Changing models - JOURNALIssue 7, June 2021 - OMFIF
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Digital Monetary Institute JOURNAL Issue 7, June 2021 Changing models How commercial banks are responding to disruptive fintechs
2 CONTENTS DMI JOURNAL_JUNE 2021
JOURNAL
Issue 7, June 2021
A revolution in money 4 Financial services to prosper 17
Bhavin Patel, editor and head of from increased collaboration
research of the DMI, and Katie-Ann
Richard Douglas, chief executive
Wilson, head of DMI programming
officer of Island Pay
Fnality targets cross- 6
Digital Interoperability will create an 18
border opportunities
inclusive global economy
Monetary Phillip Moore, OMFIF contributing editor
Richard Budel, chief commercial officer
Institute Five trends shaping 8 digital, Kalin Nicolov, head of digital
currency, and Frances Rice, digital and
6-9 Snow Hill, London
digital currencies content marketing manager at SICPA
EC1A 2AY, United Kingdom Philip Middleton, chairman of the DMI
T: +44 (0)20 700 27898
omfif.org/spi @OMFIF
Digital payments must be 20
DMI @omfif.org Adapting to a 10
able to operate offline
new landscape
Joachim Samuelsson, chief executive
Philip Middleton, officer of Crunchfish
Chairman, DMI
John Orchard, Chief
Executive Officer, OMFIF Wall Street must be aware 21
Bhavin Patel, Editor and of crypto threats
Head of Research, DMI
Asen Kostadinov, head of strategy
Julia Demidova,
Commercial Director, DMI at Copper
Katie-Ann Wilson, Head,
DMI Programming
Disjointed digitalisation 22
Fergus McKeown,
Subeditor drags on banking innovation
William Coningsby-Brown, Gero Decker, co-lead of SAP Business
Assistant Production Editor Process Intelligence and co-founder of
Strictly no photocopying is Signavio
permitted. It is illegal to reproduce,
store in a central retrieval system or
transmit, electronically or otherwise,
Bhavin Patel, editor and head
any of the content of this publication
Fintech disruption 23
without the prior consent of the
of research, DMI
publisher. While every care is taken
to provide accurate information, challenges big banks
the publisher cannot accept liability
Ken Joseph, managing director at Kroll
for any errors or omissions. No
responsibility will be accepted for
Revolutionising the future 14
any loss occurred by any individual
acting or not acting as a result of of payments
any content in this publication.
On any specific matter reference John Jackson, policy and product lead of Future of finance 24
should be made to an appropriate
adviser.
the Real-Time Gross Settlement Renewal bridges centralised and
Company Number: 7032533.
Programme at the Bank of England decentralised models
ISSN: 2398-4236 Pietro Grassano, business solutions
Commercial banks might 16 director, Europe at Algorand
not dodge CBDC disruption
John Orchard, chief executive officer
at OMFIF Meetings highlights 26
OMFIF.ORG/DMI LEADER 3
Hope and expectation
Commercial banks face an uncertain future as CBDCs threaten to disrupt their traditional
relationship with monetary policy authorities, writes Clive Horwood, managing editor of OMFIF.
A N OL D FR IEN D in the banking industry once gifted me a
word that encapsulates the all-too-frequent phenomenon in
the financial markets of hope running far in excess of realistic
expectation – bulltish. It’s pretty easy to work out the anagram ‘The Digital Monetary
that reveals its true meaning. Institute’s Symposium
It’s also a word that could well describe some of the froth that in April showed the
clouds the crypto landscape and can divert attention from the thirst for knowledge and
very real and game-changing developments that are now taking dialogue about central
root around digital currencies. bank digital currencies
The Digital Monetary Institute’s Symposium in April showed and their potential
the thirst for knowledge and dialogue about central bank digital impact on the fabric of
financial markets.‘
currencies and their potential impact on the fabric of financial
markets. More than 100 central banks attended or spoke at the
event, and several hundred central banking officials were among
the nearly 3,000 registered attendees across its two-day agenda.
Among the speakers was Mike Novogratz, founder of Galaxy
Digital and the epitome of a crypto bull, who caught the attention
with his comment that ‘bitcoin is a report card on how central
banks are doing’.
So, it’s perhaps appropriate that he’s one of the investors
pumping $10bn into Bullish Global, a crypto exchange which
another backer, hedge fund manager Alan Howard, describes as
a business that will ‘shape the future of the financial sector as
we witness greater mainstream adoption of digital currencies’.
Plenty of hope and expectation there.
This quarter’s DMI Journal’s cover story looks at how banks
are adapting to the challenges of digitalisation and blockchain,
particularly in the payment space. The symbiotic relationship
between commercial banks and central banks has been the
foundation of financial markets for centuries. CBDCs potentially
cast some doubt on that relationship.
The Bank of England’s deputy governor, Sir John Cunliffe, said
during a public lecture hosted by OMFIF in May, in response to
the idea that the public might shift their deposits into CBDC,
‘Banks have had to reinvent their business models before.’
Banks are pivoting to meet the challenge fast and it would be
foolish to write them off. But it’s not lost on these institutions
that some parts of the financial markets are questioning their
future health. In March, payment company Stripe completed
a funding round that valued the business at close to $100bn.
That makes it worth more than any bank headquartered in the
European Union. Time will tell if that’s a realistic valuation.
4 A REVOLUTION IN MONEY DMI JOURNAL_JUNE 2021
A revolution
in money
Central banks and digital
currencies
The inaugural DMI Symposium featured debate and discussion of the impact of new
digital currencies on financial institutions, both public and private, write Bhavin Patel,
editor and head of research of the DMI, and Katie-Ann Wilson, head of DMI programming.
