Leveraging Digitized Banking in Pursuit of Real-Time Payments | Techy Kings


Asset manager have cash on their minds more than usual these days, and that can pose a challenge for banks. Volatility puts a premium on liquidity, and the lackluster performance of stocks and bonds at the same time has put cash at the center of many investment conversations. Investors want cash more readily available for use in strategies over varying time horizons – from ASAP to long-term – and across jurisdictions around the world. Coincidentally, innovation in the digitization of banking has gone hand in hand with expectations regarding access to cash.

“There is a huge desire to maximize the use of cash across all our customers and product types at this time,” said Justin Chapman, Group Head of Digital Assets and Financial Markets, Northern Trust. “A transaction stuck in a payment network or payment cycle is not an efficient use of cash. There is a demand now to maximize cash withdrawals to ensure that cash is placed appropriately. For example, you may have a cash position on one system or product but need to use it for immediate settlement elsewhere.

Peter Sanchez

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

“Creating digital assets and other activities in a new environment is pointless unless we have real-time autonomous cash delivery,” Chapman said. “There is no point in automatically completing transactions on security when there is a cash gap of two days. This creates an imbalance in the support of the market structure and denies clients the ability to use their liquidity as they should be able to do in a digital environment. In terms of evolving solutions, we’ve seen a lot of movement recently in how the network itself can support digital cash transactions, which in turn can support financial institution transactions.”

Lurking behind the cash lag that Chapman cites, is the regulatory challenge of using innovative technology, especially when it comes to enabling real-time cross-border payments.

“Most of that is the result of local emissions,” said Peter Sanchez, Head of Global Banking and Treasury Services, Northern Trust. “In a CBDC world, that will decrease. And as machine learning and data improve, we will see more synergies in the digitization of payments and digital currency businesses.”


Crypto provides a lens for opportunity

With all the attention that digital currencies are getting it is interesting to consider them in parallel with the digitization of banking. They are not one and the same – parallel progress does not occur in a causal manner, but mutual benefits may emerge in the future.

“CBDC and demand for real-time solutions will leverage distributed ledger technology [DLT] and other methods to make real-time payments,” said Sanchez. “That is the ultimate objective in the transaction banking business. To achieve this, it is important to optimize the account opening process, make sure you don’t have any mistakes in restriction checks, etc. Finally, with the effective digitization of currencies, cross-border solutions is supposed simplified and moving towards being real time.”

In the near term, progress is being made with direct banking application programming interface [APIs] which will help in creating more efficient transactions across the investment landscape. For example, by increasing transparency for merchants as to whether there is sufficient cash in a counterparty’s account to fulfill real-time transactions.

“The open API network gives us the ability to see the cash position to make sure cash is where it needs to be to meet obligations,” Chapman said. “We’re starting to see the extent to which the technology is being used in a number of cross-platform ecosystems. That’s exciting, because not only is the transaction digitized, but it adds an extra level of assurance.”

While the optimal goal of digitization continues, another embodiment of innovation that is emerging is the use case around a stable coin network to support payment networks, which are fragmented around the world.

“There may be a temporary opportunity to move tokens that will enable settlement or contract cash services to achieve real transaction benefits but with cash movement afterwards,” Chapman said. “Combining that with an API can see the movement of cash and liabilities instantly 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 propel digital banking to the promised land of direct processing and real-time payments.

“Big steps are being made,” Sanchez said. “The final iteration could leverage SWIFT and ISO20022 and lead to real-time payments using CBDC and DLT, but it could also go beyond this to include efficiencies for the account opening process, anti-money laundering requirements. [AML]sanctions review and “know your customer” due diligence procedures. [KYC].”

Learn more about asset services from Northern Trust.

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