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PAVING THE WAY TO PAYMENTS MODERNIZATION WITH A SHARED HIERARCHICAL LEDGER SYSTEM

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Marten Nelson, CEO, M10 Networks

 

A few days ago, the Secretary of the U.S. Treasury admitted that she’s still on the fence about digital currency. Unlike the Bitcoin-loving president of El Salvador, Secretary Yellen thinks further study is warranted before diving headfirst into the digital currency deep end.

This hesitancy is good. It’s worth asking a few questions: What’s so great about digital currency? What will it allow us to do that we can’t already do within our current two-tier monetary system?

The answers to these questions are multifaceted and can depend largely on where you are, since the drivers to adopt digital currency differ from one country to the next. Sweden, for example, is virtually cashless. The Swedish central bank is responsible for issuing money to citizens and if it can’t do so because people don’t use cash, then a different form of currency makes sense. If we look at developing countries, financial inclusion becomes more of a driver for adopting digital money. And of course, from a corporate treasury perspective, the speed of settlement, reduced costs, and the potential for conditional payments enabling new payment models are all very enticing.

Marten Nelson

Adopting central bank digital currency (CBDC) doesn’t have to be the first step to realizing the benefits of digital currency, however. In fact, individuals can have universal access to instant, cheap, and safe payments without CBDC. Other drivers, such as preventing currency substitution, maintaining (or establishing) currency hegemony, and improving payments between countries, can also be addressed without wholesale adoption of CBDC.

The key is payments modernizationReal-time payments, account-to-account payments and open APIs are all great examples. But payments modernization can also be viewed as the first step towards adoption of CBDC. If done correctly, it can create a framework to facilitate the interconnection of tokenized central bank money and commercial bank money, much in the same way that money works today. It just needs to be more efficient and totally secure.

I’m a payments nerd, not a crypto fanatic. But I do believe that blockchain holds the answer to payments modernization and the creation of a Regulated Liabilities Network (RLN). Yet, in order to maintain the current two-tier monetary system, dispersed ledger technology must preserve the relationship between central banks and commercial banks.

A shared hierarchical ledger could create this type of RLN system that enables the tokenization of both central bank money and commercial bank money. The central bank portion of the ledger would be designated M0 and the commercial bank portion of the ledger, M1. M0 and M1 are distinct but joined in a hierarchical fashion.

This shared hierarchical ledger framework enables instant settlement between banks and their customers on the network. Domestically, it includes payments between individuals (P2P), between businesses (B2B), and from individuals to businesses (C2B). Payments are always “push payments” (credit transfers) and can be pre-authorized to create pull-like (debit transfer) payments.

In the case of cross border payments, a shared hierarchical ledger would allow banks to avoid routing payments through multiple intermediaries. Instead, a hierarchical ledger would allow instant, low-cost point-to-point transactions with currency ledgers that are interconnected through an FX service. The FX service would simply require accounts on the source and destination ledgers of a transaction and provide liquidity to the transacting counterparties.

And this is just the beginning. A shared hierarchical ledger recognizes that banks are already regulated entities. Using the RLN enables banks to do things more efficiently, but from a regulatory perspective, the banks are doing what they already do today: accepting deposits, providing loans, enabling payments, providing trade financing, disbursements, remittances, and merchant payment processing. There’s no need to change national laws or to apply additional regulatory oversight.  Banks would remain responsible for KYC when onboarding new customers and AML and sanction screening when processing payments.

An RLN based on a shared hierarchical ledger would also be highly cost-effective. If shared ledgers are connected through a single cloud-based platform, banks will benefit from economies of scale. Furthermore, the reduced reliance on correspondent banking provides additional savings, as does the ability to lower liquidity requirements, since banks can move assets instantly to where they are needed.

A modern RLN based on a shared hierarchical ledger would also use state-of-the-art authentication, tokenization, access management, and other tools which are generally not available to your average commercial bank, making the network highly secure. And perhaps most importantly, payment modernization based on a shared hierarchical ledger system can be realized in a matter of weeks or months, instead of years or even decades. This point is critical to stave off the threat of an unregulated internet of value.

At M10, we encourage central banks to continue researching and experimenting with CBDC. We also encourage implementing payments modernization solutions in parallel to connect M1 and M0 and provide future options for CBDC. This two-pronged approach is already bringing the key benefits of CBDC to market faster, and has the potential to dramatically reduce the cost to central banks.

