Standards - They're more interesting than you think!!! No really they are....

Standards hmm that sounds interesting Paul well yep fair point but where would we be without them?

Imagine a world where each time you tried to send money to someone, you had to navigate a new process, perhaps even create new accounts, or understand new protocols. Sounds chaotic, right? That's a world without payment standards.

The financial world thrives on trust, security and efficiency, and payment standards are the backbone of all these. 

At the most basic level, payment standards are universally agreed-upon guidelines or protocols for handling and processing transactions. These might relate to technology, like the EMV chip in credit cards, or operational practices, like how banks handle wire transfers.

Today I am joined by Santiago Cabeza Sos from Nexo Standards to help me.

Why are these standards so important? Listen up here we go….

Payments Industry Insights

History of Payments

Payment System Explained

Corporate Payments Strategy

Payment Regulations Impact

ISO20022 Standard

Digital Payments Evolution

CBDC Advancements

Cryptocurrency in Payments

Financial Technology Education

Transcript

SPEAKER_01: 0:01

Welcome back, dear listeners, to Bite Size Payments, where we look at their history, how they work, and of course, who does what. In this episode, we're going to talk about payment standards. Now, before you press the pause button, let's just understand that payment standards are really, really important. In fact, standards generally are really, really important. Imagine a payments world where each time you tried to send money to somebody, you had to navigate a brand new process, perhaps even create a new account. Or when you wanted to put your card into the ATM, it was too big. Well, there are lots of protocols and there are lots of issues. And without standards, trust me, it would be really chaotic. It's also true to say that sometimes these standards have created chaos in their own right. But What is really important is getting standards right. So buckle up. Here we go. Today, I'm going to be joined by Santiago from Nexo Standards. a global non-for-profit open standards organization, really leading the way with payment standards, especially for acceptance. Welcome, Santiago.

SPEAKER_00: 1:35

Yes, thanks, Paul. Welcome to everyone listening, and thanks for inviting Nexo to your wonderful podcast, Bite Size Payments.

SPEAKER_01: 1:43

Well, as you know, I'm a... I'm a super supporter of Nexo, having worked on your executive board for five years. So really great work. But let's jump into standards. Our industry is literally riddled with them. Some are extraordinarily old, and frankly, some are just ancient. They were often built to both protect a country's tax position and to have a currency walled garden. while also facilitating the ease of processing and protecting against fraud.

SPEAKER_00: 2:19

Indeed, we appreciated that time working together at Nexo. And today we can talk about something that everyone identifies with payments. I'm talking about cards. Did you wonder why every payment card in the planet is compatible with any ATM you can find anywhere in the world or can be read on any payment device? But basically it's because there is a unique global standard referring to the physical card size, shape, thickness, max stripe location, chip for contact. It's called ISO 7816 and is defining all these parameters. So let me check my notes over here and you will see how precise they are. Yes, it is here. Credit cards are... 3.375 inches wide by 2.125 inches high. And in terms of thickness is 0.03 inches. So for the one using millimeters, it makes a length of 85.6 in length, a width of 53.90 N and the thickness of 0.76. So you see, this is the same size as the US government used driver license, and it's called ID1 format, another standard for ID cards. So this was based on ISO 7810. Sorry for being that technical. But by the way, it's very close to the beautiful golden ratio, very pleasing to see, since the ancient Greek mathematicians, since the 5th century before Christ.

SPEAKER_01: 4:09

Well, yeah, I didn't know that, I have to say. But that's fascinating. But let's go backwards a little bit, because... as we'll, I think, discover through the podcast. Standards are important and they're important, have been important for a long time. So some of the very early ones are, You know, metal coins, the value of them were actually determined not only by their weight, but also, of course, the purity of the metal used. So we had standards of weights and measures for coins in ancient civilizations, which, of course, was critical. You know, you could pass off cheap gold or gold alloy instead of it being real gold, for instance. Of course, during modern times, the gold standard became a principal standard for many people. Many economies, currencies were directly linked to gold. And I think that stopped in 1931. I can't remember now. But that meant the governments were supposed to be the holders of gold reserves, which you see often in movies where banks are stealing the government's gold and what have you. But also in the London Stock Exchange, which was founded in 1801, the LSE helped standardize security trading by creating a centralized marketplace and standardized set of rules and regulation. It introduced stockbrokers, stock jobbers to make buying and selling shares more efficient.

