Expected impact of harmonising payment transactions in Switzerland
Today, SIX has extensively informed the public about the new payment transaction standards in Switzerland. With the introduction of the ISO 20022 standards, the payment transactions will be widely standardised. Commissioned by SIX, Deloitte has built a detailed study which focuses on the effects of the harmonization of the payment transactions. Below some key highlights of the changes and their implications on businesses and consumers.
By mid-2020, Switzerland’s financial sector will have brought all payment transactions into line with the ISO 20022 standard. This will enable all sectors of the economy to benefit from standardised payment processes and message types and from more efficient processing of payment transactions.
The importance of payment transactions to the Swiss economy
Payment transactions are the means by which money is transferred between the public sector, private companies, financial institutions and private households. They form the basis for the business cycle and are part of a group of system-critical sectors of the economy that contribute considerably greater value to the economy than their direct value-added figure suggests. The payment infrastructure promotes value creation by other stakeholders and is the basis for regulated, efficient and safe commerce both within Switzerland and with other countries.
In 2015, customer payments1 totalling CHF 6,946 billion were made in Switzerland; 78% of this total was accounted for by domestic payments, while the remaining 22% represented cross-border payments. This means that more than one fifth of the total value of customer payments is destined for payees outside Switzerland, underlining the importance of payment transactions to the country’s export-oriented economy. Switzerland’s strong links with the SEPA area, which has already implemented the ISO 20022 standard, are particularly important.
A total of 1,064 million customer payments were made in 2015, almost three quarters of them electronically (45% via online banking, 20% by file transfer, 6% by direct debit and 3% by standing order). Since 2012, there has been a steady shift away from paper-based payments and towards electronic payments, which have been growing by 2.5% a year. This shift is likely to continue and gain momentum as paper paying-in slips are replaced in the e-invoicing process by direct debits and QR codes as part of the switch to the ISO 20022 standard. Payment transactions will also increasingly reflect the move to digitalisation.
Interbank transactions denominated in Swiss Francs totalled CHF 38,889 billion in 2015, equivalent to more than 60 times Switzerland’s Gross Domestic Product (CHF 646 billion), underlining the importance of payment transactions.
The changes resulting from the ISO 20022 standard
Introducing the ISO 20022 standard will substantially standardise payment transactions. The main changes will come as a result of the complete replacement of present account numbers with IBANs as a standardised identifier and of the phasing out of paying-in slips in favour of a QR code. File transfers will in future also be based on a harmonised process of PostFinance and other financial institutions, while the direct debit procedure will be standardised as a result of the switch and will be integrated into the e-invoicing process.
These moves towards harmonisation relate to payment-related processes and cash management within private companies and the public sector; financial institutions will see the impact in their processing of payment transactions. The clearing house which processes interbank transactions will also be impacted by the switch. Private end-customers will see changes in invoice payment processes, while software suppliers will be impacted by changes in message types and the interfaces between payment software packages.
The impact across stakeholder groups2
Private companies and the public sector3
Analysts expect that private companies and the public sector will see substantial cost reductions following the switch to ISO 20022, particularly in the areas of process costs, investigation requests and capital costs.
One driver of this expected reduction in process costs is the introduction of QR codes, which will enable private companies and the public sector markedly to reduce manual input and to avoid data entry errors. The standardised introduction of IBANs to replace the account numbers currently used in payment transactions will also be a major factor in reducing costs: for example, IBAN numbers are already checked automatically for syntactic and logical accuracy when they are entered via online banking systems. Both QR codes and IBANs facilitate greater automation of payment processing and reduce the number of erroneous payments. Therefore, expenditure on manual corrections and fee-based investigations is expected to fall. Further factors in the reduction of process costs include the integration of direct debits in e-invoicing processes and the merging of PostFinance’s and other financial institutions’ direct debiting processes, which will enable infrastructure and interfaces to be standardised.
