Calls for standardisation intensifies across the financial services ecosystem

Banks are fighting a losing battle, and will eventually go out of business,” pointed out Anthony Perera Sooriyarachchi, deputy general manager for Corporate Banking, Commercial Bank of Ceylon as he described the current state of play in the trade finance industry during The Asian Banker Future of Finance Summit held in Bangkok, Thailand.

Sooriyarachchi highlighted how the aftermath of Easter bombings in Sri Lanka prompted the regulators to tighten the underlying documentary processes for each incoming remittance, much to the exporters’ resentment.

The summit panellists also discussed the gradual demise of letters of credit and the shift to open account transactions in developed markets.

In identifying growing challenges from stringent anti-money laundering (AML) and “know your client” (KYC) regulations, they concurred that the adoption of common interoperable standards among regulators, conversion of paper into digital, and collaboration between the banking community to build their own platforms and ecosystems were vital to remain relevant.

“From a regulatory and business process perspective, there is a need for re-shaping and introspection for bank entities to remain relevant,” remarked Munindra Verma, group president and country head of transaction banking at Yes Bank.

As banks continue to grapple with legacy technology and stiff regulations, Verma, speaking specifically in relation to issues surrounding Sri Lanka, emphasised on technologies that would disseminate data to all participants and thereby avoid the risk of transaction duplication.

Open banking is changing the dynamics of payment space and in particular, external application programming interface (API) is fundamentally altering every institutions’ mind-sets to embrace new ecosystems. As technology companies and banks work together to co-create solutions for customers and businesses, API standardisation emerged as an effective strategy to speed up transaction processing. The panel, however, also identified several obstacles, especially since banks, in general, are still catching up, owing to regulation and culture.

“Banks were also suffering under stringent and long planning cycles that require them to refocus attention toward moving things faster,” added Axel Winter, chief technology officer at Central Group, a retail and service group in Thailand. He also spoke about the adoption of global standards by regulators as he noted an increasing tendency for businesses to go cross-border.

There is a misconception that a number of APIs built by banks ensure better connectivity and user experience, or simply put, benefits of quantity exceed that of quality. During the session on “Rethinking the world of collaboration, APIs and GITS”, it was concluded that only quality APIs capable of connecting with the ecosystem could offer scalability, security and usability.

Mayda Lim, head of technology for ANZ Bank China, also drew a parallel between the functioning of APIs and the neuron system. “A single neuron cannot produce information. But if two neurons are connected, they are able to share information and create knowledge.”

A broader theme across the sessions pointed towards a greater impetus to integrate multiple ecosystems across regulation and technology.

Demand for better cash-flow visibility through real-time cross border payment tracking

In a mixed panel composed of bankers and financial technology enthusiasts, the conference session on “Instant cross-border payments in the digital world”, shed light on demand from corporate treasury and existing industry-wide solutions catering to their evolving needs. Increasing expectations around faster, transparent, predictable and more efficient tracking of cross-border payments were identified as common unmet needs.

From the perspective of Deutsche Bank, Jan Luebke, global head for institutional cash market management, gave an elaborate account of SWIFT’s global payment innovation (gpi) and how it had evolved since its launch in 2017 to serve real-time – as opposed to instant – cross-border needs of bank customers. “SWIFT’s gpi ensures that a corporate treasurer is better acquainted on the status of liquidity,” stated Luebke.

SWIFT’s gpi has come a long way, from having full traceability with unique end-to-end transaction reference to tracking payment throughout the network to its standard release in 2018 (with MT 202 COV system), which ensures real-time predictability of funds. It is now capable of distilling the transaction chain in terms of FX rates, with deductions at various intermediary levels pointing to accurate reflection of incoming funds into the account.

From a fintech perspective, Yogesh Sangle, head of APAC & MENA at MoneyGram International, a global provider of money transfer and payment services, shared that trust and adherence to compliance were significant from his customers’ points of view. “As money is sent instantly across the world, we need to make sure that we are taking care of end-to-end process such that money is picked up by the intended beneficiary’s account, whilst ensuring real-time compliance.”