WITH MORE than 2,000 attendees from over 100 nations tokenised digital asset landscape by Denis Beau, deputy
drawn from institutional investors, banks, and technology governor of the Banque de France, and Thomas Moser,
providers, the DMI Symposium created a global network of alternate member of the Swiss National Bank’s governing
digital currency stakeholders, where the public and private board.
sectors came together to shape and transform the future of The Symposium concluded with a look at the regulation
money. and role of cryptocurrencies by Hester Peirce, commissioner
The Symposium began with a spotlight on retail central of the US Securities and Exchange Commission, Christian
bank digital currencies and payments from the consumer’s Catalini, chief economist of the Diem Association, and Mike
perspective. A panel discussion featuring John Rolle, Novogratz, chief executive officer of Galaxy Digital.
governor of the Central Bank of the Bahamas, Mu Changchun,
director-general of the People’s Bank of China’s digital DAY ONE: Retail CDBCs
currency institute, and Hanna Armelius, senior adviser Consumer-ready CBDCs have captured global attention, with
at Sveriges Riksbank, provided new insights into their central banks around the world intensifying their research
implementation strategies and policy objectives. and exploring public-private partnerships. The opening panel
As the Symposium entered its second day, focus was of the DMI Symposium brought together a central banker,
brought to the wholesale side, interbank settlement and the technologist, commercial banker and payment service
provider to outline how central banks might best introduce
retail CBDCS.
115 Central banks represented Panellists agreed on the importance of addressing
policy objectives first and technology solutions second,
with ensuring universal access to payments, promoting
59 Speakers from the DMI’s global community
of policy-makers and industry leaders efficiencies, bringing down costs and creating a ‘platform for
innovation’ as key issues.
32 Partners and members
From an implementation perspective, Jose Fernandez da
Ponte, vice-president for digital currencies at PayPal, shared
103 Countries represented
how payment service providers are beginning to prepare to
distribute and even hold CBDC for their customers under a
8 Public panels and 2 private roundtables
two-tier model.
18 Exhibition booths When asked about the implications for commercial banks
of third-party providers holding and offering CBDC, Atul
OMFIF.ORG/DMI A REVOLUTION IN MONEY 5
‘New players coming
into the market
and new currencies
[...] are challenging
sovereign money in a
way that hasn’t really
happened before.’
Butcher, executive director and group payments head at DBS intermediaries and what can be done to bridge conventional
Bank, said that ‘disintermediation needs to be evaluated and new payment systems.
closely, but competition is good’ and noted this is comparable While central banks continue to consider risks and do the
to markets in Singapore, Hong Kong and the UK, where non- necessary due diligence, they have become less sceptical
banks already participate in domestic payment systems. about wholesale CBDCs, as outlined by Jochen Metzger,
Hanna Armelius, senior adviser at Sveriges Riksbank, director general of payments and settlement systems at the
said the risk of not acting are substantial, adding that there Bundesbank and one of four experts on the panel. He further
are ‘new players coming into the market and new currencies added that DLT is part of a multitude of technology offerings
that are challenging sovereign money in a way that hasn’t and that programmable money and smart contracts have
really happened before’. To ensure incumbents work with great promise.
the Swedish central bank on CBDC implementation, she Laura Loh, director of blockchain at Temasek International,
also revealed that this year it will be working on incentive highlighted that the banking industry’s pain points often arise
structures. from sluggish payments, slowed by going through multiple
Moving onto design features and the approach to technical intermediaries and restrictive working hours. Additional
aspects, Neha Narula, director of the digital currency initiative frictions come from the lack of transparent transaction fees
at the Massachusetts Institute of Technology, noted that and disparities in ledger systems.
while the token versus account debate has been useful so far, Mark Williamson, global head of FX Everywhere and
it is far too simple and risks conflating certain features and partnerships and propositions at HSBC, highlighted the
reducing design options to a false dichotomy. Many features challenge commercial banks face in connecting to central
can be combined in different ways and even within these banks operating under different design paradigms. DLT will
choices there is a spectrum, such as adopting an account- play a key role here. Additionally, as systems grow across
based model which preserves a level of privacy. borders and network sizes increase, a financial market
At a higher level this also applies to distribution. Rather infrastructure operator will be necessary to help coordinate
than it being a binary choice between a two-tier model or payments between different participants by providing
direct distribution, central banks can consider a ‘blended common standards and rules.
model’ with different tiers for different levels of access. The benefits of DLT were explained by David Creer,
global distributed ledger technology and crypto lead at GFT
Group, building on Metzger’s points about programmability
DAY TWO: DLT banking applications and smart contracts. Creer emphasised the importance of
The opening panel of day two focused on distributed ledger tokenisation, which could lead to completely new business
technology and banking, setting the tone for the rest of models, such as the SIX digital exchange bond system. DLT
the discussions. This panel explored DLT-based payments, applications, he added, can go even further when they are
clearing and settlement applications, looking at how to integrated with technologies such as artificial intelligence and
identify the best time to innovate, the impact on traditional big data. •
‘DLT is one
technology out of
many available to
banks, but its core
properties offer
great benefits for
banking operations.’
6 A REVOLUTION IN MONEY DMI JOURNAL_JUNE 2021
Fnality targets cross-
border opportunities
A new omnibus account model from the Bank of England is a leap forward for
distributed ledger technology and one Fnality CEO Rhomaios Ram wants to take
advantage of, writes Philip Moore, OMFIF contributing editor.
