Digital innovations are revolutionising transaction banking, writes Chris Hall
“Because of the explosive power of exponential growth, the 21st century will be equivalent to 20,000 years of progress at today’s rate; organisations have to be able to redefine themselves at a faster and faster pace.”
In the 14 years since Ray Kurzweil, Director of Engineering at Google, made this prediction, many traditional business models have been reshaped by digital innovation. Amazon, Airbnb, Netflix and Uber have established a new paradigm by exploiting new technologies, inspiring others also to leverage this fourth industrial revolution.1
Some firms may identify service enhancements by connecting household devices to the internet of things, others may see opportunities to share research through Distributed Ledger Technology (DLT), while still others seek new market insights through big data analysis. Almost all will aim to interact with customers and suppliers in a faster, more responsive, transparent and cost-effective manner, while frequently looking over their shoulders, lest a nimbler start-up steal their lunch.
Radical and continuous business model change requires not only a re-examination of underlying operating but also financial infrastructure. How corporates pay, collect or finance growth and trade is evolving fast. Simultaneously, financial institutions are going through similar transformation. In both cases, expectations of transaction banking services are being reset.
The invisible payment
We have already entered the cashless society, with small payments and transfers affected through cards and smartphones rather than coins. The payment is becoming invisible, embedded in an app, rather than a separate process, with implications for transaction size, speed and volume.
Entertainment, travel and other consumer industries might have seen the most radical change to date, but digitalisation is not a purely retail phenomenon. Seamless purchasing practices will expand, as sensor-equipped devices are connected to the internet of things, enabling new machine parts to be ordered automatically, for example, before old ones wear out.
Some business-to-business (B2B) firms have used digitalisation to collapse the value chain and develop direct relationships with end-users that previously dealt with a re-seller. Here, treasury functions may have to adjust from receiving large, quarterly payments from its wholesaler network, perhaps via an in-country lockbox, to capturing a more numerous and frequent flow of small payments from retail customers, potentially requiring banking partners to propose the most efficient collection processes, based on local payment clearing mechanisms.
Other B2B firms are changing more radically, adopting platform-based business models. A prime case is General Electric, which offers its Predix data platform as an open-to-all operating system for hosting the software and apps that run industrial processes, enabling users to conduct data analysis, for example, to improve performance. These new models can bring a range of new counterparts, posing new credit risk and working capital management challenges for treasurers, prompting demand for new kinds of support from their banks in the ongoing analysis and management of these risks and workflows, potentially including more granular and more real-time data.
Meanwhile, employee bases are more diverse in location, function and tenor than monthly payroll runs can accommodate, as firms contract a higher proportion of freelancers, with skills needed only for a specific project, sometimes at high volume and short notice. “As business models become more flexible, the number of full-time employees may fall. Treasury staff should not be surprised when they are asked to pay a contractor via Alipay,” says Matthaeus Sielecki, Head of Disruptive Innovation, Trade Finance & Cash Management for Corporates, at Deutsche Bank.
As payments become more invisible to the customer, they must also become more traceable, enabling users to monitor their real-time status to gain control and insight. Z/Yen Group Executive Chairman Michael Mainelli sees DLT as disrupting core payments systems, but not displacing them, providing the platforms on which supplementary services can be built. “DLT can form the basis of new payment notification and aggregation services, rather than handling the payments themselves. This will enable banks to offer more transparent, integrated and customised services as payments become embedded, without impacting core systems,” he says.
DLT isn’t the only digital innovation that can help banks build more interactive, added-value services while adhering to the requirements of local payment infrastructures. Just as they can embed banks’ services in third-party apps (or vice versa), open APIs can enable smaller players to partner with larger banks to benefit from initiatives such as SWIFT’s global payments innovation (gpi), which aims to improve the quality, speed and transparency of correspondent banking. Both APIs and cloud-based services are agents of deepening collaboration between banks, providing access to relationships and capabilities otherwise out of reach. Areas for collaboration might include compliance-as-a-service solutions, utilising artificial intelligence (AI) and combating cyber-security threats.
Paula Roels, Head of Market Infrastructure and Industry Initiatives, Institutional Cash Management, at Deutsche Bank, acknowledges the challenges posed by demands for faster, more transparent, and increasingly self-service cash and payments services. “Markets are evolving at different speeds. In certain Asian markets, local banks need their correspondents to support real-time payments information via SMS, while others, notably India, want management information sent directly via APIs,” she says.
