eBAM – building block for digitisation

A crisis can also be a catalyst for progress. The current corona crisis is probably different from many others before because it forces us into the digital realm – from home schooling to the home office, the pressure is on to re-evaluate many activities regarding many aspects. Gaps are becoming apparent that were not perceived as such in an analogue world without contact limitations and other restrictions. Application processes, authorisations and releases are part of this.

And when we talk about cash management solutions here on the blog, I think the topic of bank account management is also part of it. This does not only include the exchange of messages at the customer-bank interface, but also the management of bank and account master data and their signature authorisations (not only the digital ones) as well as all related documents, the processes in the entire account life cycle and the tiresome balance confirmation. This is where all the requirements in the KYC area as well as authorisations and digital identities come into play.

These topics could have long since been moved to the digital world as part of eBAM – the electronic bank account management. Standardisation is needed here and it starts with the correct spelling. EBAM or eBAM or e-BAM?

The time has come – many building blocks are available. Some manufacturers in the area of cash management or treasury offer modules especially for the administration of data on the corporate customer side. Success stories can already be reported for the first purely digital account opening processes. There have also been encouraging developments regarding KYC and digital identities. Even the messages at the customer-bank interface in XML according to the ISO 20022 standard are in principle available. The further development of the standard is also being discussed by a working group of the CGI-MP (common global implementation – market practice) – a global initiative of corporate customers, financial institutions and manufacturers for the harmonisation of the use of ISO 20022 at the customer-bank interface. The standards are the basis for digitalisation. They create security for manufacturers and users.

In Germany, with the appendix 3 of the DFÜ agreement there has been a long-standing multi-banking tradition – i.e. one standard that reaches many financial institutions. For this, by now, optional topics can also be integrated such as the bank service billing (BSB). Not everyone needs to support the topic – but if they do, they need to comply with the standard. And I would like to plead for such an option on the subject of eBAM. For EBICS it is easy to transport the XML messages in the message group camt (account management) – the (harmonised) standards must be agreed upon. The simple use case of a signature authorisations overview shows a first step in this direction with EBICS using the order type HKD, but – see above – this is still only the start.

Of course, the customer-bank communication part of eBAM does not have to be realised via EBICS, SWIFT as a transport route is also possible. Even APIs open up many possibilities. Independent of the channel the basis should be a standardisation of the content (XML in harmony with json) and the basic processes. And for content in the XML format according to ISO 20022, a further chapter should be added to the appendix 3 of the DFÜ agreement.

On this basis, the above-mentioned manufacturers can then expand their products for "multi-banking" and financial institutions can offer new services to many customers with similar systems – enabling them to fit very well into the digital world with these services.

Author: Dr. Mario Reichel

Machines paying machines: how machine economy is changing payments

The machine economy (Internet of Things) is growing rapidly. More and more machines and devices are connected to each other. In 2025, a worldwide network of 75 billion devices can be expected. According to figures of the American IoT provider BizIntellia, IoT-related solutions are expected to contribute a total of about 14.2 trillion dollars to the global GDP by 2030.

IoT will thus play an increasingly big part in our life and society. This raises the question how IoT will affect payments and which potentials can be uncovered in implementations of machine-to-machine payments (M2M payments).

How are IoT and payments connected? Machines are enabled to transfer not only identities and information, but also values. They send payments to other machines autonomously, without the need for authorisation by a human. However, if these business transactions cannot run without interruptions (say, for example, the machines have to wait for a manual action such as a payment confirmation), freeze periods or even abnormal terminations can be the result – both scenarios would have to be avoided in order to fully exploit the potentials of M2M payments.

But M2M payments are not merely visionary dreams of the future. Concrete solutions are already being developed, for example, in the automotive industry. Some companies are already establishing the required ecosystems. The idea is for automobiles to have their own wallets with electronic money and thus be able to pay for fuel or toll charges without human interaction.

To analyse these effects, challenges and opportunities, we have conducted a study on the subject "Machines paying machines" that deals with the following questions in particular:
  1. Which prerequisites must be met in order to enable implementation of M2M payments?
  2. What are the challenges of implementing M2M payments?
  3. How strongly will payment transaction numbers increase due to M2M payments?
  4. Which payment methods are best suited for M2M payments?
  5. Which impact do M2M payments have on payment service providers?
  6. How should payment service providers respond to M2M payments?
For M2M payments to become reality, the participating machines must first receive their own machine identity with individual attributes distinguishing them from other machines. A secure machine identity cannot be manipulated, forged or misused. The machine is given a unique, secure identity it can use to authenticate itself within the productive network towards other machines, instances and participants.