RHOMAIOS RAM, chief executive represents a notable landmark for be released from risk mitigation to
officer of Fnality, was in good spirits DLT. The imprimatur from the central support business growth.
when he spoke at OMFIF’s DMI bank, he said, is the first time a Ram said that these benefits
Symposium. It is easy to see why. A ‘pre-eminent authority’ has endorsed come into their own in cross-border
few days earlier, the Bank of England the decisive role that blockchain activity. ‘Frankly if we were only
announced the launch of its new technology will play in wholesale talking about settling in a single
omnibus account model, paving the payments. currency, the proposition might
way for wholesale settlement to be This, said Ram, will have far- not be that interesting because the
carried out between banks using reaching implications for the existing real-time gross settlement
tokenised assets on next-generation financial services industry and system can handle this efficiently’,
payment systems. broader economy. The use of DLT he said.
The announcement was enables the Fnality payment system ‘Where the global payment
described by Ram as a ‘huge to operate a true tokenised peer-to- system becomes very interesting
event’ for Fnality, which began life peer market, interoperate across is when you start expanding into
in 2016 as the Utility Settlement business platforms and jurisdictions, different currencies’, he added.
Coin Project, supported by five and allows for instant settlement. This will be the next key stage in
banks. It has since expanded into The disintermediation generated the Fnality project. ‘Today, we are
a consortium of 14 banks and one by the payment system underpinned focused on five currencies – the
financial market infrastructure by DLT, said Ram, creates a number euro, US and Canadian dollars,
company. It has developed a fully- of notable benefits. ‘Our view sterling and yen – and we are
functional global payment system is that the two main benefits of considering adding a sixth, the
allowing for near-instant peer-to- using distributed infrastructure are Swiss franc. In due course, we are
peer settlement. Ram explained technological resilience and cost intending to set up independent
that the Fnality payment system control’, he said. payment systems in each of these
essentially uses distributed ledger More specifically, Ram said that jurisdictions’, said Ram.
technology to act as a form of because participants continue to ‘The idea is to have an interlinking
accounting system for co-mingled be the beneficial owners of funds system between all of them’,
funds held in the omnibus account. in the co-mingled account, they he explained, adding that he is
In other words, it generates a single are not exposed to any credit or confident that the system has the
pool of liquidity for participants. counterparty risk. Operational necessary capacity to synchronise
As well as being an important risk is reduced because risk is settlement finality.
announcement for Fnality, which concentrated within a single An example of how this might
has already made an application to intermediary. Additionally, work in practice, said Ram, would be
open an omnibus account, Ram said efficiencies in liquidity management a UK bank settling in the US market.
that the Bank of England’s initiative are enhanced and resources can ‘In order to do this at the moment’,
he said, ‘it would have to hold money
at a US correspondent bank and
ensure it has sufficient funds to
buy the securities in the US. If not, it
‘Today, we are focused on five currencies – the euro, would have to do a foreign exchange
US and Canadian dollars, sterling and yen – and we trade which would take two days to
are considering adding a sixth, the Swiss franc. In settle. This would then need to be
coordinated on the asset side via
due course, we are intending to set up independent several intermediaries involved in
payment systems in each of these jurisdictions.’ the settlement.’
OMFIF.ORG/DMI A REVOLUTION IN MONEY 7
‘In the Fnality world,’ said Ram,
‘you would instantly exchange your
sterling into dollars, which would settle
immediately. The whole business
‘In the Fnality world you would
process would become much easier instantly exchange your sterling
on a peer-to-peer basis.’ into dollars, which would settle
This means that the next step in immediately. The whole business
the Fnality journey will be achieving
interoperability with securities process would become much
settlement systems overseas. ‘We easier on a peer-to-peer basis.’
expect that we will be able to enable
delivery versus payment on a bilateral
basis as soon as other settlement
systems with characteristics similar to
ours come on line’, said Ram.
None of this will be achieved
overnight. Ram is cautious about
making a prediction of when the
system will be ready to go. ‘While
applying for and authorising payment
systems has been done before,
undertaking a careful regulatory
review of the risks that we or other
systems may or may not pose will take
time’, he said.
As to demand among end-users
for the efficiencies generated by the
Fnality system, Ram is confident that
this will be robust and sustainable.
‘Market participants definitely want
cheaper and more efficient settlement
and to optimise the efficiency of
their balance sheets’, he said. ‘I don’t
think they really care about how this
is achieved, but they are receptive to
any suggestions that can deliver these
efficiencies. We’re not claiming we’re
the only solution, but we are confident
that we provide one way to help lower
overall risk in the financial system.’
Ram is also confident that Fnality’s
compelling business proposition
will attract more adherents from
the banking and financial market
infrastructure communities. ‘The
eventual goal is to attract many more
participant owners’, he said. ‘The
drive and energy of the 15 members
of the consortium will make others
comfortable with the project and we
believe that more will come on board
as we add more currencies.’ •
8 A REVOLUTION IN MONEY DMI JOURNAL_JUNE 2021
Five trends shaping
digital currencies
Discussion and debate at the DMI Symposium reveal competition, a transforming world,
private currencies and more will sit at the heart of the digital money revolution, writes
Philip Middleton, chairman of OMFIF’s Digital Monetary Institute.
1
In times of crisis, topics and people
who had lurked unrecognised
suddenly become the centre of Global transformation
attention and the subject of debate.
In the 2008 financial crisis, it was Against the tragedy of the pandemic, we have seen a rapid
central bankers who emerged, acceleration of the move from a physical economy towards
blinking, into the spotlight of a digital one. Nowhere has this been more apparent than in
unaccustomed publicity. In the financial services, and in particular in payment methods, with
current pandemic, alongside the a marked decline in the use of cash. Both financial markets
indispensible health professionals
and the real economy will pursue increased digitalisation,
and epidemiologists, we have seen
digital payment and central bank
driven by a combination of new technologies, public policy
digital currency specialists take and entrepreneurial zeal. Not all incumbents will survive. Not
centre stage. all innovators will succeed. Managing the balance between
Last month’s OMFIF Digital stability and innovation will be tricky.
