Episode 7: In pursuit of dataful payments with Mike Sigal & Andrew Higgins

Transcript of the recording

Justin Ferrabee:  The world is slowly standardizing the language of payments. This is happening for a number of reasons that are compelling to Canadian businesses and consumers, including international operability and richer data traveling with each payment. Although many countries have committed to implementing ISO 20022 payment message standard, including Canada, the market dynamics make broad adoption a complex challenge. There's a market gap that needs to be addressed, including limited understanding of the true potential of a completely ISO 20022-enabled payments ecosystem.

Hi. I'm Justin Ferrabee, Chief Operating Officer of Payments Canada, and your guide on ThePayPod podcast, which examines all aspects of Canada's ambitious payments modernization mission. I'm joined today by Mike Sigal, the founder of newly launch 20022 Labs, a nonprofit organization focused on furthering the adoption of ISO 20022 globally. Along with Mike we have Andrew Higgins, head of the IBM Payments Center in Canada. Thanks for joining me today on ThePayPod.

So Mike, ISO 20022. Not only does it sound boring, it sounds like something from Dr. Who or a scientific experiment in action. For those not in payments, I've seen their eyes glaze over as soon as you start with ISO part. What is it, and why is it so important?

Mike Sigal: Well, it's a payment message standard that's been around for close to 20 years now. It was defined by-

Justin Ferrabee: I thought it was new and exciting.

Mike Sigal: It's kind of new and exciting too. Actually, no, we're just getting to a critical mass where it can be really useful to the general economy on a global basis, not just here in Canada. So what's different about it is that it defines not just a payment to go from point A to point B, but it defines the business process in which that payment fits, or that security message fits, and send this stock certificate to this new shareholder.

But let me give you an example, and for this morning I'm going to use the example of blenders that are bought or paid for by a little retail shop to put up on their shelves.

Justin Ferrabee: Is it one of those really fancy blenders, or is it just [crosstalk]

Mike Sigal: It could be a really fancy blender, but we will know from the message actually.

If a shop buys some blenders, well then some time after it arrives they get a bill for those blenders, assuming they were paid on credit. Then they look at that, and they decide when to pay it. Then they write a check, and they stuff it in an envelope and they send it off to some address. Well, most payment messaging standards today are just that process of put the check into an envelope and send it, as opposed to, "Wow, it's time for me to pay for the 10 blenders just arrived," right? And, "When were they shipped? Did they arrive? Were they the right ones? Were they the right blenders that I ordered? Was there any problems with the shipping? Okay, no. Everything's right, and now I can send off the payment that matches to that invoice." When the seller gets it at the other end, they're like, "Oh, this little retail shop just paid me for these 10 blenders. It may be time for me to reorder some more," right?

Justin Ferrabee: Okay. Okay, I get it.

Mike Sigal: So it's a little long description but you understand the process steps, and where today's payment message is, which is put the check in the envelope and send it, versus, "I'm paying for my blenders."

Justin Ferrabee: So Mike, you're not from Canada. Where are you from?

Mike Sigal: Although my grandmother was born here.

Justin Ferrabee: That doesn't make you Canadian, but it's a good start anyway.

Mike Sigal: So I live in San Francisco, in the heart of Silicon Valley. From there I have a couple of different activities. I'm a very active early-stage FinTech investor through a fund called 500 Startups. We've done about, oh, nearly 70 investments in the last 24 months globally. I do a bunch of consulting work with banks and insurers on their own digital transformation strategies and cultures.

Justin Ferrabee: So why Canada? Why Toronto? A global lab headquartered in Toronto?

Mike Sigal: Well, I was introduced to the environment here in Canada several years ago through some work we did together on your FinTech Cup program. What I noticed first of all was Canada frankly is pretty far behind in payments modernization, but there's a lot-

Justin Ferrabee: We're trying to change that.

Mike Sigal: You are trying to change that. You are trying to change that.

Justin Ferrabee:  Just for the record, we're trying to change that. IBM, you're helping us, okay.

