blockchain’s potential role in payment modernization · • blockchain - technology underpinning...

Blockchain’s Potential Role in Payment Modernization

Christopher J. Mager Managing Director, Head of Global Innovation BNY Mellon Treasury Services

Fintech Istanbul March 20, 2017

Information Classification: Confidential 2

• Payment disruption – a convergence of forces

• What experience do we want to provide?

• Various paths to get there

• Industry payment modernization initiatives

• Blockchain’s potential role in payments

Agenda


pre

Traditional Challenges

End to End Cost Timeliness

Managing Payee Information Risk Transparency Client

Experience

Growing Pressures on an Imperfect Payments System Market Forces

Payments System

Growing Regulation

Fraud & Cyber Attacks

2008 Financial Crisis

Advancing Technology

Millennials with New Expectations

Globalization of Trade Flows

+ +


What experience do we want to provide?

One Global, Real-Time Payment Experience

With today’s technology, we can

• Send and receive texts, email, pictures, video, etc. in real time, globally

• Why not payments?

As an industry, we need to drive payment processing through the door technology has already opened:

• Real-time execution, globally

• Complete transparency as to

– Status, beneficiary receipt

– Pricing

– Counterparties

• Real-time fraud analysis / prevention

• At reasonable cost

• When? within 10 years


Global, Real-Time Payments - How Will We Get There?

1. Connecting National RTP Systems Leverage country-by-country real-time initiatives

to connect multiple regions over time.

2. SWIFT Global Innovation SWIFT builds out and operates,

alone or with partners, a global real-time payment network.

4. Blockchain / Distributed Ledger Fintechs/banks develop credible decentralized

ledger(s) permitting rapid adoption of global real-time payment and settlement.

Traditional Global

Transaction Banking 3. Telecom-based Banking

M-Pesa like networks, provided by Vodaphone and others, provide basic

payment services for the developing world.

+

+

+? Markers of Traction: 1. Network effect 2. Standards 3. Regulatory engagement


Banks, Networks, & Regulators see the need for change Current Payment Modernization Initiatives

SEPA Instant Payments

• Target date - November 2017 • Harmonization of payments • Electronic retail payments 24/7/365 • Immediate & confirmed • Payment types – credit, debit, card

The Clearing House Real-Time Payments

PSD2

• Target date – January 2018 • Third Party Providers – access to payment

initiation & information via APIs • Customer authentication using biometrics • Leg Out Transactions

SWIFT Global Payment Innovation Initiative

• Launched 2015, Pilot Fall 2016

• Go live is expected in May of 2017

• SWIFT and 90+ global banks

• Leverage/enhance existing structure

• Improve speed and transparency

• Initial focus – cross border B2B payments

• Approved November 2015 • Target Launch 2Q 2017 • 24x7, Credit Push only, irrevocable • Optional Alias/Token ID origination • $25K per transaction • ISO 20022 Formatting


Challenges Solved by Payment Modernization Initiatives

New

Solution

Cost to

User Speed Trans-

parency3

Managing Payee Info4

Risk5 Network Effect Standards Regulatory

Framework6

SWIFT gpi

TCH RTP

SEPA Instant

Payments

PSD2

Blockchain

--------------------------Theoretical—to be validated-----------------------------

Notes: 1 Checkmarks indicate challenges each solution could significantly improve. 2 Markers of Success – checkmarks indicate if they exist or are fully expected to exist. 3 Transparency = visibility of transaction status through end-to-end payment process. 4 Managing Payee Info = collecting, storing and securing payee bank account information

5 Risk is generally defined as settlement risk throughout this document, unless otherwise noted. 6 Inclusive of legal, OFAC, and AML

------Markers of Success2------

? ? ?

------------------Challenges1-----------------


and what about Blockchain?

• APPLICATION PROGRAM INTERFACE (API) - Set of routines, protocols, and tools for building software applications. An API specifies how software components should interact. Additionally, APIs are used when programming graphical user interface (GUI) components.

• BITCOIN - Cryptocurrency and payment system invented by Satoshio Nakamoto, released as open source software in 2009. The system is peer to peer allowing users to transact directly without an intermediary

• BLOCKCHAIN - Technology underpinning the Bitcoin cryptocurrency, Blockchain is a database structure which can only be updated by appending a new block of validated transactions to previous blocks of validated transactions

• DIGITAL CURRENCY - Money that is distinct from physical (such as banknotes and coins) that exhibits properties similar to physical currencies, but allows for instantaneous transactions and borderless transfer-of-ownership..

• DISTRIBUTED LEDGER TECHNOLOGY (DLT) - A term which describes a database architecture where all nodes in a system collaborate to reach a consensus on the correct state of a shared data resource. Do not necessarily keep track of all transactions but rather track a ledger of accounts and their balances

• SMART CONTRACTS - Self executing algorithm that updates accounts automatically. Smart contracts are programmed to generate instructions for downstream processes (such as payment instructions or moving collateral) if reference conditions are met. Like a paper contract that can read itself and carries out the agreed terms as and when they come into effect.