Monetary Institute Symposium
convened over 1,700 participants
from 103 countries, including
2
senior central bankers and public
officials on the one hand, chief
executive officers of bleeding edge
digital economy companies on
CBDC not if but when
the other and pretty much every
A digital economy requires digital payment instruments.
other profession with an interest in
financial services in between. Two
Entrepreneurs are willing and able to provide them. We are
years ago, we could just about have already seeing the birth of retail central bank digital currencies
held the colloquium in a phone box. in the Bahamas and China, with more to follow. Experiments
In two days of discussion, debate with stablecoins and tokens are taking place in capital markets
and often heated argument, five and will become more widespread. There are many valid policy
trends shaping the future of digital reasons for central banks and governments to introduce a
money emerged. • CBDC, but none more compelling than the risk of losing financial
and political sovereignty to either the private sector or to other
sovereign actors. Major economies will be wary of the potential
threats to financial stability and fractional reserve banking posed
by some varieties of CBDC, but will be persuaded, sooner rather
than later, to work seriously towards one.
‘Not all incumbents will survive. Not all innovators will
succeed. Managing the balance between stability and
innovation will be tricky.’
OMFIF.ORG/DMI A REVOLUTION IN MONEY 9
3
Cross-border currency competition
Just as there will be intensifying competition within
national boundaries between public and private payment
instruments, brands and media, so too will there be growing
competition between nation states and currency areas.
Whether this will be waged by private sector proxies or by
central banks as an extension of national policy remains to
be seen. This competitive arena will extend to regulation,
governance and technology with universal agreement about
the benefits of co-operation and interoperability and fierce
disagreement about who should have the whip hand.
4
Abundant private currencies
A tapestry of currencies will soon cover the world. These
will be both quasi-fiat (such as stablecoin) and private, with
many in the space between these two. Money will be dumb,
smart, local, international, private, public and all things in
between. It will be principally digital in format, although
there will also be physical representations, particularly of
sovereign currencies. Cryptocurrencies will continue to
bloom and perish with equal rapidity. Some will become
institutionalised investment assets, though probably not
widely accepted payment instruments. Physical cash will
continue to exist for the foreseeable future, even if usage
declines.
5
Arm’s length public-private
partnerships
‘Money will be
The private sector is realising that, whatever utopian dreams
dumb, smart, local, some have, it is not going to be allowed an unopposed
international, takeover of a fiat financial infrastructure, which sovereign
private, public states have spent several centuries building. Central banks
appreciate that, whatever their manifold capabilities, they
and all things in have neither the appetite nor the capacity to launch and
between.’ run accounts for millions of citizens. In designing, piloting,
launching and running CBDCs, there will have to be a
degree of partnership and co-operation between private and
public sectors. The balance of power, activities and functions
between the two will vary widely between countries.
Partnerships will range from the enthusiastic to the wary,
but going it alone is unlikely to be seen as a viable long term
option, except in a narrow range of circumstances.
‘I never make predictions, especially about the future’ has
been attributed to a number of seers. I am confident that
of my five predictions, not all will be correct. I am just not
sure about which ones. I am certain that we shall be hotly
debating the subject at the next annual DMI Symposium. •10 ADAPTING TO A NEW LANDSCAPE DMI JOURNAL_JUNE 2021 Adapting to a new landscape Banks are updating payment systems around the world under pressure from both fintechs and central banks. But incumbents can work with their new rivals, writes Bhavin Patel, editor and head of research of the DMI and senior economist at OMFIF. Commercial banks are revamping but are of lower value and less risky. rapidly. Second, in many cases, when their payment infrastructure, either in Unlike interbank transactions, driving interbank transactions are cleared by collaboration with or under pressure real-time settlement in the retail fast payment systems, different banks from central banks, leading to greater space has traditionally been too costly undertake settlement of sovereign- innovation and vibrancy especially in or inefficient to justify direct central backed currency within reserve retail payments. bank maintenance or management. accounts held at central banks. This Jurisdictions that already had But the barriers to retail payment provides a high level of confidence in well-developed retail payment innovation are coming down. the system, allowing transactions to services have had little incentive to Retail payment innovation be settled between account holders innovate in the past. Central banks is being built on the existing across different payment service and supervisors had focused on clearing, settlement and payment providers and banks. mitigating systemic risks from the infrastructures of commercial Innovation will also bring with it wholesale payment sector, which banks, which provide several a broader range of services. These executes high-value, high-priority advantages. First, these institutions could be provided through digital payments between major financial have large networks of customers channels that support new, fast institutions. In contrast, retail and intermediaries. Iterative payment infrastructure. Developing transactions are characterised by improvements to proven payment an open banking system, in which much higher transaction volumes, rails can achieve scale and be adopted third-party fintech services can work
OMFIF.ORG/DMI ADAPTING TO A NEW LANDSCAPE 11
with financial institutions’ data and
software, can help. Francisco Maroto,
blockchain discipline leader at BBVA,
said, ‘As a result of new entrants,
systems are improving and adapting.
We are seeing real-time systems, like
Bizum in Spain and faster payments
in the UK, create competition and
innovation that can compete with new
fintechs at the service level and in
cost.’
Commercial banks are providing
point-of-sale financing and lending
options and escrow services that help
instil trust and mitigate security
issues as part of improving payments.
Fintech advances will allow more
convenient, safe and cost-effective
services. For smaller banks, payments
as a service could allow them to ‘Under an open banking regime, data that
quickly upgrade legacy infrastructure was traditionally controlled by banks can
and offer third-party services on their
be leveraged by different providers.’
core platforms.
