://www.revolut.com/crypto/).

Indeed, in September 2022, Finbold reported that British citizens had invested nearly £32bn in cryptocurrencies, and additional research from HMRC would have it that one in 10 UK adults has bought crypto, double the number from the previous year. 

But even given the legitimacy lent to crypto by the fact that now 50% of UK banks allow customers to interact with these currencies as well as other digital assets, how can the asset management industry turn it into a significant – and mainstream – asset, particularly in today’s turbulent economic climate? With the collapse of FTX, this must be taken into serious consideration. FTX was sold as being a safe and stable way to trade digital currency, alas this has not been the case. It turns out Sam Bankman-Fried seriously over-promised and dramatically under-delivered, gambling away customer assets and ultimately prioritising fraud and malpractice.

First, we need to acknowledge that not all crypto is created equal. Some, such as Bitcoin or Ethereum, do function as a currency, are limited in volume and therefore can increase and (as 2022 amply showed) decrease in value. But other blockchain-based crypto doesn’t behave like what most people commonly accept as currency at all. 

For there to be significant uptake in crypto as an asset, there is going to have to be a far broader and deeper understanding of what it is and what it can do. As Christophe Diserens, chief compliance officer at SwissBorg has suggested: “Value and useability are going to be key. Metcalfe’s Law has been used to value tech and internet stocks so why not crypto?”. That value took a bit of a beating during the recent sell-off and crypto’s perceived volatility will need to be addressed if it is to achieve scale. Because that’s what it’s going to need if it’s ever going to be considered as a legitimate global payment alternative in the future.

 

The role of The Merge

Not the latest B-movie, sci-fi flick, The Merge in September 2022 saw the world’s second-biggest cryptocurrency, Ethereum, move from a ‘proof of work’ to a ‘proof of stake’ protocol. This was nothing short of seismic. 

Proof of work is how the vast majority of crypto has been mined to date. People solving complex equations to validate transactions (the ‘work’) uses masses of computer processing energy, accounting for a significant slice of the world’s electricity consumption. In today’s climate (in both senses of the word), that’s just not on. 

Proof of stake, on the other hand, relies on far fewer ‘miners’, fewer computers and less energy as a result. This so-called ‘Merge’ is not only expected to reduce worldwide energy consumption by 0.2%, but also boost the crypto economy as a whole, creating more opportunities for investors and allow developers to build more products and applications on Ethereum. Ultimately, it could be what drives the decentralised internet of blockchain, crypto and NFT – Web3 – mainstream. 

What does this mean in the ‘real’ world? This could present a real opportunity for the financial services sector as a whole. It will change the way it operates, speeding up transactions, creating new business models and generally just making the whole thing a more efficient way of working. Fully cashless payments for business would be a real boon, given the costs and potential losses involved in transacting in cash. Digitisation also makes transacting an altogether more intuitive experience. 

One thing crypto and its associated technologies and solutions needs to be wary of is becoming a solution in search of a problem. For a truly mainstream breakthrough, the industry needs to make sure it’s bringing the consumer along on the journey. For end users to be truly confident in crypto, it has to benefit from the same levels of governance and regulation that cover the rest of the financial services industry, building and maintaining consumer confidence will be extremely important as trust levels have been shaken by the recent lack of solid administration and “irresponsible lending practices” leading to the FTX implosion . It has to be simple to transact, but with all the protections that investors have come to expect. It can’t afford to take them on another rollercoaster ride like 2022’s. 

While 50% of the UK’s banks may be getting on board with crypto to some degree, there is still a wide open ocean of opportunity for asset management players to realise value for themselves and their clients. It will involve some reshaping and more investment in digitisation to manage the assets of the future, whatever they may be. 

Somo, part of the CI&T family, will be publishing a report titled ‘Assessing the Crypto Conundrum: Will cryptocurrency ever be a significant trading asset and how can digitalisation shape its future?’ in 2023. 

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Skedadle to change the game for advertising with Currencycloud partnership

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Currencycloud, the experts simplifying business in a multi-currency world, has partnered with Scottish start-up app Skedadle to provide its users an easy, secure and seamless way to transfer money earned in-app while playing games on public transport.

Skedadle rewards travellers for the time they spend playing on-the-go. They can earn £2 per day simply for playing games on the move. That’s an extra £60 in their pocket each month. This can be done thanks to a disruption in the advertising market, by using algorithms to verify and track the users’ engagement with ads, proven to be higher while playing than in traditional online advertising, which increases product and brand recall for advertisers. Thanks to the partnership with Currencycloud, Skedadle users can use the app on public transport and be reassured that all financial transactions and financial data comply with the highest standards of security and validations.

By connecting to Currencycloud’s API technology, Skedadle has been able to integrate in their app a state-of-the-art payments ecosystem that seamlessly bulk settles the money earned from advertisers into a secure account and then processes withdrawals from users fast. At the same time, Currencycloud also sets the infrastructure that will enable them to grow both geographically in the UK and globally, by providing access to 38 currencies and low cost, fast FX rates.

Says Nick Macandrew, CEO and Founder at Skedadle: “Trust and security are crucial, especially when it comes to people’s money. As we rapidly grow our platform, we need a solution that can keep up with our pace and Currencycloud do just that. Our cutting-edge technology requires a secure, stable, and simple way of managing payments, whilst guaranteeing the best user experience possible.”

Nick Cheetham, Chief Revenue Officer at Currencycloud commented: “Backing bold start-ups from day one has always been part of our DNA. Skedadle’s creation of new revenue streams for travellers and advertisers alike is an exciting business endeavour. We are eager to see how the  platform can grow and disrupt the market by integrating our seamless payment capabilities.”

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