September 2016

On day three of Sibos, the debate focussed on two key ingredients for an industry in transformation.

Collaboration is an important driver of these themes and in a panel titled ‘ISO20022 Harmonisation: Theory becomes practice’ it was noted that industry is working collectively and is seeing a pick-up of a global messaging standard. Isabel Schmidt, Head of Institutional Cash Management Americas, Global Transaction Banking at Deutsche Bank said: “It’s a tribute to the work we’ve done as a community in making this the format for the future. But we’re still facing a very fractured environment in the payments space. Cross border payments are global by nature.”

Schmidt added:  “We need to think global as an industry and not as individual banks. There’s value to every bank across the globe in talking the same language. Simplifying the landscape is important. I’d rather spend on creating a common standard. The positive business case: eliminating cost and complexity.”

However, changing systems has the potential to introduce operational risk. The industry needs to acknowledge that it has a problem with data to address anti money laundering and the increasing risk of fraud. Banks need to address their own internal challenges with respect to data so that it can start running scenarios around AML. “We need to enrich the data so that we can perform the analysis internally.” Once that has happened, those banks can start to look at sharing that data with each other to eliminate those risks.

Global interoperability and global standards are important. “We need international consensus on how to move forward we need to push our thinking and be more global,” said Schmidt

In keeping with the themes of standardisation and harmonisation, another panel discussed how the industry is moving forward with a pan-European clearing initiative. Christian Westerhaus, Global Head of Product & Strategy, Institutional Cash Management, Global Transaction Banking at Deutsche Bank, said that the bank’s participation in the pan-European clearing initiative was a natural choice that builds on the experience of SEPA.

The public and private sector have a crucial role in creating a single pan-European payment sector. We also need a more integrated legal framework to achieve that. The key to transforming the landscape lies in the reinvention of correspondent banking, With regulatory requirements growing and customer expectations, cyber threats and competition from fintechs, it is important that the industry responds collaboratively.

In responding to these pressures, and meeting clients needs in a changing environment, the correspondent banking industry debated how to best move forward. In a panel titled “Reinventing correspondent banking” the global payments innovation (gpi) was highlighted as an example of such a move. The SWIFT-led initiative takes banks’ API platforms and places them in the cloud to deliver faster payments and remittance information, transparency of fees, and a real-time view into where payments are in the chain.

In addition to making cross border payments faster, gpi gives defined status on when a payment arrives at the beneficiary. It’s the immediacy of information that clients require. gpi is a dramatic move forward and the right move forward for correspondent banking, said Susan Skerritt, Global Transaction Banking’s head of Institutional Cash Management and regional head for the Americas.

Correspondent banks have the scale to achieve the greatest level of safety and security but each bank interprets things differently.“To truly address financial terrorism and money laundering the industry needs to come up with a mechanism to legally share information in an efficient way,” said Skerritt. With gpi, when banks’ payment information becomes available in the cloud there will be an opportunity to conduct big data analysis and some pattern information on transactions.

Asked where blockchain will feature, Skerritt said: “We are taking a proactive approach to where are the most significant problems to solve and at the moment we don’t see the opportunity for Blockchain in the payments space. Where we see more opportunity for blockchain is in the way securities are settled.”

The big issue in exploring blockchain for securities settlement is the delivery versus payment of transactions where securities are settled against the delivery of cash. In a blockchain scenario the DVP issue lies in the cash leg of the transaction and in the creation of a security that is a reflection of cash or has a derivative of cash and how such a security can be incorporated in the securities settlement process.

Addressing the burning question on whether pricing in correspondent banking will decrease, panelists noted that  gpi will deliver fee transparency and that will drive the market to drive a different level of pricing. This will be discussion topic for the coming years. For now the focus is on pilot testing of the initiative. 

Next year it was predicted there will be a third fewer banks and more fintech providers at Sibos but more new entrants partnering with banks to share much-needed institutional learnings on the themes of safety and soundness in the payments space. Correspondent banking will endure but those that can make the investment in the technology to respond to current themes will emerge as the winners in this space.

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