Furthermore, the new standard will enable real-time notifications when payment details are entered incorrectly, both for transfers and for debits. Private companies and the public sector will then be able to make corrections directly, facilitating more efficient cash management and a reduction in average capital costs. They will also benefit from the fact that payments currently made through PostFinance via paying-in slips will in future increasingly be processed by SIC, with guaranteed same-day posting.
Overall, these effects are likely to result in annual savings of CHF 197.0 million for private companies and of CHF 8.6 million for the public sector. The difference between these two stakeholder groups can be attributed partly to the number of institutional units in each group: 567,219 private companies against just 5,030 units within the public sector. Moreover, small and medium-sized units, of which there are many more in the private sector than in the public sector, are much less likely to be automated and, hence, particularly likely to make savings as a result of the switch.
Financial institutions and clearing house
QR codes will also drive the expected reduction in costs within financial institutions. A QR code contains multiple sets of full payment information and is markedly more robust than current coding lines, making the scanning process less prone to error. The structured data fields required for transfer notifications under the ISO 20022 standard also facilitate automated payment checking (e.g. through end-to-end notification and comparison of the IBAN with the payee’s name and address), thus making compliance with regulatory requirements about payer and payee transparency more efficient. Overall, it is expected that once systems are harmonised, there will be fewer disruptions to the automation chain involved in payment processing resulting from the need for manual input and correction.
For financial institutions and the clearing house, annual savings are likely to be around CHF 65.1 million, considerably smaller than for private companies. The reason is that processing of payments within financial institutions is already almost fully automated.
Private end-customers and software suppliers
Like private companies and the public sector, private end-customers will benefit from a reduction in erroneous payments as a result of the introduction of IBANs and QR codes. On the basis of an assumed reduction in fee-based investigations, the quantifiable savings each year are expected to total CHF 1.2 million. In addition, private end-customers are expected to benefit even more from time savings by scanning and directly activating payments via their smartphone using QR codes. Software suppliers will probably find that the switch pushes up the number of subscriptions to their software update and maintenance contracts for payment software and cost management solutions. However, it is not yet possible to give a reliable quantification of the impact on them.
Across all stakeholder groups, the annual recurring positive impact of the switch is estimated at CHF 271.9 million. Beyond the quantifiable impact, however, harmonisation will also open Switzerland up to the advantages of digitalisation, and compliance with international standards will secure its competitiveness. In particular, switching to the new standard will make compliance with regulatory requirements, including Swiss legislation on combating money laundering and the financing of terrorism, more efficient. This will be of advantage when other statutory requirements come on stream in future.
Transition costs4 and amortization periods
It is expected that implementing the ISO 20022 standard and achieving recurring annual cost savings will require an initial one-off transition cost of between CHF 1,020 million and CHF 1,240 million across all stakeholder groups. Financial institutions are expected to incur around half of this cost (CHF 500 million to CHF 600 million). Private companies will face a slightly smaller one-off transition cost of between CHF 450 million and CHF 550 million, while the public sector’s one-off cost will probably be between CHF 70 million and CHF 90 million.
Most of the cost incurred in harmonising payment transactions will be generated by staff expenditure, for example the staffing costs of adapting master data and the cost of employee training and information briefings. Stakeholders are also likely to face expenditure on equipment, software updates not already covered by subscriptions, scanning equipment and other hardware, as well as on external consultancy.
Setting expected one-off transition costs against the expected recurring annual cost saving produces an expected amortization period for private companies of 2.5 years. Private companies will, therefore, amortize their costs more rapidly than other stakeholder groups. Financial institutions are expected to amortize their costs over 8.4 years and the public sector over 9.3 years. The expected reduction in manual input will also free up time that private companies, the public sector and financial institutions can use for other value-creating activities.
1 According to the Swiss National Bank, the number and total value of customer transactions (outgoing payments) are based on data provided by the leading Swiss banks.
2 Analyses and calculations based on data as at 2015.
3 The public sector includes public administration and public sector businesses.
4 Expected transition costs involved in introducing the ISO 20022 standard in Switzerland are based on a plausibility-checked approximation of the cost of introducing SEPA within the EU.