The current legal framework is not prepared for autonomous machines either and must thus undergo further development. Both clear assignment rules for actions of autonomous systems and specific allocations of the risks involved in using autonomous systems are required. Last but not least, new liability systems are needed that take into account the particularities of autonomous machines.

In terms of practical implementation, we have identified the following fields of action, the solution to which will be especially challenging:
  1. Mapping the identification of machine payments
  2. Compliance checks in relation to a machine (KYO instead of KYC)
  3. Processing returned information (including disruptions of the processes)
  4. Taking into account a more complex and comprehensive reporting
  5. Increased security of machines and interfaces
  6. Consistent implementation of digital onboarding and digital processes
Many analyses suggest that the number of transactions will rise dramatically with M2M payments. We agree with this assessment and also expect a significant increase. Taking into account compensation effects, we estimate that by 2027, there will be about 12 billion additional machine-to-machine payment transactions in Germany and about 50 billion in the EU.

Not all currently common electronic payment methods are suited equally well for M2M payments. We believe that digital money (stablecoins, "unbacked" coins and e-currencies) and e-money are the most suitable for M2M payments.

Established payment methods generally have more or less high transaction fees. Crypto money and e-money solutions, in contrast, enable inexpensive transactions even for the smallest amounts and make them appealing for use in the IoT. After all, they offer the opportunity to economically settle even small payments for services, as far as below one cent; such as, for example, the use of a light bulb in a smart home. E-money solutions and crypto money can also be integrated independently of traditional financial service providers.
This leaves the question how the payment service providers should position themselves in the future. The Internet of Things will further reinforce the trend towards differentiation of specialist providers with a data-based business model and infrastructure providers.

Specialist providers can use the data volume increase due to the IoT to their advantage in market competition and develop additional business potentials or completely new business models. For example, precisely customised additional services can be offered to customers on the basis of detailed usage data. This depends on whether the payment service providers can manage to place themselves "on top" of the machines or at least to act as data aggregators that compile the relevant usage data into figures and transfer it.

Regarding the positioning as data aggregator or data hub, payment service providers could also ensure the necessary trust between the participating persons, companies and machines, and act as a sort of clearing instance for secure digital identities and valid data.

In summary this means that the traditional payment service providers must overcome considerable challenges. The functional and above all the technical requirements for the infrastructure of payment service providers will entail massive changes. They must meet the following prerequisites:
Completely uninterrupted availability, increasing the importance of 24/7/365 operating models and real-time transaction processing
  • Downtimes for the installation of new releases are no longer possible.
  • Ability to handle very high loads due to billions of additional transactions
  • Possibility of distinguishing between automatic and non-automatic payments, as they will be processed by different rules
  • Possibility of complete digitisation and machine onboarding
  • Future compliance with KYO for machines, which is currently not yet regulated, in combination with KYC, mapping in the corresponding systems and, in particular, organisational regulation
  • Possibility not only to trigger payments, but also to process feedback information from system and process disruptions accordingly. Based on the feedback, the machines must be able to draw the right "conclusions" in real time and select alternatives if necessary.
In addition, payment service providers must decide how they want to position themselves and adjust sales structures, as ecosystems in IoT will become increasingly important.

Author: Michael Titsch

EBICS security – when is the time to update your customer system?

With EBICS communication, various security features and regulations are specified that must be adhered to by customers and financial institutions alike. The financial institutions must always ensure that the current specifications are available and supported in their EBICS bank server. EBICS customers themselves and each individual EBICS users are, however, also responsible for ensuring the use of customer software that is continuously up to date and that meets the current EBICS security standards. It is therefore paramount both due to functional adjustments and for security reasons to frequently update the software of the EBICS client systems.

Once an existing EBICS client software has been brought up to date via updates, however, it does not mean that the EBICS software in question automatically starts to communicate with the financial institution using the most recent EBICS version and the latest security procedure. Depending on the previously used EBICS version and client functionality, this requires an update of the various application keys for encryption (E002), authentication (X002) and authorisation (A004, A005 or A006) and of the new EBICS version to be used, followed by an exchange of this data with the EBICS bank servers. It may also be necessary to update the Internet encryption (TLS) to a more recent and secure version by means of a renewed certificate exchange. Such updates usually require a proactive approach and manual adjustments by the EBICS user.

Why are these updates important?