Regulators have encouraged
competition by opening payments
to a wider range of providers. Recent
regulations, such as the European
Union’s revised payment service unbundling of integrated financial should be doing communication for
directive and the UK’s open banking offerings could also allow incumbents financial data.’
initiative, promote the concept of to leverage complementary fintech However, there are calls for to level
PaaS by allowing third-party fintechs services. the data sharing playing field for
greater access to data. Banks can take advantage of the banks. Maroto said ‘Fintechs, payment
Under an open banking regime, opening of their data. BBVA’s Maroto service providers and big technology
data that was traditionally controlled provided the example of account firms, like Google, can access bank’s
by banks can be leveraged by different aggregation services in Spain. customer data through APIs. We
providers. It allows insurance Customers can connect accounts should also be allowed to do the same.’
companies, mortgage providers from different banks and view them
and others to offer more tailored in one app, allowing them to see their Co-opetition not competition
services to customers. Although this true position and instruct payments Banks are in a race to innovate fully
could cause disintermediation, the more easily. ‘BBVA’s open application before fintechs reach a critical mass
programme interface platform was of customers and replace them.
developed in order to be able to take Meanwhile, the future of banking
advantage of new regulation and depends on its ability to leverage the
consumer data from our competitors, power of customer insight, advanced
‘We are seeing real-time in order to offer this service to our analytics and digital technology.
systems, like Bizum customers both in the retail and Fintechs span all of these areas,
in Spain and faster corporate space.’ meaning banks must engage and
payments in the UK, Open banking also increases collaborate with them.
security. Sara Castelhano, managing Greater competition from and
create competition director and head of payments for collaboration with fintechs will drive
and innovation that Europe, the Middle East and Africa further incentives and opportunities
can compete with new at JP Morgan, said, ‘Leveraging for commercial banks to improve.
fintechs at the service data to figure out if a bank account Banks as incumbent financial
level and in cost.’ belongs to the correct person really service providers are competing
helps with preventing fraud in the with emerging fintechs, which can
Francisco Maroto, system. Leveraging APIs to connect rival banks in the services they offer.
blockchain discipline leader technology is more secure than Competition is only one side of the
at BBVA screen scraping and is the way we coin though. Banks can engage with12 ADAPTING TO A NEW LANDSCAPE DMI JOURNAL_JUNE 2021
fintechs and profit from increased co- to make them faster, ‘Leveraging data to figure
operation. transparent and cheaper. out if a bank account
Traditional financial institutions BBVA was one of the first
still have several advantages. They movers in SWIFT gpi and
belongs to a person really
have large customer bases and deep in bringing these features helps with preventing
pockets, but legacy systems hold them to our customers.’ fraud in the system.’
back. Matthew Davies, head of global However, major
Sara Castelhano, managing
transaction services, EMEA and global global banks face some
co-head of corporate sales GTS at Bank disadvantages in the director and head of payments
of America, said, ‘The relationship battle to innovate. New for Europe, the Middle East
between banks and fintechs has challenger banks and and Africa at JP Morgan
changed over the last 10 years. It has fintechs enjoy lighter
moved from direct competition to how regulatory burdens and
fintechs could be leveraged by banks. more manoeuvrability in
Even in areas of competition, fintechs testing new solutions, thus
are supported by banks who provide potentially establishing
funding, access to settlement systems first-mover advantages.
and other solutions that enable them This may not always be
‘The relationship
to grow.’ the case, though, as BoA’s
Fintechs are iterating on the Davies explained. ‘Many between banks and
services traditionally offered by fintechs choose not to go fintechs has changed
banks. Yet there is a tendency for direct [in accessing the over the last 10 years.
new entrants to be more radical central bank’s clearing It has moved from
and ambitious when it comes to system] often driven by
direct competition to
cross-border payments. While some the additional regulatory
blockchain technology providers do burdens and the cost of how fintechs could be
not expect an overhaul of the financial being a direct participant.’ leveraged by banks.’
market infrastructure, most take a In most cases, fintechs
Matthew Davies, head of
‘neoliberal approach’, intending to opt for a partnership or
global transaction services,
supplant existing infrastructure. sponsored model so that
These efforts, however, have fallen they are shielded from EMEA and global co-head
short. the costs of rule changes. of corporate sales GTS at
In comparison, banks prefer to As such, these fintechs Bank of America
play it safe by talking to regulators, remain dependent on
rather than seek an advantage by banks.
staying ahead of the technology curve New fintechs seeking to overhaul to a blockchain project if is to be
through engaging in risky bets on new financial market infrastructures successful. For this reason, banks have
blockchain applications. face another constraint. To compete sought out methods of capitalising on
Traditional cross-border payment with banks, they must build up their scale and incumbent positions
methods are also improving. The from nothing. Small firms acting by collectively pooling resources to
Society for Worldwide Interbank independently may lack sufficient best position themselves within this
Financial Telecommunication’s institutional commitment and volatile space.
global payments initiative has been regulatory alignment to drive more
a major development pointed to disruptive changes. Culture shifts and new approaches
by commercial banks. Building on Banks do not have the same The shifting business models of banks’
existing correspondent banking appetite as smaller companies for more consumer-focused corporate
networks, it has improved speed, disruptive innovation. However, clients are driving them to find new
increased transparency and lowered collaborative activities may introduce solutions, typically while partnering
costs. More important for major global more extensive cross-border payment with a fintech. ‘We are seeing pressure
banks is the savings in prefunded changes. Systematically revamping from their customers asking for more
liquidity that is tied to correspondent processes to remove the opaqueness digital services and immediacy. There
banking. BBVA’s Maroto explained of fees would entail a combination is greater competitive pressure from
how end-users are benefiting from of technological innovation and different fintechs and big technology
the upgrades. ‘[SWIFT gpi] is now commitment from banks. They must companies entering the payment
attacking low-value retail payments pledge generous financial resources space,’ said Maroto.OMFIF.ORG/DMI ADAPTING TO A NEW LANDSCAPE 13
An example of demand driven practical ways. These boil down banks giving a ‘seal of approval’ to
innovation is Bank of America’s to developing internal capacity, lightly capitalised and regulated
beneficiary portal, called Recipient partnering with a fintech, investing companies who have passed their due
Select. It allows users to select how in a fintech and acquiring a fintech. diligence criteria, increasing their
they want to be paid using email or Castelhano outlined different methods attractiveness to other potential
a mobile phone. ‘On the back end, in which JP Morgan approaches partners.