Key Terms


Distributed Ledger Explained

• Multiple actors in the network have write access to the ledger

• Single version of truth used by all participants (nodes)

• Richer dataset than exists in a single system

• Exchange of value via native digital assets

• Representations of real world ‘off ledger’ assets can be achieved by ‘tokenising’ the asset

• Transparent, real time data

• Security enabled by encryption and a combination of public and private keys

• Mutual consensus verification protocols allows the dataset to remain correct at all times

• Proof of work & proof of stake verification options

• Can be anonymous or permissioned


• Decentralized, transparent, immutable, time-stamped distributed ledger of cryptographically secured transactions

• Keeps track of all transactions that have ever happened in the system

• Can permit real-time settlement of transactions

• Can serve as a “clearinghouse” with increased automation and reduced counterparty risk

Blockchain Basics


Permissioned ledger with an intermediary is better suited for financial transactions

Technology is still evolving. Standards will drive adoption and interoperability

Blockchain/DLT could be transformative in financial services K

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ID

ER

AT

IO

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KE

Y

TA

KE

AW

AY

S Fundamental business process redesign

is required to reap the benefits of blockchain

Effectively representing cash in-ledger is first step towards any financial use cases

Regulatory, accounting and legal frameworks needs to evolve. Fiat currencies not going away.

Internal use cases are a good start but Network Effect will be the key to harness the benefits of distributed ledger

BN

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2017- ............ 2016 Q1- Q4 2015 Q3- Q4 2015 Q1- Q2

Education Educating clients and internal businesses for organizational readiness.

30+ Clients educated, 8+ Internal businesses educated

Exploration Exploring FinTechs, and internal use cases for efficiency, security and resiliency.

50+ FinTechs explored, 5 internal POCs

Collaboration Clients, Fin Techs & Industry Peers to explore opportunities.

Consortiums participation to drive standards. 4+ Consortiums, 6+ Collaboration opportunities with Clients

Transformation Sort Term: Incremental benefits – efficiency, security, resiliency. Long Term: Organizational readiness for potential disruption 2 internal Use cases in production


DLT – Promise and Challenges Legal: Does the asset comprise the property or account for changes in ownership

Payment leg: how to achieve RVP / DVP without fragmented liquidity or pre-funding

Cost / benefit: Still not proven. Transition costs may be high.

Ownership: Holdings would be ‘owned’ based on possession of public and private keys – lost keys?

Governance: Much more granularity required on role definition, software development, standards.

Inter-operability: Multi asset ledger vs fungible assets vs tokenisation

Data Controls Need to take into account privacy

RoE: Transform the cost base of incumbents. Mutualise the costs of non-differential but essential processes.

Collateral & Liquidity Benefits through shorter settlement cycles.

Efficiency: Avoid replication of business processes. Clean data is replicated in real time.

Connectivity: Bring the buy side community closer to the asset servicing platforms

Ownership: Collapsed hierarchy of vertically integrated players

Security: Current databases contain raw, unencrypted data with outer security. DLT encrypts the data itself.

Audit history: Transparent ownership allows monitoring by regulators / supervisors

24/7 potential: Due to no central operator


Blockchain as the Backbone of the new Payments Ecosystem?

Promising Aspects

• Appears to be capable of recording movement of digital assets real-time

• Based on public/private encryption key technology. Would be very difficult to hack without private keys

• Encodes all transactions into blocks that cannot be altered

• Immediate, global confirmation that block has been finalized

• Decentralized, no one place for cyber attack

• Can be effectively separated from crypto-currencies

Questions Remain

• Open source – is it secure?

• Adoption requires network effect – how to build critical mass of adopters? Level of investment required?

• Scalability for global applications?

• How much transactional data can be incorporated into the blockchain?

• Transparency of transaction details to comply with regulations like AML/OFAC?

• Who provides validation function? How do we ensure continuity of service?

Cost to User Speed Transparency Managing Payee Info Risk Network Effect Standards Regulatory

Framework

---------------------------Challenges-------------------------- -------------Markers of Success-------------

? ? ? --------------------------------Theoretical—to be validated-----------------------------------


Sample Blockchain-based Payment Initiatives

Ripple Global Pmt Network

• 20+ global banks • Live • Ripple Consensus Ledger • P2P and C2B primarily, some B2B • Market Makers provide FX & liquidity • Works with XRPs or fiat currency

Veem (formerly Align Commerce)

• Cross border payments using Blockchain and traditional rails

• Live • B2B payments for SMEs • Payment tracking and transparency • Send/Receive in 23 countries, Receive-only in 37

countries

MAS Digital S$ POC • Monetary Authority of Singapore (MAS) will test

digital currency and use Blockchain driven system for interbank payments.

• 8 banks participating in POC • POC involves exchanging fiat cash for digital

currency , banks paying each other with digital currency, Banks redeem digital currency for cash

Utility Settlement Coin • UBS, Santander, Deutsche, BNYM, ICAP and

Clearmatics • POC • Synthetic representation of fiat • Backed 1-1 with fiat at central banks • Facilitate delivery versus payment market

scenarios


Payment Modernization is Underway

• A convergence of market forces and new entrants have spurred payment innovation to overcome various challenges.

• Banks and payment operators have launched significant payment modernization efforts.

• Blockchain/DLT has the potential to dramatically modernize payments, but impact and timing is TBD.

• BNY Mellon is invested in payment modernization, with efforts underway to:

─Extend our capabilities with new solutions

─Play a leadership role in industry initiatives to modernize payments

─Explore the transformative potential of blockchain technology and other fintech solutions

Questions?

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blockchain’s potential role in payment modernization · • blockchain - technology underpinning...

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