Mike Sigal: Yeah, but there's a lot of interest and activity, including from FinTech startups because we've seen a lot of great FinTech startups here. So it seemed like there was an opportunity to work with the folks here in Canada, and in particular in Toronto, to help Canda go from a lagger to a thought leader in what you can do with ISO 20022. So that was a really exciting opportunity to anchor and idea, and then I went around the world talking, validating that this lab idea is needed. Everyone loved the idea of a nonprofit, and everyone was good with the answer of, "Well, Canada's got a lot of talent in this regard, and they've got an environment where you can run a lot of experiments and prove a lot of value, and prove that the lab can make an impact."

Justin Ferrabee: Fantastic. So Andrew, you do payments for IBM in Canada. You're part of the gravitational force that has brought this lab here. How does this lab in Canada at IBM relate globally to IBM's practice and to your global customers?

Andrew Higgins: Yeah, I think to the point that Mike was making, we've always viewed Canada as a great pilot. Both from an FI perspective, corporates, FinTechs, everything going on with payments modernization in Canada, and the fact that it's, I would suggesting, learning from other experiences worldwide, looking at doing it right. If I look at that from a doing-it-right perspective, a lot of what we've done, what IBM have done in payments in Canada can be instantiated and shared, and can be learned from and grown from.

We're looking at this as a pilot for many other jurisdictions because we don't see the answer as just Canada. We don't see the only place we're focused on is just Canada, even though other jurisdictions may move forward with 20022 with many different payments modernization ... Whether it's mandated, legislated, or voluntarily, I don't think anybody's done it right. I don't think the end is there. I think that we're just at the beginning of the next iteration of doing payments worldwide. I think that we can learn from what we're doing in Canda and leverage it into other jurisdictions, and that's what we intend to do.

Mike Sigal: Yeah, doesn't hurt that if you implement this well on a cross-border basis, Canada ultimately generates more exports, more revenue than the [crosstalk].

Justin Ferrabee: Cross border's a big thing.

Mike Sigal: Yeah, we think it's pretty important.

Justin Ferrabee: Fantastic. Right on. So what inspired you to create 20022 Labs?

Mike Sigal: Well, first and foremost I think this messaging standard is really important. It is because it makes it easier and more cost effective for actors in the economy, be they people or businesses, to interact with each other and deal with commerce, right? It also bonds a lot of data to a payment message that wasn't there before, which means you can integrate it more effectively into your business processes, and you can analyze it, and you can decide what direction you want to take your business based on that analysis. That said, the value of this message is dependent upon how many people use it or how many companies use it.

Justin Ferrabee: The network effect.

Mike Sigal: Exactly. It's really hard to convince any given individual company or person to use this payment standard unless there's others in the economy that are using this.

Justin Ferrabee: Right, so who goes first?

Mike Sigal: Exactly. So I created the lab because I think we can help move along that process of getting lots of actors in the economy to use this standard.

Justin Ferrabee: Are you getting some now? Do you have a few? Is it like when you're selling Coca-Cola or something, you got to get a really good celebrity to adopt it and once they do everyone else follows, or how do you get people in to this?

Mike Sigal: Well, we've got a whole range of corporate end users. We've got a number of payment infrastructure providers, software providers, professional services providers who all agree that activating the market in this way is really interesting to them.

Justin Ferrabee: Andrew, IBM is everywhere. It works in every sector. It's big in financial services and it's global. So before we talk about ISO, can you just give us a little bit of the IBM view of it? Then you can talk about what you think's coming with the transition to ISO 20022.

Andrew Higgins: Yeah, absolutely. I agree very much with what Mike's saying. I mean, we've been building and modernizing payments in multiple geographies for multiple years now. It's been a long time. All our products have been moved to 20022 standards just a while back.

Justin Ferrabee:  Oh, so you guys are already there?

Andrew Higgins: Oh, absolutely. Absolutely. But I don't think having a standard or having products that are readily available really makes a difference when you think about driving adoption, when you think about driving a change. I think that until a business starts to exploit all the attributes associated with 20022, give themselves an advantage over their competition, you're really not going to move the needle much.

Justin Ferrabee: So they got to see somebody win before they want to do it?

Andrew Higgins: They have to see a threat before they'll do it. They have to see a necessity to change. I go back to an old futurist, Buckminster Fuller always said, "You really have to create a new model that makes the old model obsolete." I think that's what we want to help do.