SPEAKER_00: 5:36

Yeah. And even before that, we got older financial standards like the double entry bookkeeping, So this is standard for recording financial transactions and was actually developed in Italy in the 14th century. So it involves very basically making two entries for every transaction, a debit to one account and a credit to another. This allow for better tracking of finance. Another more recent example, telegraphic codes. With the invention of the telegraph, a system was needed to securely and efficiently communicate about financial transactions. So little by little, some people developed standard codes to communicate this information, leading to the first wire transfers in 1871. So in that date, that year, basically we transfer$2,500 from San Francisco to New York City using the wire transfers. And then there is others like the MagStripe, magnetic stripe technology, one of the earliest electronic standards introduced in the 1916s. And these stripes found on the back of the credit and debit cards store account information. So they were standardized to ensure that the same card could be read by different machines, regardless of the issuing bank or the point of sale. And then the last one, our dear ISO 8583. This is an international standard for financial transaction cards, originated, you know, the interchange messaging. It is the message protocol used by the vast majority of ATMs and point-of-sale transactions worldwide. However, today we have over 1,000 different flavors of ISO 8583. So we can consider that is not anymore a standard. And that drives us to the next generation, of course. The ISO 20022, so important that I would like to discuss with you later. I think it will be very interesting for our audience.

SPEAKER_01: 7:53

Standards are innate, but they're extraordinarily innate inside of the payment industry. And they're so important that they often get ignored. In the sense that people just take them for granted and don't even realize they're there. But they're really important, Santiago, aren't they? They are.

SPEAKER_00: 8:13

They are. Let's take some examples. For example, the global shipping of goods and products. Before it was nets, wooden boxes, one week to load the ship, another to unload the ship. Then the shipping container was created. It took a while to be adopted worldwide. And here we have today shipping for almost nothing from China. So we can say that the box, that box, made that change the global economy. Rail tracks is another example. you define very precisely the tracks distance separation, and you can use any train rolling on these equivalent rail tracks.

SPEAKER_01: 8:59

Look, I think it's really important at this moment in time, because I would argue, and I've said throughout the podcast, that really payments is going through a once-in-a-lifetime change. Everything to date has mostly been analog. Now we're going to digital payments. There are lots of issues and lots of changes right now in our industry, right?

SPEAKER_00: 9:19

Indeed. Yeah, that's right. The payment industry is facing a number of challenges today. So to list a few, I will include the increasing globalization of payments, the rise of new payment technologies, and the need to improve security and compliance.

SPEAKER_01: 9:37

With all that going on, Santiago, with all this change, Why are we discussing payment standards now? And why are they so important?

SPEAKER_00: 9:46

Two big things, Paul. The first one will be security. For instance, there are standards like PCI, payment card industry data security standard, that helps protect cardholder data from theft. So these ensure that everyone follows best practice to protect user information and funds from the personal identification number, PIN, to make sure that the payment software is developed securely, preventing vulnerabilities and threats, and for merchants to keep information secure and prevent breaches. The second one, the second big thing will be interoperability. Standards promote interoperability. It means that no matter where you are, your credit card, your digital wallet, your banking app works smoothly. you can thank standards for that seamless experience.

SPEAKER_01: 10:47

Yeah, and you know, we absolutely take a lot of this stuff for granted. But without it, we'd have even more issues. And I guess the problem we're going to come up to in a minute is the point that you've already raised. There are just so many standards that they're almost not a standard anymore. Okay, but look, in practical terms, what are payment standards? We've talked an awful lot about terminology that people might not understand, PCI, DSS, PIN. We've got lots of acronyms, but in real terms, what are these payment standards?