this [beneficiary portal] is linked to innovation. ‘Can we build it ourselves?
providers, often fintechs, that have Do we want to buy the service or do CBDC opportunities
a digital wallet, almost becoming a we want a partner for the service?’ Central bank digital currencies are
clearing mechanism in the middle of BBVA emphasises partnerships coming and will further revolutionise
these wallets,’ said Davies. and venture capital investments, the payment landscape. Central
Similarly, BBVA is focused on its bolstered by research partnerships banks have outlined different ways
retail customers’ user experience, with universities and academics. In to implement their digital currencies.
particularly on their mobile addition, Maroto explained how BBVA One of the least disruptive is the
application, and is updating the is launching new initiatives that two-tier model. The currency’s
payment capabilities offered to foster novel ideas. In addition, Maroto issuer remains the central bank but
customers as it moves from batched to explained how BBVA is launching disseminators and customer-facing
real-time payments. new initiatives that foster novel services come from the private sector.
Banks can innovate in several ideas. The open innovation website However, the level of involvement and
allows BBVA to connect to different innovation that commercial banks can
innovators by letting start-ups and foster as facilitators depends on the
entrepreneurs register with them, central bank’s design decisions.
creating a catalogue of innovators Ensuring that retail CBDC allows
in variety of business areas. This for competition requires the central
‘Current cyber criminals
portal is combined with a series of bank to operate an infrastructure that
aren’t just after Fast Tracks meetings, where start- fosters innovation. Payment service
individuals but also ups can pitch to business leaders, and providers must be able to access the
corporates and financial conferences open to all participants in CBDC through multiple channels,
institutions, especially the payment ecosystem, establishing a including back end interfaces and
community where ideas can be shared. APIs. A level playing field and
now as technology
Apart from being able to identify adaptability will foster private sector
is blurring the lines innovative start-ups to work with, due innovation. This was emphasised by
between the two’ diligence is crucial when approaching Sir Jon Cunliffe, deputy governor of
fintechs. Castelhano explained how the Bank of England, in an OMFIF
Sara Castelhano, managing
JP Morgan looks at cybersecurity, meeting (see p. 16).
director and head of
stability and resiliency. ‘Current Commercial banks agree that
payments for Europe, the cyber criminals aren’t just after CBDCs will complement their
Middle East and Africa at JP individuals but also corporates and operations. However, some banks
Morgan financial institutions, especially are more ready than others for the
now as technology is blurring the coming wave of CBDCs. Some have
lines between the two, such as with taken lessons from experiments
corporates leveraging wallet-based with stablecoins, while others are
solutions to enable their customers to in dialogue and collaborating with
make financial transactions, pay for central banks, providing input on how
goods and hold balances.’ these payment rails will run.
Davies explained that at Bank of Collaboration and the almost
America fintechs undergo a strenuous symbiotic relationship commercial
due diligence process and many fail banks have with central banks
to meet the bank’s standards. He will continue. Partnerships and
said, ‘We need them to operate to collaborations between private sector
standards, as the bank itself has that operators will also be necessary. As
set from regulators.’ the demand for services, business
There are spill over benefits for models and internal cultures change,
fintechs that pass due diligence. both fintechs and banks will continue
Davies provided the example of to need each other. •14 IN CONVERSATION DMI JOURNAL_JUNE 2021
Revolutionising the future of
payments
John Jackson, policy and product lead of the Real-Time Gross Settlement Renewal
Programme at the Bank of England, talks to Katie-Ann Wilson, head of DMI programming at
OMFIF, about the programme’s vision for the future and the transformative services that the
renewed system will bring to the payments industry.
Katie-Ann Wilson: Can you give us renewed RTGS service which is fit payments data, offer 24/7 services,
some background on the programme? for the future, increasing resilience take advantage of technologies, such
and access, and offering wider as cloud and software as a service,
John Jackson: It started with a interoperability, improved user and be more resilient to a wide range
strategic review, which I joined in functionality and strengthened end- of shocks. Industry involvement
2015 as business lead. The purpose to-end risk management of the UK’s is vital so that we can ensure
of the review was to work out high value payment system. we’re meeting the needs of our
what the Bank’s strategy should We are renewing a system participants and the wider economy.
be in operating this critical piece that recently celebrated its 25th
of national infrastructure, where anniversary and that has changed KAW: What are the key design
settlement in all major sterling dramatically over its life. It already features of the upgrade and how do
payment systems takes place. has a strong customer base and these address the challenges of the
Eighteen months of industry current environment?
outreach and consultation
JJ: We are delivering the renewal
culminated in the RTGS renewal
blueprint, which set out the Bank’s
‘Industry involvement programme in four distinct stages.
objectives. is vital so that we can This is intended to minimise delivery
We had a concept for what we ensure we’re meeting the risk and give participants the time
wanted to achieve and how that
needs of our participants they need to make changes to their
would drive change in sterling own systems.