There are still multiple challenges associated with connectivity, however, increasing collaboration between banks – often through organisations such as SWIFT – is gradually helping to overcome these. Perhaps the most significant development in this area in recent decades has been the industry’s adoption of the ISO 20022 XML standard, which has simplified corporate-to-bank communications and can potentially play an important role in advancing automation.

David Chance, vice president for payments and strategy innovation at Fiserv noted that the missing piece in the jigsaw was the availability of information throughout the processing of payment transaction. He added that for an easy reconcilable process to take place, payment data should match the invoice generated. “We are seeing the SWIFT gpi moving closer to support the ISO message certification in the near future, and I think that is going to be the next game changer moving forward.”

Facilitating real-time cross-border transactions while meeting regulatory expectations is always a cause of headache for industry practitioners. While fintech and non-bank players continue to enjoy the wild west of minimal compliance, panellists representing several banks pointed to overregulation for lack of instant payments in cross-border transactions within the banking network. This is besides lack of interoperability, infrastructure reachability and existence of cross jurisdictional views and multiple parties on a single payment transaction. These were identified as the main reasons as to why banks were yet to live test cross-border payment.

Whether gpi, ISO or API, the session concluded that standardising the way institutions communicate with each other could help customers track the status of their cross-border payments online. And this is without making an enquiry at the corporate call centre or deploying robust budgets toward expensive solutions.

Maintaining relationships in emerging markets is akin to opening a Pandora’s box

Global banks have been limiting correspondent banking relationships (CBRs) with local banks in emerging markets to comply with increased regulatory scrutiny on these issues: anti-money laundering/combating the financing of terrorism. A low-margin and high-risk activity, reduction in CBRs are back in the picture with increasing incidence of economic sanctions being imposed by the US.

The session on redefining “emerging markets” in correspondent banking raised thought-provoking conversations that track the effect of onerous regulations on the business providers of correspondent banking. While the real background of client and associated business is significant when one is looking at KYC from a revenue perspective, the panel identified the hardest challenge as being compliant with every regulator for a single cross-border transaction. Exemplifying hypothetically, T.S Shankar, head for Asia FI at Western Union Business Solutions said, “If you are based in Singapore, the Singapore regulatory authorities need to sign off, if it’s a USD denominated transaction, then the US regulator needs to sign off, thus getting all regulators onsite becomes the hardest challenge.”

Lack of common regulatory standards well exist within the banks internally. Thomas McMohan, CEO at Dillon Gage Asia further explained, “Take for example DBS Bank in Singapore, it has five different KYC platforms internally, different from what UOB and OCBC deploy. What’s more, DBS Hong Kong has different KYC platforms relative to DBS Singapore.” He further defined the mismatch of regulatory standards as a ‘traffic jam’ which was essentially choking business growth.

The session also weighed on the underlying differences in interpretation of AML, despite common understanding of AML risks between all countries.

Christopher Balding, associate professor at Fulbright University in Vietnam, gave his account from a policy perspective. He cited that “Chinese regulators are concerned with issues around capital flight and not as much as illicit financing.”

In response to a web of issues, banks today are concentrating their efforts on fewer, but more strategic, partnerships with financial institutions across the spectrum. As stitching common standards of implementation is presently challenging, there is a need to have an active dialogue with the clients as well as regulators. “As a responsible institution, you have to engage with clients and even make site visits to high risk countries in order to be convinced that AML and financial crime controls are complied with,” opined Marc Recker, global head of cash and market management at Deutsche Bank.

The panel also noted about the ongoing industry collaboration, as underpinned by the power of wider network reach. They reached a conclusion that “Platformication” can alleviate margin pressure and the heavy investment required for sanctions screening, AML and combatting cybercrime. SWIFT’s KYC Registry facilitates exchange of data between registered market participants where they can store documents in a shared repository. As correspondent banking relationships become increasingly bilateral, the panel advocated for institutions to consume shared data collected in alternate platforms in their compliance processes and pair it with robotic process automations to turn compliance into a completive advantage.