Monday, 28 November 2022

Financial institutions will lead the global transition to net-zero

5 min read

By Siddharth Chandani

Industry practitioners and experts discuss the critical role financial services play in meeting the needs of both customers and the community, and their preparation for black swan events as the industry moves its innovation from theory to execution

This year’s Sibos virtual gathering of more than 19,000 banking and finance practitioners and experts discussed the industry’s emergence from the period of disruption and adaptation to transformative technologies that are shaping the future of financial services.

The focus was on how the industry can collectively evolve, reassess and re-energise to meet client, regulatory and societal demands. This year’s conference theme – Recharging Global Finance – included topical discussions ranging from the rapid pace of digital acceleration in payments, securities and fiat, i.e. interest in digital currencies including risk management, adoption of common standards, transparency in supply chains to sustainability and environmental responsibility, which will take more prominent roles.

Sustainability and transition to net-zero

Financial institutions (FIs) have a major role to play in leading the global transition to net-zero through intelligent and responsible financing solutions. These are primarily built on the premise of moving away from carbon-intensive portfolios to alternative technologies or cleaner and more efficient energy sources. For example, large investments are required to combat climate change and banks need to partner with customers on their transition journeys to identify new opportunities or mitigate risks arising from environmental changes.

Broadly, sustainable finance means channelling capital towards projects and businesses that promote environmental protection and inclusive growth. This can range from environmental projects that drive renewable energy and clean transportation, to social projects that deliver affordable housing or inclusive social infrastructure. “Our key priorities include increasing energy security and access, while decreasing emissions by supporting renewable energy projects across the continent (Africa), increasing access to basic services by financing affordable housing, student housing and other bankable social infrastructure projects, and supporting our clients’ transition journeys by providing sustainability-linked bonds and loans,” said Shiran Moodley and Heidi Barends, co-heads of sustainable finance for Absa Corporate and Investment Bank.

Shiran Moodley, Co-Head of Sustainable Finance, Absa Corporate and Investment Bank

Market participants, issuers and investors are increasingly recognising the importance of sustainability and embracing ESG (environmental, social and governance) as an effective way to diversify their portfolio. Driven by regulatory interventions, for FIs, this may be reflected on how they integrate ESG into their trade finance and lending practices.

Heidi Barends, Co-Head of Sustainable Finance, Absa Corporate and Investment Bank

Crosby Mkhwanazi, global head of transactional products and services at Standard Bank, pointed that owing to the imposition of regulations, while banks have been strong on the governance side, it is the environmental aspect that has particularly accelerated in the last 18 months. “The environmental aspect started off as, can we assist with reporting on ESG to the kind of businesses we finance, deposits we take and types of clients we support,” he remarked.

Crosby Mkhwanazi, Global Head of Transactional Products and Services, Standard Bank

As banks drive green transformation in financing, they will continue to develop innovative financing tools such as green bonds, green loans and green project financing where the proceeds from such instruments will be exclusively earmarked for green projects. A number of banks are also tapping into the sustainability-linked loans and bond markets that impose a set of pre-agreed sustainability-linked KPIs to encourage participants. For example, suppliers are rewarded, such as getting access to cheaper financing rates, if they perform well against certain ESG.

Making cross-border payments data rich, frictionless and real-time

With the growing number of real-time domestic payment schemes offering instant experience to customers, there is a demand for similar convenience in cross-border transactions. This paradigm shift is brought about by increased innovation through the adoption of mobile wallets especially as more small and medium-sized enterprises (SMEs) reorient their payment operations and customer interactions.

The growth of gig workers has also led banks to explore faster modes of pay outs. “As real-time payments come into play, they are really changing the dynamics of how payments are made and really meeting the expectations of customers and changing society. There is rise of pay-on-demand, gig economy, where people are asking to be paid at the end of their shifts and there is request to pay which is enabling instant bill payments. This is happening domestically and customers now see opportunities in cross-border payments,” elaborated Russ Waterhouse, executive vice president for product development and strategy at The Clearing House.

Russ Waterhouse, Executive Vice President for Product Development & Strategy, The Clearing House

The number of real-time transactions soared 41% in 2020. Asia Pacific (APAC) continues to lead the way, with real-time payments now live in 13 APAC countries. India registered 25.6 billion transactions in 2020 (more than 70% increase over 2019), followed by China with 15.7 billion and South Korea with 6 billion transactions.

Countries with existing faster payments systems have been exploring the opportunity of linking them with similar systems in other countries to facilitate cross-border payments. “Linking domestic systems is key to achieving fast, transparent cross-border payments, but on which corridors is this more suitable?” questioned Ulrich Bindseil, director general for market infrastructure and payments at European Central Bank. “You may go for multilateral approach and corridors where we already have an interoperable infrastructure in place or target high remittance corridors,” he opined.

