Volante Insights

Financial Markets News Update

Where to start? PSD2/Open Banking stutters along. It’s clear that many organizations across Europe are taking a watching brief, with continued uncertainty over implementation of the directive. Despite the go live date of Jan 13 2018, many EU countries still have yet to transpose the directive to local law. For example, the Netherlands were still debating issues on PSD2 and privacy as recently as June.

One major issue is that there appears to be no clear consensus for the adoption of a European wide standard for the XS2A APIs for PSD2. Although not mandated, it seems clear that unless common standards are defined, the aims of the directive are unlikely to be achieved in the short term. Notably, with the UK being somewhat more advanced in the process of developing an Open Banking ecosystem, the UK Open Banking Group is forging ahead with the development of new APIs for the initiation of a wide range of payment related services (AIS and PIS related), e.g. Confirmation of Payee (CoP). (The latest development roadmap can be found here).

It certainly seems that smaller banks in particular are in no rush to comply with the regulatory demands of open access to account. Certainly Volante has observed that minimally compliant solutions are the preferred implementation approach for smaller banks, particularly for the domestic branches of international banks. However, solid progress is being made in the development of a European wide standard directory for PSD2 service providers (both TPPs and ASPSPs) through the EBA’s PRETA/Open Banking Europe Group. The first version of this directory has been published which consumes and standardises information from the national competent authorities within the 31 European countries applying PSD2.

On global payments developments, SWIFT’s gpi program continues to gain traction. In line with the push for instant payments on a domestic level across the globe, as well as alternative DLT-based payment mechanisms such as Ripple promising instant global cross-border payments, SWIFT has seen significant traction in banks signing up to the service and has published some impressive numbers in terms of speed of payments processed under SWIFT gpi rules (currently 80% of cross-border payments are now using SWIFT gpi, 50% of which are credited to a beneficiary within 30 minutes). Coupled with mandatory SWIFT member SWIFT api compliance in the next 2 years, SWIFT is currently piloting a project designed to enhance the offering further, enabling the corporates themselves to generate the SWIFT gpi UETR (unique end-to-end payment tracking reference) which will eventually deliver complete end-to-end tracking for international payments over SWIFT.

Since the last newsletter we’ve seen a big decline in the crypto markets among Bitcoin and all the major cryptocurrencies. Though distributed ledger-based projects in the FS space continue to develop (such as the HSBC Trade Finance project on R3’s Corda platform), the likelihood of adoption of cryptocurrencies by central banks has been dampened. Despite some interesting discussion papers being published, central banks are generally muted in their tone when it comes to creating digital fiat money. That said, the major central banks continue to explore the idea of integrating with cryptocurrency-based systems for payments, as demonstrated by the very recent announcement of a POC by the Bank of England.

In conversations with our clients and the industry at large, we are witnessing an increased focus within banks in wanting to simplify their existing systems by ‘balancing’ payments routing, validation, enrichment, etc., capabilities between a pre-processing capability and core payments processing engine. With a pre-processing capability you can include dynamic upfront validation, canonical standardization, enrichment, tokenization and channel agnostic behaviors such as online, mobile and more recently, APIs. In addition, such a pre-processing approach can provide ISO 20022 compliance – hence in effect making the entire payment process ISO 20022 compliant.

Blockchain’s Transformative Power – Hype or Happening?

By David Mark, Non-Executive Board member, Volante Technologies
Senior Partner and Managing Director at The Boston Consulting Group (BCG)

I was at a seminar on disruptive technology and the presenter was going through a list of tech trends that were going to upend the universe – blockchain was at the top. “But what is a blockchain?” an audience member asked meekly with her arm raised. “It’s huge… it’s going to transform massive businesses but I’m not sure exactly how it works… maybe someone in the audience has a better answer.” Utter silence.

Blockchain will undoubtedly transform the world of transactions and displace many intermediaries over time but what the technology does and how it will transform businesses has taken on mythical proportions. At its core, blockchain produces a digital signature, attaches a piece of data (a coin, a smart contract) and ensures that transactions are valid – that’s It! The way that a blockchain governs and ensures that transactions are valid by putting transactions out in the open on a distributed ledger and asking participants to validate (or consent to) transactions is remarkable. But as such, what blockchain technology really does is enable valid transactions between parties without the intervention of an intermediary.

But like Public/Private Key Encryption twenty years ago, the implementation of what on paper is a conceptually simple concept is complex and is going to take time. It will require the development of core blockchain platforms to execute orders of magnitude faster, that are green and consume much less power (less than Denmark!), improve governance and that can manage public and private systems seamlessly. It will also require the development of new business models (often involving tokens), core utilities and applications. The development of these systems will need the backing of large players that can drive transaction volume to breathe life into these emerging platforms. All of this will take time.

So what does this mean for financial services and other companies? It means that blockchain is going to be a force but it will take time before the applications take hold and start to impact the core businesses for incumbent players. It also means that blockchain will take hold in lighthouse applications and then grow over time. Crypto currencies of all types, cross border settlement and others are all early examples and many others are on the way (e.g., gem tracking).

Some questions for CXO’s to consider when thinking about implementing blockchain solutions:

• How will blockchain impact your business over time and what parts of your business could be addressed by a blockchain solution? Are there de novo opportunities?
• Does a blockchain solution add value or will either existing solutions or a centralised solution with an intermediary be sufficient? Can the blockchain solution be “private” (shared by a limited group of participants) or “public” (out in the open and available broadly)?
• For those areas where blockchain either creates a new opportunity or may disrupt existing parts of your business, what are the highest value use cases? Do you and/or potential partners have sufficient market power to play a shaping role in the development of a blockchain solution?
• Even if you are “along for the ride”, are there areas of your business that can be made “blockchain ready” – areas where your organisation can add value if a blockchain solution emerges?
• Do you have the right expertise within your organisation to manage the integration and engineering of internal processes and are your internal systems robust enough?
• Are you ready to start investing resources and time in to get started?

Blockchain is happening and it will transform our world but we are still at Day 1. The winners will be those that are thoughtful, respond, start moving forward purposely now and have access to the strongest capabilities and excellence in expertise. But as Steve Jobs said “the journey is the reward.”