UNKNOWN: 11:34

Okay.

SPEAKER_00: 11:35

Payment standards, yeah, I know, it sounds pretty boring stuff. But stay with me, because they actually have a big impact on how you pay for everything, whether topping up your MetroCard or buying groceries. See, every time you hand over your credit card, tap your phone, or click buy, there are like dozens of companies coordinating behind the scenes, your bank, the store, payment networks, and more. For your money to seamlessly and securely go from your account into someone else, everyone needs to speak the same language and follow the same rulebook. That's what payment standards are. They are the playbook. They make sure your payment info is secure. They enable your money to move smoothly between different players. and they help set consistent rules so payments work identically whether you're spending your dollars in San Francisco or using your car to buy croissant when on vacation in Paris. Without common standards, it will be chaos. Online purchases from Amazon will be declined or stuck. Then while boring on the surface, payment standards support everything going on behind the scenes to ensure your payments work seems lead anytime, anywhere. Yeah, the glue holding it all is not exciting stuff, but kind of essential to efficiently get money from point A to point B. So payment, they are used, the standards by all type of business, from a small business to large corporations, as well by consumers, what you called in a precedent episode of bite-sized payments, the super users.

SPEAKER_01: 13:25

Yeah, it did. And, you know, we super users, we've traveled a lot. And I can remember, you know, when actually cards did not work everywhere. Or even, you know, you went to a store and there were several card machines. So, you know, we now take it for granted. You've got your card, you'll travel, and it'll just work. But it really wasn't always like that, was it?

SPEAKER_00: 13:53

No, it wasn't. Historically, different countries or even different banks within the same country had their own systems. But as commerce became more global, the need for universal standards became clear. Diner's Club in 1915, as the first payment card in the world, was accepted initially in just 27 restaurants in New York City. Then came a visa nationwide. And today you can use your visa card in the same way in over 100 million merchants locations worldwide.

UNKNOWN: 14:34

Wow.

SPEAKER_01: 14:34

Wow, that's a very interesting stat. 100 million merchants. Wow. But, you know, they really help to reduce costs, improve efficiency for the business. And when businesses use the same standards, they can process payments a lot more quickly, easily, saving time and money.

SPEAKER_00: 14:54

Yeah, and there is also the element of innovation. Standards provide a foundation upon which new technologies can be built. Think about contactless payments or QR code based transactions. Once the standard is established, innovators can develop solutions around it without reinventing the wheel. They can differentiate, however, themselves from some other areas like customer experience, price, etc. Can you make it a bit more tangible? Can you give us a few

SPEAKER_01: 15:25

more examples, Santiago?

SPEAKER_00: 15:26

Yeah, there are many different types of payment standards in use today. Some of the most common payment standards include the ISO 20022, by his full name, Universal Financial Industry Message Scheme, was created by the International Organization for Standardization, ISO. So it's a global standard for financial messaging and debt exchange. It is used by a wide branch of financial institutions, including central and international banks, and payment processors, but there is more. SWIFT, I think that many people know them, is a global messaging network that connects financial institutions in over 200 countries and territories. So it supports a variety of payment standards, including ISO 20022. And then for the ones in the US listening to us, there's the ACH, Automated Clearinghouse, a network that facilitates the electronic transfer of funds between financial institutions in that country. Then Visa, MasterCard, Global Credit and Debit Card networks, they have their own property payment standards that they are used by merchants and consumers around the world. And to name it, PayPal. It's a popular online payment system that has its own proprietary payment standard. It's not a truly standard, but a de facto standard, as the market said they have in the payment means space.