EBICS communication via the Internet has its own specifications for security procedures. The EBICS society continuously updates and adapts them to current security requirements by means of new EBICS versions. One example are key lengths. Older EBICS versions still permit key lengths of 1024 bits for encryption (E002), authentication (X002) and authorisation (A004, A005 or A006). That length no longer meets the current security requirements as too short key lengths are considered unsafe. Newer EBICS versions only permit keys with a minimum length of 2048 bits. Another example is evident in the procedures and versions of the TLS encryption that are in use. To be able to follow security recommendations such as the ones by the BSI in Germany more flexibly, the EBICS society has created a separate annex of the EBICS 3.0 specification called Transport Layer Security, which contains the respective guidelines. As the EBICS 2.5 specification could not be adapted retroactively, the DK (Deutsche Kreditwirtschaft) has additionally issued its own recommendation document in 2019 titled Empfehlungen zu EBICS-Sicherheitsverfahren und Schlüssellängen (recommendations on EBICS security procedures and key-lengths). It contains information on the security procedures to be used in EBICS communication. See also www.ebics.de and www.ebics.org.

To allow EBICS users a smooth transition to newer EBICS versions and security standards, most financial institutions still offer their customers the older procedures in parallel with the new ones. Unfortunately, it has become clear that in many cases this leads to customers not taking the opportunity to update their EBICS communication. Many keep using older systems and procedures. This, in turn, makes it hard for the financial institutions to discontinue those old procedures.

In the end, every participant in EBICS communication expects a secure data exchange to be ensured. Nobody wants to sustain losses. Which means that everyone should take care to contribute their part. Of course, EBICS security is not the only thing financial institutions need to keep an eye on. Ultimately, all parties involved must take all possible security measures in their infrastructure and software solutions to prevent misuse and losses.

So why wait any longer? Let's do this.

Author: Michael Lembcke

Open banking: EBICS versus API

Open banking is one of the mega trends that many banks supposedly risk missing out on. As hardly any PSD2 interface seems to be market-ready, the banking supervisory authorities have granted a transition period until December 2020. However, the problem is elsewhere: many institutions are not too keen on spending their money to make the lives of open banking interface providers easier – especially considering that established protocols like FinTS and EBICS have much more to offer than has been brought to the table by the "APIsation" of banking so far.

Both protocols, FinTS and EBICS, already cover almost all areas of banking, from payment transactions and securities trading to credit business. Overall, far more than 200 processes are available which bindingly describe both the business interfaces and the technical communication between the participating partners. HBCI and FinTS have been leading the way regarding open standards in communication with financial institutions since the 90s. EBICS was introduced by the Deutsche Kreditwirtschaft (DK), or its predecessor, more than ten years ago as a binding standard for communication with corporate customers. Open banking has thus been a reality in Germany for many years already.

No uniform PSD2 interface in sight

As good as the idea of open banking may be; the debate forced by PSD2 (among other things) leaves many financial institutions at a loss, including the willing ones. On the one hand, PSD2 is supposed to bring about an open banking standard for all of Europe. Then again, legal authorities have deliberately left open the question of how exactly communication should take place and how it should be secured. As a result, providers of open banking APIs are urging the banks to implement their solutions and adopt their own interpretations of open banking, just so they won’t be left behind. On top of that, various initiatives in various countries are developing protocols for technical/business application aspects, which is bound to lead to an uncontrolled number of API dialects. Cross-country concepts, on the other hand, are still a long way off.

All of this could develop into a bottomless pit for the institutions unless a uniform PSD2 specification that every bank can follow becomes available soon. As long as this does not happen, many open banking dreams will likely remain unfulfilled. After all, by law, the opening must be free of charge and free of discrimination. Earning money with it is for others. So what should be a bank’s motivation to keep adding new API dialects free of charge, just so that third-party providers can more easily spread their apps among the people? This would reduce the institutions themselves to the status of mere service providers. It is much more reasonable to fall back on long established standards.

