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March 22, 2021

Digital Overlay Services – The New Kid on the Block


The first two decades of the 21st century saw new and disrupting phenomena in the payments ecosystem. Before that, the payments world was going through a monotonous journey, dominated by card-based payments with an occasional flutter here and there. A number of waves like Digitization, Open Banking, Real Time Payments, Cryptocurrencies, ISO 20022, etc. have disrupted the space since then. These two decades also saw the rise of the Fintech as the new player in the ecosystem.

Real Time Payment (RTP) is, of course, the biggest of the waves. For well over a decade, an increasing number of fast retail payment services have been deployed across the globe, and the trend is only growing in momentum with many countries currently developing instant payment mechanisms, and an endless stream of announcements from countries planning to go in that direction. This has also brought back an entity to its rightful place at the centre of the payments ecosystem – the banks.

Banks, until this point in time, had played a more passive role in the payments ecosystem ruled by the processors, networks, and PSPs. They have to now rise to these challenges and bring about the necessary changes in their technology, processes, and people. The growth and rollout of new RTP rails, Digitization, and Open Banking have together been one of the leading drivers of IT investment across both retail and corporate banking. The push to develop these capabilities required banks to invest considerable resources in developing new and upgrading existing capabilities in areas from the underlying payment processing platforms and orchestration layers to fraud, authentication, and digital channels. The question remained on how these investments can bring returns to the banks – Can they bring new customers? Can they bring new revenue streams? Can it help them to compete [or collaborate] with the Fintechs?

Banks would need something that would bridge the gap between their underlying payment rails and infrastructures and reach out to their customers with new and enhanced experiences, and value-added services, embrace digitization and ISO 20022 and unlock the potential of the new payment paradigm of real-time payment. That something is a Digital Overlay Service Layer; an answer to many of the challenges faced by the banks.

So what is a Digital Overlay Service Layer? Simply put, it is an API-based digital facade that provides payment and banking APIs and ancillary service APIs that often ride the real-time payments rails, and can be flexible, nimble drivers of innovation; acting as a cradle for new use cases or digital services. These digital services riding on the standard payments rails, real-time payment rail, and others – not only add value to core payments but also bring about convenience and ease of use for all participants in the payments ecosystem. The Digital Overlay Service layer delivers value to the banks as they can improve customer service and enable them to retain their customer base. Such digital services create additional revenue channels and empower the banks to compete with Fintechs, E-Commerce players, and the social media giants.

An answer to multiple challenges
Banks and FIs must respond to consumer demands for more open and transparent, always-on, real-time, global access to financial services – at a time of increasing challenges from geopolitics, cyber-criminality, regulation, and more agile, technology-driven competition in this 21st century.

Specifically for the banking sector, customer expectations are surfacing rapidly and companies with a range of profiles continue to position themselves along the value chain with disruptive consequences. E-commerce giants such as Amazon and Alibaba continue to drive towards frictionless purchasing, while API-native Fintech players are investing to take advantage of “open banking” access to previously closed interbank systems. Moreover, card companies aim to expand into the traditional banking space in response to regulation in their core markets and competition from instant payments and E-commerce platforms.

Unlocking the power of real-time payments
Real-time payment is a reality now in the US, Europe, and many parts of the world. Banks are at various stages of onboarding to real-time payment rails. But the real question that has remained with the banks is how real-time rail can generate more revenue and offset the loss from float income from other payment methods. The faster roll-out of real-time payment use cases for P2P, P2B, and B2B – either by themselves or through a Fintech partner has become the real challenge. A Digital Overlay Service Layer helps the bank in surfacing those real-time payment APIs that can enable the creation of these use cases.

Riding the Open Banking wave
A Digital Overlay Service Layer helps the banks [in EU] to comply with PSD2 norms and surface the banking APIs for the Fintech partners. From a strategic point of view, the banking industry recognizes the need to innovate in order to counter the competitive threat from non-bank entrants to the value chain; something that has been exacerbated by the development of open banking of course. RTP overlay services present a clear opportunity not just to maintain the position of the banking industry at the heart of the customer payments experience, but also to bring new value to merchant and corporate customers.

Adopting ISO 20022
Banks are typically connected to the RTP rail using ISO 20022 message protocol. However, the internal systems of the bank do not recognize this protocol. Some of them use ISO 8583, some use native formats while others use a batch method instead of an online message. Therefore, a big challenge for the bank is how they can establish communication between such disparate systems. A Digital Overlay Service layer solves this problem for the banks with its adapter and converter functionality. It can do format conversion from ISO 20022 to others and vice versa.

Therefore, banks should invest in building or buying a Digital Overlay Service layer to unlock the potential of real-time payments, open banking, and ISO 20022. A Digital Overlay Service layer would leverage the power of APIs to integrate with Fintechs and drive innovations that provide a competitive edge to the bank.


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