SPEAKER_01: 16:58

Yeah, I think that's important to say there are de facto standards here as well. But it's not just cards, is it? It's a whole industry, whether it's electronic cards, Payments, they have their own standards. So we have FedNow, we have T2, we have Swift, as you mentioned. We have Vax, we have Euro One, we have Tips, etc. They're all different and they all kind of do similar things. But they were designed at very different times, with different needs, and of course, in different countries, with absolutely little or no... Nobody's sharing information outside of that country. Now, that's not always true for faster payments. A lot of that's been done. But, you know, when people were building backs, they didn't go and speak to America and say, hey, what are you doing? And as you talked a little bit earlier, you know, roughly there is about 200-ish countries with electronic payment systems. which kind of means there are at least a thousand different rails with their own standards and own protocols to go with them. Boy, that's a lot of standards doing extraordinarily similar things.

SPEAKER_00: 18:15

Yeah. So imagine you are a bank or a merchant, right? So you are in the business of handling money, making transactions, accepting payments, and keeping the financial gears turning smoothly. Now, standards, they are like the rule book. the set of guidelines that everyone's supposed to follow to keep things fair and square. Sounds great indeed. Well, not always. First off, let's talk about the global stage. Financial transactions are not just happening down the street. The 1,000 rails you mentioned are crossing borders, jumping time zones, different currencies, and navigating different regulatory landscapes. Now, Imagine trying to align your standards with every small, hidden, or obscure place of the financial world. It's like playing a never-ending game of regulatory Tetris. Nexo standards are truly global, so it helps along the lines of collaboration you refer. And here's the kicker. Everyone has a view to these standards. You got first world economies trying to lead, then developing countries wanting to say, And then there's the constant evolution of technology. It's like trying to herd cats, not an easy thing. Now, let's zoom into the tech side of things. We're living in a world of rapid-fire innovation. Fintech is booming, and every day there's a new company or financial service changing the game. Think about the recent buy now, pay later trend, but sound as well. They move at their own pace. It's like trying to fit a sleek, modern sports car into a horse-drawn carriage. They, too, just don't sync up easily. And there's that need of balancing between stability and innovation. Banks are caught in this, when in between wanting to embrace cutting-edge tech, and maintaining the rock solid stability that the financial system demands. It's like walking on a tight rope with a rock in one hand and a feather in the other. So no wonder standards can be a challenge for our friends in the banking and merchant world. It's a wild ride out there and standards are the roller coaster that keeps in sync this fall.

SPEAKER_01: 20:40

It's really interesting with my time at Nexo. It really opened my eyes to the Deep differences, different needs, the huge amount of input from all over the world. And of course, some of it becomes political and people wanting to push forward things. But it was a real eye opener of just how important standards are. We've talked about all the complexity, all the inputs. all of the, not all of the history, but a lot of the history of how we got out of here. But how do we get out of this mess?

SPEAKER_00: 21:25

Good question. I would say that the standards development requires collaboration across industries, regions, and sometimes even competing business, what we love to say, competition. Plus, as technology evolves, standards need to be revisited and updated, which can be a lengthy and continual process.

SPEAKER_01: 21:45

I guess the key isn't drowning in a sea of standards. And it's definitely not about having a standard for every country or every region. And there used to be. But a way out of this mess for, say, card acceptance is crafting a global single standard that can be swiftly rolled out everywhere. A universal playbook, as you said. where every player has a voice, a space to collaborate and a chance to shape its needs to their unique needs. A standard that is both flexible as it is, in fact, comprehensive.

SPEAKER_00: 22:22

Well, you are fully right. In our case, for Nexo standards, it works exactly as I have just mentioned. This is the basis of our collaboration model inside our not-for-profit association. This is how we build the next generation of the payment acceptance standards, all the set of protocols and specifications that we deliver for free to the market. So it's not anything that you need to imagine. It's a reality today with a caveat. We would like to do more to grow quicker and to deliver faster to the industry. And we are not there anymore.