EBICS: open banking for corporate customers

One such standard is EBICS. It is widely spread: aside from Germany, EBICS is also popular in France. A cooperation agreement exists between the Deutsche Kreditwirtschaft and its French counterpart, the CFONB. These two largest payments markets in the Euro zone use EBICS for the corporate customer and interbank business. Switzerland (SIX) is also a fan of EBICS, and Austria (STUZZA) is thinking about joining in. Instead of drowning in the API swamp, the question should be how EBICS can be expanded to comply with PSD2. And the answer is: with a remote signature (see Fig. 1). A modern EBICS portal can generate the signature from incoming data such as the code of a PhotoTAN or a QR TAN using hardware-based methods and send it to the EBICS bank server.
Fig. 1: How remote signatures expand EBICS towards a PSD2 compliant open banking solution
EBICS offers many advantages for corporate customers. Companies that have an EBICS client can conduct secure multibanking and also use the electronic distributed signature (EDS). This enables the use of roles and rights concepts (T, A, B and E signatures) to determine, for example, whether submitted payment orders originate from authorised persons and whether the respective person has the appropriate rights to release these payment orders. Similar to FinTS, the following also applies for EBICS: the necessary infrastructure to implement open banking already exists. For this reason alone it is understandable that many institutions are reluctant to invest at the moment. There is no guarantee that they will choose the right API provider or that legislators will not issue new regulations that will render existing investments obsolete.

Author: Michael Schunk

T2/T2S big bang: banks risk exclusion from payment transactions

Payment transactions are invisible and reliable for the general public. But it does not have to stay that way: the biggest current topic that is unknown to the general public is the TARGET2/TARGET2 Securities consolidation, and with it the ISO 20022 migration and a new account model. Banks that cannot deal with this in time are in danger of being cut off from payment transactions – and customers will feel the consequences.

The migration affects all participants in the current TARGET2 system and takes place within the infrastructure of the financial institutions, central banks and the European Central Bank (ECB). Since the migration will happen as a big bang, i.e. simultaneously for all financial institutions in Europe on 21 November 2021, delays at individual institutions may also have a negative economic impact. At worst, complications in the often outdated IT systems or delays in project implementation can lead to exclusion from individual payments if the switch cannot be performed by the cut-off date.

The consequences of a failed T2/T2S consolidation for banks:
  • Exclusion from individual payments with central bank money
  • Exclusion from conducting monetary policy operations, which means in particular:
  • Open market operations cannot be used.
  • Standing facilities cannot be used.
  • The minimum reserve requirements cannot be met.

If an ancillary system connected to TARGET2, such as the SEPA-Clearer, is used for mass payments, the bank would also be excluded from the relevant clearing channels and would no longer be able to process payments.

The consequences are therefore dramatic and practically threaten the viability of the bank itself. The only remaining alternative is establishing a direct connection via another institution. However, it would also have to be decided and planned at an early stage and cannot be done just before November 2021. If this also fails, the bank's future is at risk. Relying or speculating on a possible postponement of the migration would be negligent.

However, the major challenge of the TARGET2 consolidation is not only the redesign of the account structure, but also the technical standardisation of the access for the existing TIPS and T2S systems to TARGET2, as well as the upcoming migration of the message formats.

Future access to TARGET2

The connection to TARGET2 will change. So far, SWIFT's FIN Copy service (called Y Copy mode) is used. In the future, there will be a separate dedicated communication architecture provided by the ECB that will run with the Eurosystem Single Market Infrastructure Gateway (ESMIG) as the central access point to all TARGET2 services. For this access, a Network Service Provider (NSP) that communicates with ESMIG will be required as a new participant.

Message formats

The future speaks ISO 20022, and so does TARGET2. So far, TARGET2 still uses MT messages for communication. The MT messages will be replaced by ISO 20022 messages in XML format (MX), which will be significantly more comprehensive and able to compile more information. The MX messages are not introduced in a like-for-like approach, where it would still be relatively easy to transform MT messages into MX messages; instead, the potential of the new formats will be exploited from the beginning.

This, as well as the complete rearrangement of the infrastructure, means that parallel use or an interim solution with both formats will not be possible.

Taken on too much?

New message formats, new connection channels, new players and new processes – all of it across Europe by one cut-off date. Can that work?

Due to the topicality of the subject, detailed reporting via the central banks is carried out on a strict time schedule. Project milestones are set centrally by the ECB and the achievement of objectives is regularly monitored. Each bank is responsible for its own implementation. Currently, seven participating markets (including Germany) have reported the status yellow, while 18 have reported green. At first glance, this looks as if everything is still going well - but banks that underestimate the consequences and the effort required to be compliant in time are likely to slide from yellow to red faster than they would like.

To keep things interesting, in addition to the TARGET2 consolidation, SWIFT will also switch from MT formats to MX formats. The latter will, however, allow for a four year transition phase during which financial institutions will still be able to use both formats. Given the topical proximity, it makes sense to address this issue together with TARGET2.

