Leverage digitized banking services in search of real-time payments

Asset managers have money on their minds more than usual these days, and that can be a challenge for banks. Volatility puts a premium on liquidity, and the lackluster performance of stocks and bonds has put cash at the center of many investment conversations. Investors want liquidity to be more readily available for use in strategies over a variety of time horizons – from early to long-term – and in all jurisdictions around the world. By a happy coincidence, innovations in the digitization of banking are keeping pace with expectations around access to liquidity.

“There is a huge desire to maximize the use of cash for all of our customers and product types right now,” says Justin Chapman, Group Head of Digital Assets and Financial Markets, Northern Trust. “Stuck transactions in payment networks or payment cycles are not an efficient use of cash. There is now a demand to maximize cash generation to ensure cash is positioned appropriately For example, you may have a cash position in one system or product, but need to use it for instant settlement elsewhere.

The demand for improved liquidity and ultra-efficient cash flow through various processes is expected to continue to grow in the current economic and investment climate. And it’s a differentiator for digital leaders, such as Northern Trust, which expects that by 2030 between 5% and 10% of its assets under custody and administration could be digital assets. – either cryptocurrencies, stablecoins, central bank digital currencies (CBDC), or tokenized/natively issued digital assets.

“Creating digital assets and other activities in a new environment is pretty pointless unless we have real-time cashless self-delivery,” Chapman says. “There is no point in automatically settling a trade in a security when there is a two-day cash lag. This creates an imbalance in the structural support of the market and robs clients of the ability to use their cash as they should be able to in a digital environment. In terms of evolving solutions, we’ve seen a lot of movement recently in how the networks themselves can support digital cash transactions, which in turn can support financial institution transactions.

Behind the cash mismatch cited by Chapman are regulatory challenges in deploying innovative technologies, particularly when it comes to enabling real-time cross-border payments.

“Most of this is the result of local mine clearance,” says Peter Sanchez, Global Head of Banking and Treasury Services, Northern Trust. “In the world of CBDCs, this is going to decrease. And as machine learning and data improve, we will see more synergies in the digitization of the payments and digital currency industry. »


Crypto offers a prospect of opportunity

With all the attention digital currencies are getting, it’s worth considering them alongside digital banking. They are not identical – parallel progress does not occur causally, but mutual benefits may appear in the future.

“CBDCs and real-time claims will leverage distributed ledger technology [DLT] and other methods to create real-time payments,” says Sanchez. “That’s the ultimate goal of transaction banking. To achieve this, it is important to optimize the account opening process, ensure that there are no hiccups in sanction reviews, etc. Eventually, with the effective digitization of currencies, cross-border settlements should be simplified and evolve in real time.

In the shorter term, progress is taking place with direct banking application programming interfaces [APIs] that will help create more efficient transactions in the investment landscape. For example, by improving transparency for merchants about whether there is enough cash in a counterparty account to satisfy a transaction in real time.

“An open API network gives us the ability to see cash positions to ensure cash is where it needs to be to meet obligations,” Chapman says. “We are starting to see this level of technology deployed in some cross-platform ecosystems. This is interesting because not only are the transactions digitized, but it adds an extra level of assurance.

As the optimal goals of digitization are pursued, another embodiment of innovation that comes into its own is the use cases around stablecoin networks to underpin payment networks, which are disjoint to the global scale.

“There may be intermediate opportunities for mobilization around a token that will allow the settlement or service of contract money to benefit from an actual transaction but with the movement of money afterwards,” Chapman said. . “Combining that with APIs could see instant movement of cash and liabilities across balance sheets and accounts, which is quite dynamic.”

Ultimately, digital banking will continue to focus on security, resilience, and efficiency, and over time digital currencies will likely lead digital banking to the promised land of straight-through processing and real-time payments. .

“There’s been tremendous progress being made,” Sanchez says. “The ultimate iteration can leverage SWIFT and ISO20022 and lead to real-time payments using CBDCs and DLTs, but it can also go beyond that to include efficiencies for the account opening process, anti-money laundering requirements [AML]sanction reviews and “know your client” due diligence procedures [KYC].”

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