SPEAKER_01: 23:00

Yeah, and I think, you know, when people nowadays talk about standards, they don't necessarily talk about the card standards anymore. Everything has switched over to ISO 20022. It's probably the most famous standard from a payments point of view. There is. And of course, it's not just for payments. It's for the financial services industry. And I'm going to have a podcast just on ISO 2002. But effectively, this is the building block of all the payment standards moving forward. Nearly every new rail is based upon ISO 2002. Currently, I think there are some 76 clearings already using it. Can you just give us an overview of ISO 2002?

SPEAKER_00: 23:44

I will try to explain in a few words the ISO 20022. So first, its use for standardization is changed on trade finance transactions, and it enables richer, better structured data to be carried in payment message, leading to a more transparency and incredible customer experiences, with a goal to create a global standard for financial messaging and data exchange between financial institutions. is mandated by SWIFT for cross-border payments starting in 2025, has been adopted with major payment systems like the ones you mentioned, that were Target 2, RTGS, stands for Real-Time Gross Settlement, reference to a payment funds transfer system that enable instant transfer of money between banks on a gross basis, is one last one, And of course, it is supported by major card networks like Visa, MasterCard, Amex. And here at Nexo Standards, we are submitting our organization into ISO 20022 for the payment acceptance part.

SPEAKER_01: 24:55

This is a really great opportunity to embrace ISO for what we need to go forward. The industry needs this, right? Where are we going? What is the future of standards all about? And how do we not get into a new mess with ISO 20022?

SPEAKER_00: 25:13

It will be a good ride into the future of financial standards as we navigate the ever-changing global landscape. Let's break down some key points for the people listening today. So first off, the global scene. Financial standards have typically danced to the tune of first world economies, but hold on to your hats because large developing countries are stepping into their spotlight. They are not just players, they are becoming movers and shakers, bringing their innovations to the global financial system. As an example, as Nexo standards, over 102 members today, they are coming from every continent. Now let's talk about inclusive growth. It's time for standard-setters to broaden their vision. No more exclusive focus solely on financial stability. We are talking about a shift towards twin goals, financial stability and inclusive economic development. It can be a game changer. And here's a connected point. Representation for developing countries. There's a call for more formal and global representation in setting these standards. Do you need a proof? Check this out. The latest member to join the next standards is the Jim UEMOA, a central switch linking up to 120 banks across eight countries, if my memory is right, in West Africa. They are not just about cars. They are diving into innovations like mobile money. And we have also ad group from China too. So the best experts of QR codes payments in the world. Big moves, right? In a nutshell, I will say that the future of financial standards can be a combination of technological leaps, new payment means, geopolitical acrobatics, and a big dose of inclusive economic development.

SPEAKER_01: 27:10

Well, there you go. Geopolitical acrobatics. That's a new one on me, Santiago. But look, stay tuned because the future is knocking. Or is it already here anyway? We're trying to break it down here on Pint Size Payments podcasts. But, you know, Santiago, thank you so much. I know this is a dry subject, but it's a really important one. Thank you so much indeed for your help and your insights here.

SPEAKER_00: 27:37

Thank you, Paul. It was a big pleasure to be here with you today and trying to make Payment Standard something easier to understand for everyone listening. Your awesome podcast. Thanks, really.

SPEAKER_01: 27:49

Pleasure, mate. And as I say, great to have you here. Thanks, mate. There you go. Payment standards. I hope it was a lot more interesting than you thought. Or perhaps I started off by saying the truth of the matter is the financial world thrives upon trust, security and efficiency. And payment standards are the backbone of that. At the most basic level, payment standards are an agreed-upon rulebook for handling and processing transactions. Now, the key thing here is that that rulebook exists. And as we move forward into the digital world, we need more modern standards. And as you heard from Sender Yoga and what NEXA are doing, they're trying to help revolutionize standards. I hope you found it really interesting. And of course, as ever, please tell a friend. And if you want to get in touch, it's bitesizepayments at gmail.com. I look forward to hearing from you. And thanks to everyone who sent me email already. Cheers, guys.