The list of tasks is rather long and will tie up the institutions' capacities for the next few years. Executive board members must come to understand this as well. We are not just dealing with a "compulsory exercise" here, but with the sustainability of each individual institution.

Authors: Swaantje Anneke Völkel, Thomas Ambühler

EBICS for clearing and settlement of SEPA instant payments – the new Delta document as a milestone

Since the introduction of SEPA in January 2008, the EBICS transfer protocol has also been used in interbank payments for the bilateral clearing and settlement and for the exchange of SEPA payments with the Deutsche Bundesbank. Over the years the number of European institutions which use EBICS has further expanded. Therefore, it comes as no surprise that as of November 2013 the EBA CLEARING also offers EBICS as an alternative access for so-called "garage clearing" and STEP2.

The introduction of SEPA instant payments was the next step after the conversion to SEPA for a standardisation in the European payments sector. However, due to the real-time approach, this new payment method brings a special challenge for the use with EBICS. Whereas in conventional EBICS use file-based data transfer has so far been the main focus, for interbank payments the SEPA instant payments procedure requires a message-based approach related to transactions. Thus, in November of 2017 the EBA CLEARING successfully introduced RT1 based on SEPA instant payments.

For the support of EBICS in connection with the transfer and clearing of SEPA instant payments, in October of 2019 the EBICS company officially published a Delta document for the EBICS specification (see Use of EBICS for the Clearing & Settlement of Instant Payment Transactions, www.ebics.org). It describes the modifications to be considered for the processing of instant payments using EBICS 3.0. To meet the new requirements resulting from the real-time behaviour, the new schema ebics_inst_request_H005.xsd has been added. However, for the administrative business transactions of the instant payments the file-based EBICS behaviour and, therefore, the standard schema are still required. For the use of SEPA instant payments in combination with EBICS the new schema must be added to the overall schema.

Nothing changes when using EBICS in a customer-bank relationship or for interbank payments that do not include instant payments.

The Delta document Use of EBICS for the Clearing & Settlement of Instant Payment Transactions is a welcome development. In practice, EBICS is widely in use and many other scenarios are conceivable. In order to ensure the comprehensive and uniform use of EBICS, standards and their compliance are essential. Still, it must be possible to react with flexibility to new market challenges. This document meets both objectives equally well. Another milestone has been set on the way to standardising the European payments sector.

Author: Michael Lembcke

Request to Pay (R2P) is changing payments – technical challenges

Our last blog entry on Request to Pay showed us how peaceful the Christmas season could be and how R2P could make all the associated shopping perfectly organised. Now it is still a while until next Christmas, which leaves us time to deal with the challenges of establishing R2P based payment systems.

The first aspect that warrants mentioning is the technical component. In December 2019, EBA CLEARING published format specifications that describe both the payment request (pain.013) and the response to the payment request (pain.014). Thus, the clearing part is technically defined and the "only" challenge left is to prepare the incoming and outgoing interfaces of the payment system for these processes and formats. This may sound trivial at first, but is in fact quite challenging for a payment system: both the outgoing payment request and the returning response to the request must be routed from a customer system through the payment system, the relevant clearing systems and the receiving and/or responding customer system within the shortest possible time.

This, of course, also raises the question of how customers should transport the payment request to their bank to begin with. The technical aspect is currently being discussed by the European Payments Council and the Deutsche Kreditwirtschaft (DK). A corresponding technical specification for the customer-bank interface will be created.

This is where the business component comes into play. It should involve a conceptual revision of existing systems with regard to which system shall accept incoming payment requests and which system shall respond to them. This leads to immediate follow-up questions; for example, if customers can choose whether they want to pay via SEPA or SCT Inst (provided they are given the choice at all by the design of the payment request). No less important is the question of how they shall authorise the payment request. Suitable authorisation methods are, for example, a mobile device with an established TAN system or a submission to the EBICS signature folder for signing via electronic distributed signature.

Meanwhile, information on a payment receipt from an instantly settled payment request can be provided rather easily thanks to the specified "Credit Notification for SEPA instant credit transfers".
With the right combination of technical possibilities, R2P will certainly give Instant Payments an immense boost. Admittedly, mastering the challenges along the way will require a considerable amount of effort, but in view of the numerous design possibilities, it will pay off if the implementation is handled correctly. Find out more about the application scenarios and use cases that result from the technical possibilities in the white paper "Request to Pay and its versatile applications" we created for you . Please also feel free to contact us any time for both content-related and technical discussions.

Author: Eric Waller