payments. To implement that, we and the wider economy.’ We’ve come to the end of stage
had to bring in expertise to deliver one. This encompassed all that could
technological change, including be achieved without technological
a technology delivery partner, we need to continue to meet its changes to the existing
project managers, business analysts, needs, while at the same widening infrastructure, such as expanding
architects and all the assets needed participation to include emerging access to non-bank payment service
for a major delivery programme. banks, non-bank payment providers providers and bringing in-house the
While we are building to a and new market infrastructures. governance of the Clearing House
blueprint agreed with the industry, We’re trying to innovate while Automated Payment System.
the precise vision is not set in also pursuing the Bank’s central The key design feature of
stone. As such we are constantly objectives of maintaining stability stage two, due in June 2022, is
reassessing how to meet our and promoting competition. the migration to the ISO 20022
objectives. The renewal will have been messaging standard. We will also
successful if it helps drive beneficial start to build out our application
KAW: What are the main change in electronic payments. Our programme interface capability.
policy objectives of the renewal customers are modernising rapidly. It’s about creating more advanced
programme? They want us to help them achieve information channels to address the
JJ: Our vision is to develop a greater automation, access richer current challenges of fragmentedOMFIF.ORG/DMI IN CONVERSATION 15
and truncated data in payments. KAW: Why has the bank decided to specifically acknowledge the need
Creating harmonisation with maintain an account based ledger for the RTGS system to be able to
ISO 20022, the global standard for over adopting a distributed ledger interface with DLT infrastructures in
electronic payments, will align technology solution? Will there be future.
our RTGS system with others, such potential to integrate tokenised To support this, in 2018 we
as Target2 and Fedwire, and will assets? did a further proof of concept to
enable participants to offer richer understand how the renewed RTGS
data services. We’ll achieve this by JJ: Distributed ledger technology service could support settlement
building a modern integration layer has yet to be proven and tested in for systems operating on innovative
on top of the legacy RTGS platform. terms of security, scalability and payment technologies, such as those
The key deliverable of stage three, performance. In 2016 we carried out built on DLT. This proved that the
due in October 2023, is replacing a proof of concept that illustrated renewed RTGS system would be able
the core RTGS architecture with a the limitations of the technology, at to interface with new technologies
modular one that is more flexible this early stage in its development, as and when they are developed to
and easier to update. This will to deliver an RTGS system that could provide innovative sterling payment
deliver advanced features, such meet our needs. However, we did services. •
as improvements to our liquidity
savings mechanism, modern tools
for analysing RTGS data and a
streamlined on-boarding process.
Stage four is all about forward
looking change that provides greater
added value, 24/7 operation, a
fully API enabled user interface,
additional resilience tools and
a network-agnostic design that ‘We are renewing a
will enable sending and receiving system that recently
payment messages from multiple
sources. Using the greater flexibility celebrated its 25th
of the new platform, we’ll be able anniversary and
to deliver these improvements in a that has changed
series of upgrades starting in 2024.
dramatically over
KAW: What is the potential for its life.’
allowing interoperability with other
systems?
JJ: The RTGS system is already
used by several different sterling
payment systems, including CHAPS,
CREST, the faster payments service
and Bacs. The Bank’s omnibus
account policy, introduced in April
2021, seeks to broaden access to
innovative payment infrastructures.
During stage four, we will introduce
payment synchronisation, an
interface through which payment
systems can access central bank
settlement for their participants
that will be specifically designed
to enable atomic settlement across
multiple ledgers.16 CBDC DISRUPTION DMI JOURNAL_JUNE 2021
Commercial banks might not
dodge CBDC disruption
Sir John Cunliffe, the Bank of England’s deputy governor, seems relaxed about possible impact
of CBDC on banks, writes John Orchard, chief executive officer of OMFIF.
While he avoided pre-empting the the PBoC may reduce this during proponents have not provided good
findings of his new task force on market turbulence that might cause answers to this, while citizens seem
central bank digital currency, Sir a run on the banks. wary of handing their privacy to
Jon Cunliffe, deputy governor at The existing infrastructure also new counterparties.
the Bank of England, refused to has ready answers to regular CBDC Nevertheless, central banks think
become anxious about the potential conundrums. There are plenty commercial banks overcharge for
disruption to UK commercial banks of banks that can easily, though transaction services and could do
from introducing central bank expensively, move money from with being disrupted. As Cunliffe
digital currency. one jurisdiction to another, while seemed to indicate, central banks
‘They have had to reinvent central banks’ CBDC teams scratch are reluctant to surrender to private
their business models before’, he their heads about cross-border money, as M1 replaces M0 through
said during a lecture for OMFIF, interoperability and automated the contactless payment revolution.
in response to the idea that the foreign exchange processes. The most intriguing area
public might shift their deposits The issue of privacy also seems containing both risks and benefits
into CBDC. He pointed out that insoluble. But commercial banks for commercial and central banks
commercial banks ‘could fund don’t have to answer this from is the creation of stablecoins,
themselves from capital markets first principles. People seem to issued by non-banks but pegged
instead’. trust them with their data, perhaps to national currencies. Cunliffe
Banks have more than because their use of it is not core to suggested that the replacement of
incumbency on their side and can their business model. sterling by a digital dollar or euro
afford to be a little complacent. The Citigroup pointed out during was unlikely, though would not be
People’s Bank of China designed an OMFIF discussion on the drawn on how regulation might
its digital renminbi around the future of payments that banks are prevent this.
existing banking and payments also embedded in the regulatory Stablecoin issuers will probably
infrastructure. While leaving infrastructure relating to anti- have to be regulated, with deposits
options open, the digital renminbi money laundering and know your held at the central bank as a
carries no interest and is limited customer processes. Distributed guarantee against retail users losing
to Rmb3,000 per person. However, ledger technology and blockchain their digital savings. This will be a
relief to some commercial banks.