Many levels of collaboration may be required, says Roels. “On the one hand, renewal plans for payment infrastructures by national central banks and payments regulators must accommodate evolving market need in order for banks to deliver new services. On the other, the industry must automate and accelerate the checks and processes around the payment, e.g. KYC, sanctions screening and cyber-security. Much can be achieved through AI and data analytics applications, but only if we improve standardisation, especially on reference data,” she says.
Power of collaboration
While digitalisation is transforming the economics of many industries, in some cases the changes are slightly more prosaic, if nonetheless welcome. “Everyone’s looking to Uberise,” says Alexander Goulandris, co-founder of essDOCS, a trade solutions provider. “You may not be able to entirely digitise bauxite mining today, but you can get very close, making it cheaper and more efficient through greater automation.” For example, aluminium ore is only partially being transported by driverless trucks at source, and we’re not entirely experiencing crewless ships yet, but in terms of operational processes across the supply chain covering operations, logistics, financing, compliance, invoicing, payments and more, digitalisation is disrupting and accelerating supply chains, thus pressurising the financial value chain. A recent, much publicised example of impending new efficiencies is IBM’s plan to develop a blockchain-based platform (with Maersk) to manage shipping transactions.
According to Goulandris, shipping times of fewer than eight days already test banks’ abilities to complete the notoriously error-prone letter of credit approval process without holding up the flow of goods.
Wider adoption of the Bank Payment Obligation, jointly developed by SWIFT and the International Chambers of Commerce, would help, but Goulandris believes DLT/blockchain could have a much more profound impact. “Collaborative platforms provide an opportunity for accelerating processes that were previously constrained and compromised by having to be conducted in consequential steps by multiple parties,” he explains. “Increasingly, these steps can be taken simultaneously, which accelerates processes exponentially.”
Digitised, collaborative platforms, potentially using AI to reduce data-related errors in documents, may shorten supply chains and free up capital, but change management in a complicated world is no easy task, with legal, regulatory and policy hurdles to be overcome as well as technological ones. “We face the prospect of a classic format war before any single digital platform can become dominant, or true operability is established. This is why initiatives such as the HyperLedger Project 2 are so important,” observes Goulandris.
Over the past decade, the securities industry has been reshaped more by regulation than technology innovation, with business adjustments to post-crisis reforms still being made as rules are rolled out. But digitalisation does offer opportunities to address the challenges posed by regulation – which bolsters accountability, transparency and client protection, while constraining capital – in new ways.
While other sectors have been exploiting digital technologies to create new business models, broker-dealers, asset managers, custodians and other intermediaries have been examining their potential to address compliance burdens. In both cases, existing processes have come under the microscope, with the aim of reducing cost and complexity, while improving efficiency, speed and transparency.
“Partly due to regulation, but driven by ongoing efforts toward process standardisation, and a more open
and collaborative ethos, we’re seeing a fundamental, end-to-end reappraisal of workflows, independent of specific technologies,” says Graham Ray, Global Head of Product Management, Investor Services at Deutsche Bank.
As new solutions and platforms begin to emerge, Ray believes innovation may first bear fruit in regulatory reporting and compliance. “But these new approaches can only work if we can leverage data
more effectively. Existing industry efforts on data and process standardisation must continue if we are to leverage, share and re-use data on new common platforms. There is great potential across the industry, but the quick wins could be in improving how we share data between clients, service providers and regulators for reporting purposes,” he says.
Terry Roche, Head of Fintech Research at Tabb Group, agrees that improvements in data quality will be critical to the realisation of new efficiencies. He predicts the emergence of utility structures for non-differentiated services such as reference data. But he also suggests the industry must overcome the many legacy hurdles erected by its existing technology and organisational infrastructures to fully exploit recent waves of innovation.
At one level, this requires the re-examination of existing market practices, but it also demands a more fundamental re-appraisal of how the market works in order to deliver value to clients. A previous preference for proprietary solutions may recede as the industry undertakes a behavioural and cultural shift on the path to embracing the collaborative platforms of the digital economy.
“There is too much upside for the capital markets not to change, but it will take significant investment and a restructuring not just of workflows but of individual organisations and market structures,” concludes Roche.
1 As identified in a report published by Klaus Schwab, WEF founder and executive chairman, in January 2016
2 The HyperLedger Project is an open source collaboration forum hosted by the Linux Foundation aimed at ensuring compatibility and interoperability between DLT use cases
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