Mike Sigal: Yeah, I would agree. There's a number of jurisdictions around the world who support this capability in their economy, but many of them got where they are based on regulatory mandate. Essentially the government said, "Oh, thou shalt use ISO 20022." In other economies where it's not been adopted yet or where the mandate hasn't come down from regulators yet, you need to tap, if you will, the greed or fear of the end users to decide, "We really can get a lot out of using this stuff, so we should make an investment in using it."

Justin Ferrabee: So you're talking about getting globally companies, small, medium, large, and financial institutions, and all industry onto this standard and using it?

Mike Sigal: It would be to their benefit.

Justin Ferrabee: That's not a small challenge.

Mike Sigal: No.

Justin Ferrabee: How are you going to do it?

Mike Sigal: Well, I alluded to it a moment ago. We want to go to ... starting with the large corporate customers who can see the most benefit out of using this capability set. Basically first showing them what can be done generally for companies, then for companies in their same business or in their same geography, right? So give them some more context, what they stand to gain by adopting it, like reducing the cost of reconciling the payments that you receive, right? Then help them look through their own organization to create a business model to identify the risks of adopting it. So basically helping them along the entire journey of deciding to implement 20022.

We feel that if we do that with the demand side, with the customers, then the suppliers in the economy, the payment systems, the banks, will be able to see that they'll get a return on the frankly very large investments they have to make. So start with demand.

Justin Ferrabee: So what is the lab portion? Where's the experimentation, and the beakers, and all the lab coats, and all the cool, neat innovation stuff happening?

Mike Sigal: There's two pieces to that. The first one is assuming that intellectually and by business model you decided that it's worth investing in this new capability, then you want to figure out what the risks to your organization are. Is your current systems going to integrate with the new payment systems? If you're able to do that in a laboratory environment, which represents both your system and the new payment system, then it doesn't have to impact your day-to-day business while you figure out what all the costs and risks are, so we want to remove the risks of doing that.

The second element of the lab is there's a lot of interesting things that you can do with the data that attach to these messages, but we don't know what all of them are yet. Again, for a bunch of actors in the economy, say a supply chain, the people that manufacture that blender, the people who distribute that blender, the seller of the blender, for them all to interact around this new capability and figure out how can they make their supply chain more efficient, more effective, is again something that you need to do in a laboratory environment before you try and take it out into the real world.

Justin Ferrabee:  So what is it that has drawn IBM to this? Is it the lab environment, kind of like your AI Watson or your fraud stuff? Tell us about that.

Andrew Higgins: I think having a lab is great. I think the biggest issue that I've seen over the last, I don't know, 10 years or so, is that getting into the payments business, getting into the payments industry isn't easy. There are a lot of barriers to entry here. When I talk to many FinTechs, the biggest issue they have just to survive, what do they do with their cash flow? How do they place all their precious investment dollars? How do they keep pace with modernization roadmaps? Because if there are stops and starts, that's not good for them to get started with their business. So they see a lot of challenges.

When I talk to them about what they're developing, it's pretty interesting to me because a lot of it has to do with foundation and plumbing. If you're putting the greatest portion of your investment into foundation and plumbing, stuff that I have a great deal of, stuff that many other vendors out there have a great deal of, I just don't see it because you're not getting the value to your businesses. You're not getting any real focus put, or any real money put on what your business was about.

So for my perspective, where I see 20022 Labs kick in is creating that collaborative, innovative environment where they can partner. Where I can bring my stuff, everybody else can bring their stuff, and these guys can leverage. In leveraging, they can create possibly new business models that will make those old way of doing payments pretty much obsolete because I think that's really the next step we need to take.

Justin Ferrabee: So you're bringing all kinds of vendors competitive in nature. You're saying, "You can bring all your stuff, and others can bring their stuff." You're bringing corporates from around the world, and they're all going to meet in this place where they can learn about ISO. Then they can play on this, in this lab environment. That's the-

Mike Sigal: That's right. No, no, no. That's-

Justin Ferrabee: This isn't going to be like Noah's Arc where you've got one of everything in there, but actually they eat each other? Are they going to get along, or-

Mike Sigal: Well, somehow all the animals came off the arc.

Justin Ferrabee: Well, that's true. That's true.

Mike Sigal: Not eaten, right?