Ulrich Bindseil, Director General for Market Infrastructure and Payments,European Central Bank

The Association of Southeast Asian Nations (ASEAN) is preparing to launch the Cross-Border Payments Interoperability Network, an ASEAN-wide payments network powered on mobile and online channels by 2025. Singapore, Thailand and Malaysia have already taken the lead to interlink their domestic payment market infrastructures. Singapore’s PayNow and Thailand’s PromptPay were linked in April 2021. Phased linkage of PayNow with India’s Unified Payment Interface and Malaysia’s DuitNow is in the pipeline for 2022. Low-value mobile-phone based transfers will be completed within minutes, representing a marked improvement over the few days needed by most cross-border retail solutions.

Standards and interoperability for cross-border payments reform were also key discussion points. There was a broad recognition that the richer and higher quality structured data enabled by the migration to ISO 20222 would have an overall impact of decreasing frictions in cross-border payments.

Christian Fraedich, head of cash business architecture at Deutsche Bank, pointed out several reasons as to why the industry must to move away from legacy format to new-data rich format. “We decided this is because of pain points in the existing financial system, the challenges around reconciliation and in compliance control and interpretation of data for false positives as well as limited data and remittance information around the movement of cross-border payments,” he added.

Christian Fraedich, Head of Cash Business Architecture, Deutsche Bank

Panelists at the “ISO 20022 adoption journey for payments” session agreed that the adoption will change the way banks send cross-border payment instructions. Banks can start making use of the rich data embedded in the ISO 20022 payment message format and can share this additional information with their customers to provide added insight on each transaction. The data can also be used to easily automate KYC and AML activities – helping to reduce the risk of fraud across the value chain.

“Broadly speaking, this is a watershed moment as the adoption will bring efficiency, transparency and message harmonisation. For corporates, this will bring huge reconciliation opportunities by way of improvement in design of regional reconciliation tools and the ability to automate will improve Days Sales Outstanding, cash flows and more,” added Nicholas Soo, head of product management for global liquidity and cash management at HSBC.

Nicholas Soo, Head of Product Management for Global Liquidity and Cash Management, HSBC

However, challenges to this journey are present on multiple fronts. From a human resource and customer standpoint, Fraedrich stressed, “Training of our people will be the biggest challenge along with educating our own clients.”

As cross-border payments typically involve one bank sending a message to another bank, which in turn passes the message on to another bank in the chain – therefore, all banks need to be equipped to receive, process and pass the full ISO 20022 payment data from one counterparty to the next, else the chain will be broken and vital information potentially lost.

Panelists recognised that the fullest potential of the initiative will be realised upon the industry’s collective adoption. “The more banks that participate in any standard platform, or evolution, that’s where the value truly comes in. For ISO 20022, if one bank can send it but the other bank cannot receive it, it doesn’t really enjoy benefit of richer information so it’s important that we encourage and get as much participation as possible,” elaborated Mkhwanazi.

Creating transparency in supply chains through data, partnerships and technology

This crisis of the past 18 months has prompted organisations to re-evaluate how they source their goods as consumers and regulators demand more information on ethics, quality, safety and environmental impact of their supply chains. Issues around human aspect of supply chains such as ‘sweat labor’ or for example adverse impact of an apparel value chain have raised questions around how much control does an organisation really have over its supply chains.

Moreover, with global supply chains becoming more complex and lengthier, many of these issues occur not with direct, but with deep-tier suppliers, which are often SMEs who remain cut off from low-cost and timely financing. Driven by calls for transparency, firms and their financial service providers are leveraging data, partnerships and technology, which seek to enhance visibility into supply chains ecosystems.

DBS for instance takes an upside down approach to understand an industry deeper. Leveraging data and digital, the bank helps anchor buyers’ deal with their partners seamlessly. “We are able to onboard, rank, credit score finance suppliers quickly and seamlessly using data and digital. We also make sure that the anchor does not need to get involved in the processes and goods arrive on time”, noted Tan Su Shan, group head of institutional banking at DBS.

Tan Su Shan, Group Head of Institutional Banking, DBS

DBS also partnered with JD Logistics (JDL), the supply chain and logistics arm of to provide financing to JDL’s e-commerce SMEs and improve their cash flows. The bank leverages APIs to integrate its digital service into JDL’s blockchain platform. This enables real-time exchange of transaction data to refer financing for the e-commerce merchants. Merchants are able to not only view their available balances and outstanding loans at one go on the platform but also receive the disbursed funds quickly.

Standard Chartered Bank partnered with Linklogis to co-create Olea, a fully digitised trade finance origination and distribution platform that brings together institutional investors seeking opportunities in an alternative asset class and businesses that need supply chain financing. A concept that marries international trade and risk management, with access to multiple asset classes, significant capital opportunities are available for SMEs to fulfil their needs of working capital more efficiently.

“With Linklogis serving about 20% supply chain finance market in China, the ability to provide much more transparency around risks is updated in real-time across the supply chain”, said David Whiteing, group chief operating officer at Standard Chartered.

David Whiteing, Group Chief Operating Officer, Standard Chartered

Digitised supply chains offer greater efficiency and more robust processes, ensuring access to fast and fluid working capital for all parties and enhancing connectivity across a horizontal and vertical ecosystem. 

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