Cunliffe is clearly open to
potential wide-ranging disruption
to existing structures, though
‘It is clear that central banks suggested regulators would carefully
think commercial banks watch for the creation of ‘walled
gardens’ that ‘lock consumers
overcharge for transaction in’. He is not wading in to protect
services and could do with commercial banks from state
being disrupted.’ competition or from a profoundly
radical private sector incursion into
the design of money. •OMFIF.ORG/DMI COLLABORATION 17
Financial services to prosper
from increased collaboration
Partnerships between central banks and fintechs will take advantage of new opportunities, writes
Richard Douglas, chief executive officer of Island Pay.
R A PI DLY E VOLV I NG card, letting consumers spend their Similarly, partnerships between
expectations and digitalisation are sand dollars anywhere Mastercard is established banks and fintechs
creating enormous challenges for accepted around the world. can yield immediate advantages
the financial services industry. But These are major steps in the to both. Banks gain the agility
they also represent tremendous global advancement of CBDC. and innovation of a fintech, while
opportunities for collaboration We are currently in conversation offering customer loyalty, scale and
between central banks and fintech with other central banks about established networks in return. At
companies. replicating this initiative. This is the same time, banks can build their
Increasingly, traditional just one example of how financial visibility and customer base without
banks and fintechs have come to institutions can expand product competing with new platforms
appreciate that collaboration wins capabilities, forging partnerships or having to invest in their own
out over competition when it comes focused on new payment methods technological expertise.
to driving innovation, growing and basic banking products. In short, collaboration is the
revenue and delivering better These are the kinds of win-win biggest source of opportunity in the
banking services. collaborations that we must begin financial services industry. When
Collaboration is what allowed to see more regularly so that banks and fintechs come to the
Island Pay and the Central Bank of companies and consumers the world table with shared, consumer-centric
the Bahamas to launch the world’s over can reap the full benefits of goals, and each contributes what it
first central bank digital currency, innovation in the long-term. does best, results will follow. •
the sand dollar. The first step in our
collaboration was agreeing a shared
strategic goal – to democratise
access to currency across the
Bahamas, especially for underserved ‘Collaboration is what
communities that lacked financial
services infrastructure.
allowed Island Pay
The next step was to leverage one and the Central Bank
another’s strengths. The central of the Bahamas to
bank brought the CBDC while
Island Pay contributed its leading launch the world’s
technology and track record of first central bank
digital security and consumer safety
to create usability and promote digital currency, the
market-wide acceptance. sand dollar.’
Together, we created a platform
that allows individuals, merchants
and governments to easily and
securely pay for goods and services,
as well as to transfer and receive
funds electronically with a digital
wallet. Recently, Island Pay and
the central bank expanded on this
by partnering with Mastercard to
launch the world’s first CBDC credit18 INCLUSIVE FUTURE DMI JOURNAL_JUNE 2021
Interoperability will create an
inclusive global economy
Legacy institutions must keep pace with progress if they want to solve their shortcomings, write
Richard Budel, chief commercial officer digital, Kalin Nicolov, head of digital currency, and
Frances Rice, digital and content marketing manager at SICPA.
TODAY’S F R AGM EN T ED financial Current circumstances offer a infrastructure standards. Digital
system results in inefficiency, once-in-a-lifetime opportunity to payments are also inaccessible
expensive transactions and financial create a more inclusive financial for many due to cost and a lack
exclusion. Interoperable systems, system, not only for the 1.7bn of equipment and knowledge.
based on disruptive technologies, people underbanked, but also for the Complex onboarding processes
can change this. hundreds of millions affected by the and restrictions on merchant
The Monetary Authority of pandemic. Although physical cash acceptability limit usability
Singapore agrees. According focuses on domestic uses, the future and adoption. Insufficient data
to its April 2021 report, public of sovereign digital cash in global protection and authentication
digital infrastructures are critical trade, work and migration underlines requirements create security
for inclusivity. They will allow interactions across borders. Full concerns.
interoperable services to reach more Legacy systems face questions
people and businesses, at lower costs over equal access, privacy, security
and with greater convenience. and the shift towards real-time
Interoperable technologies ‘A fully interconnected, instant settlement for account-
already play an influential role in the inclusive global based payments. Aligning different
exchange of money, assets, goods requirements and technical
and services. Just as the internet
payment system not specifications is a challenge.
enabled cheap, easy information only increases financial Seamless interoperability will
exchange, the development of access, it also holds the depend on factors including
technological, legal and regulatory
potential to increase governance and regulatory
standards will forge the smooth structures between different parties,
interchange of currencies within and confidence in the as well as new infrastructure.
across borders. Emerging exchange financial system.’ At SICPA, we see value in the
technologies will empower the stability and efficiency of public
internet of value and enable routine monetary systems and in innovation
transactions to be as cheap and easy and product diversity provided by
as sending an email. interoperability between networks the private sector. We support shared
Commendable efforts by central might not only fix the cross-border foundational technology built on
banks and others have paved the exchange of fiat currencies, it can open standards. But we also explore
way for global standards and open also increase competition, enhance tailored functionality, such as our
payment protocols that will enable innovation and promote financial prototype which shows there is no
full-scale interoperability. Success inclusion. tradeoff between compliance and
hinges on the implementation of Changes in financial privacy and that digital cash can
new financial transaction models infrastructure must keep pace with be transferred in varied situations,
that include all citizens. These will technology that enables institutions including in low connectivity
stimulate economic development and to overcome legacy issues. Among settings. This will allow innovation
individual prosperity, contributing these is the difficulty financial in transaction flows and enable the
to the World Bank’s goal of ending players have connecting to one unbundling of traditional functions
poverty by 2030. another due to a lack of common of money (such as being a store ofYou can also read
