By Marcus Treacher, Executive Chairman at RTGS.global
Hindsight is a wonderful thing. That elusive reset button that enables us to go back in time and try again is always just out of reach
However, we should never underestimate the value of understanding what we would go back and change if given the chance. This insight is a powerful way to identify the shortfalls within our existing reality.
Before delving into the specific case of the world’s cross-border payment systems, there’s a layer of context we first need to address that applies to most areas of technology. When a new piece of tech is introduced, it usually takes a while for people to use it to its full potential.
More often than not, people constrain it by using it in ways the old tech was limited to. For example, when TV was invented, the first TV shows were essentially radio programmes in video – people would stand in front of microphones and record commentaries. Only over time, as TV took hold, was content created that fully exploited the capabilities of the new medium.
In the cross-border payments world, understandable caution and wariness of change led to an extreme example of the TV syndrome. New technology was applied in the 1970s and 1980s in very conservative ways, which then became deeply embedded in how things were done ever since – preventing the industry from really exploiting the power of information technology. The gap today between what we have and what we could have is substantial – and it is getting wider every year.
So, in a reality where that reset button exists, what would we change?
Changing the fundamentals
When money was digitised in the 1960s by replacing physical book ledgers with ledgers held in computer memory, there was a real opportunity to think differently about how money was handled. We could have exploited the fact that computers communicate with each other and share information much more efficiently and extensively than stacks of individual books and clerks could ever do. So instead of just digitising methods and standards designed for paper and ink hundreds of years ago, the industry could have moved more directly to open API technology and distributed ledgers, both of which are only possible with computerised money.
An Internet of Value
The Internet as we know it germinated in post-war research projects, taking form as early as the 1960’s. The underlying protocols for the Internet were available back then, at a time when many banks were still operating manually. At the same time, computers were already set up to allow programs running on them to talk directly to programs running on other computers – early Application Program Interfaces or APIs. Yet the leap was not made to a commercial Internet of Information until the turn of the century. Furthermore, an Internet of Value that would move money internationally like information moves over the Internet, is still unrealised.
Instead, the old message-based method of managing money cross-border, called Correspondent Banking, was like-for-like automated with technology systems that took hold and became entrenched – bringing with it a host of challenges that delay the movement of money between countries and introduce considerable risk and cost into the process.
It’s never too late to set the record straight, and pioneers are now developing alternatives that make much better use of the Internet and API models to redefine how banks move money internationally. The benefits are enormous – taking risk and delay out of the estimated USD 18 trillion that needs to be moved and settled around the world every day to keep the wheels of the global economy turning. These new models will have a huge impact, but they are having to wrestle with old entrenched methods and legacy technologies that will take time to unpick and replace.
Wouldn’t a reset button here be a good thing?
Distributed Ledgers
Another delayed leap was into decentralised ledger technologies. The obvious way to computerise the world’s records of accounts was into islands of information, each sitting within an organisation and audited separately. But a more radical approach, using technology available at the time, would have had a far more impactful outcome.
The creation of distributed ledger accounting provides a secure and decentralised record of ownership that has much greater integrity than standalone ledgers. By eliminating the need for many centralised functions to prove records are correct, thanks to the new high-trust distributed model, the risk of failure and error diminishes significantly. The blockchain ledger itself acts as the governing policy, obviating the requirement for extensive audits and regulatory layers. The industry now finds itself facing the challenge of making that leap in the 2020s, where old methods are now deeply entrenched in computerised systems that have proliferated all over the world and, in total, carry billions of important payment instructions every day.
Holding ledgers and records of value in blockchain structures, combined with interactive API networks and protocols, paves the way for an ‘internet of money’, where value can be held and moved across the globe as easily as information moves today, but with the added feature of deep protection and control. This offers distinct advantages over traditional systems. The immutable nature of blockchain records ensures a clear and irrefutable record of ownership. Additionally, the integration of smart contracts can enable intelligent money and transparent ownership records, which can in turn trigger further creative innovation in the digital systems (e-marketplaces, driverless cars, AI tools, etc) that are powered by these blockchains of money.
Embracing such a paradigm shift now, with so much of the global economy running on legacy ledgers and message networks, requires striking a balance between caution and progress. This should be done with a keen awareness of potential risks and a collaborative effort between regulators and entrepreneurs. Finding this middle ground ensures both innovation and the necessary safeguards.
Understanding the risk of change
Any major change to an industry – hypothetical or not – will bring a cascade of new risks and opportunities to consider. Ultimately, the challenge of navigating these contradictions is what usually holds people back from progress. Too often, well-meaning caution can hold back great advances in technology for noble reasons, robbing generations of the benefits that new solutions can ultimately bring.
New technologies do introduce new problems; some like CFC gases in aerosols created catastrophic problems that far outweighed their benefits and which can often – as in the CFC case – do a great deal of damage before they are identified and rectified. Others like the adoption of the motor car create new challenges that are surmountable. For example, the much higher risk of collision has sparked a very effective industry in safety mechanisms like airbags, and law now dictates we must wear seatbelts and adhere to speed limits, all in the name of risk limitation. However, few of us would return to horses and carts to avoid the risk of injury.
As the payments industry embarks on shifts to open API networks and distributed ledger methods, some models may prove too high risk; others may pose new risks but these may be surmountable. Hindsight will show clearly which category these new ideas fall into in the end. However, in the present moment, innovators and regulators need to work together to explore new models, knowing they may ultimately be enormous sources of benefit or the cause of some very challenging problems.
Balancing creative innovation with prudent regulation
In any scenario, drivers of change need a balanced mind and must look at what the technology can create and how it works within both the regulatory and entrepreneurial world. It’s about hitting the sweet spot; not cowering in the corner and missing out on opportunities, but also not being cavalier.
The recent emergence of Artificial Intelligence (AI) technologies marks another moment-of-truth for innovators and governments; the technology promises enormous benefits, but in some scenarios could do great harm. Will society adopt AI in over-safe, underwhelming ways as banking adopted computing in the ‘60s and ‘70s, or could it unwittingly allow great harm to be done by giving the new technology too free a reign?
In the payments world, AI has the potential to greatly improve the awareness and prevention of money laundering and financial crime in general, which are both enormous problems that banks struggle a great deal to counter, even after copious amounts of work and effort have been dedicated over the years. One big side effect is ‘de-risking’, where banks reduce the connections they maintain into other countries. The result is the banking world reaches fewer people across emerging markets at the very time those markets are in most need of quality cross-border banking services. Applied in bold new ways, AI could reduce the cost and risk of financial crime to such a degree that banks are able to re-engage and reconnect with countries world-wide and play a much more beneficial role in supporting all our societies.
We might not have a reset button, but we have the capabilities to rewire the payments industry enough to revolutionise how we move money around the world; as well as the opportunity to be bolder than in the past with today’s new ideas like AI. By simply understanding what we would change if given a second chance, it becomes clear what is and isn’t working in our industry. It’s now time to act.