Justin Ferrabee: That's not a very good example. But it's an ecosystem with everybody, they're all competitors and everything, they all want to join you. I guess there's this a high tide lifts all boats. What's the incentive here?

Mike Sigal: That's our thesis, right?

Justin Ferrabee: Mm-hmm (affirmative).

Mike Sigal: I mean, IBM and its competitors in this space, they all have big pieces of business and all win more big pieces of business if the market evolves. So some of the players who are coming into the lab are definitely direct competitors, but they're there to help, not at all their own expense, raise the market up.

Justin Ferrabee: Wow. How does IBM feel about that?

Andrew Higgins: Well, that's what we're encouraging because let's walk the walk.

Justin Ferrabee:  Okay. Okay, you're ready to race.

Andrew Higgins: Well no, we have to walk the walk. I mean, some of our partners already complement and fill up gaps that I have in my service offering. Now, in truth, they also compete. That's just the way it has to be. We've done this in pretty much every piece of payments business that we've done, but we do it everywhere. We're not going to be alone; we can't be alone. And in order to, as I say, change the models, you really do have to ignite this industry and you have to get them to change.

Justin Ferrabee: So let's say you actually manage to pull this off. What does this look like in five years? What's happened? What's changed? How's the world different or better?

Mike Sigal: If we're successful in five years we've probably got some material indicator that companies are adopting this, and banks are moving their systems over. I also think we'll ultimately be able to measure, if you will, the economic value add of bonding the data and the business process to the message. I'm not certain what that looks like today, but folks who have adopted this will already see returns coming in. I also think you'll begin to see, at that point in time, some new business models that we can't even imagine having come to market.

I think on a more practical basis, the lab and its partners will have detailed use cases around various vertical industries and various supply chains on a global basis. I think we'll have provided a platform for FinTechs, to Andrew's point, to be able to be part of this change, or even help drive this change as opposed to it being led by the suppliers. So I think there'll be a lot of interesting activity that'll happen.

Justin Ferrabee: Sounds fascinating. What does IBM get at the end of five years out of all this?

Andrew Higgins: Let's talk about what the industry gets. First, I mean, to a great degree I'd like to see myself drive up to a gas station, the gas station already identifies my car. I've paid because I've pumped gas. I didn't actually pull out my phone. I didn't pull out a card. I didn't pull out anything. I see all sorts of use cases coming out of this. I see thousands of  use cases.

Justin Ferrabee:  So ISO 20022's at the base of all of those huge payment innovations?

Andrew Higgins: Rich engagements, yes.

Justin Ferrabee:  Wow.

Mike Sigal: Again, it's not at that level. It's not about the payments. It's about the commerce that is going on in and around those payments.

Justin Ferrabee: I love it. It's so exciting.

Mike Sigal: It's not the payment. It's, "Why did you make the payment?"

Andrew Higgins: Exactly.

Justin Ferrabee: I love it. So you launched the lab at the Payments Canada Summit. How'd it go?

Mike Sigal: It was terrific. We couldn't have hoped for a better response. Some of the things that we announced there included some of our key partners, our friends at IBM, a couple of really interesting earlier-stage technology companies that offer key tools for experimenting in the lab, and implementing ISO 20022. Those are XMLdation, and Trace Financial, and Volante. We're also really excited to announce support through the CHILA, which is the Canadian Health and Life Insurers Association. We're working with five of their major clients-

Yeah, on what are the use cases, and the ordering of the use cases, and the value proposition of the use cases to ISO 20022 in the insurance industry. And we announced some support, not just from IBM, but from Visa and from Mastercard's Vocalink group. So we've brought three large ultimately competitors into the lab environment to help support the growth of ISO 20022.

Andrew Higgins: Wow. 

Justin Ferrabee: Congratulations. That's a great, great progress.

Thank you both.

We are excited about 20022 Labs. We think it can help fill the gap by working to establish market-driven demand for ISO 20022 among corporations, and helping the Canadian payments ecosystem build an innovative world-leading payments value chain. Mike, Andrew, thank you both for joining me today. We wish you great luck with the lab.

As always, ThePayPod is available for download on your favorite podcast app, or payments.ca. Join the conversation online using #modernpayments. That's all the time we have for this episode, but join us next week as we continue to delve into the world of payments.