 

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Why Anti-Money Laundering is no longer just a tick box exercise

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Tremors following Russia’s invasion of Ukraine have been felt around the world. At a time when customers are already demanding more from companies, the additional pressure being felt — especially by banks and financial services — to prioritize compliance and risk management is stronger than ever before. This has been further compounded by the realization across Western democracies of the extent of the Kremlin’s financial links within their jurisdictions, adding yet more pressure on governments to implement regulatory change. The need to investigate unexplained wealth orders and provide stronger reporting measures to tackle illicit transactions is more necessary now than ever before, while simultaneously ensuring sanctions do not impact the security of ordinary citizens’ bank accounts.

Anti-Money Laundering (AML) was once merely a tick box exercise. However, those in compliance now see financial crime and any link to bad actors as a legitimate risk to the reputation and the future success of financial organizations. As the industry moves in this direction, the entire ecosystem — law enforcement, regulators, and financial institutions — must move with it. Investment in banking technology is increasingly being focused on the development of more sophisticated solutions in the AML and anti-financial crime space. Clearly, there is more to be done in establishing the openness, reliability and safety needed to ensure customers’ assets remain secure. While some of the more traditional organizations still use fairly basic tools, there is a desire to innovate quickly and effectively, with a focus on implementing high-risk–reducing activities that can provide AML alerts in real-time across both traditional finance and the growing presence of digital assets.

However, the banking sector is also on the precipice of great change and dynamism, and AML has a fundamental role in achieving this success, especially for the emerging economies market. A report by PwC highlighted that Brazil, Indonesia, Mexico, and Turkey will develop banking sectors of comparable scale to major European economies such as the UK, France, and Italy before 2040. Meanwhile, EY’s report in 2019 showed that financial inclusion can help boost GDP by up to 14% in large developing economies such as India, and up to 30% in frontier markets across Africa. These predictions are being aided by the continued rise of digital assets, growing exponentially, and projected to reach $4.94 billion by 2030, growing at a CAGR of 12.8% from 2021 to 2030, providing capital access to customers worldwide through instant decentralized transactions.

This makes the need for frictionless financial activity imperative, ensuring businesses have constant access to capital to invest alongside the security of working with banking providers with industry-leading AML services in place.

At Zenus Bank, we have approached this challenge by offering a US bank account that allows clients in over 150 countries to deposit, hold and make payments through US banking infrastructure. This form of international movement makes secure worldwide AML services an imperative.

As demand for our services has grown rapidly this year across Asia, Europe, and South America, we knew to scale at speed we needed to have a secure AML system that would allow us to grow our operations remotely without compromise. Adopting systems such as Identity Onboarding Authentication (IOA) has been key to achieving this. The technology streamlines the onboarding process for all our new customers using facial and voice recognition combined with artificial intelligence, all but eliminating the risk of individuals or businesses setting up fake accounts. IOA also validates thousands of identification documents in seconds, comparing the customer’s ID when submitting transactions to their facial recognition to provide financial security for us and our customers against money laundering. This type of full cycle integration of customer biometric validation and frictionless connectivity with multiple vendors is essential for financial irregularities and fraud prevention, eliminating old protection systems such as the need for passwords, personal questions, or other weak links in the security chain.

And so, the future of AML is two-fold: helping to fight the rising risks of financial crime that come with the increase of embedded financial services, and to ensure the ever more complex forms of payment can be completed at speed while monitoring the legality of each transaction in real-time.  AML is no longer just a tick box exercise — it is key to the future success of the financial industry.

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Making better decisions with people data and analytics at Standard Bank

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By Ian McVey, SVP & GM EMEA at Visier

 

Talent attraction, development and retainment remains a key challenge facing the financial services sector, one which has intensified due to the impact of the COVID-19 pandemic and how it has transformed working environments.

Even before the pandemic arrived, financial services was ranked the second most stressful industry to work in, second only to health and social care on a list of 12 of the UK’s most prominent sectors.

Today, financial services employers are having to keep pace with the growing need for new digital skills in the workforce, as well as placing a greater wellbeing focus on their most important asset – people.

Indeed, the landscape continues to shift at speed. According to a survey of financial services workers undertaken by UK Finance, three in 10 said they needed more digital and tech expertise, with 28% saying they needed a better understanding of the mental and physical health of their staff and customers.

Industry leaders are wary of the talent crunch as well. Around seven in 10 banking and capital markets CEOs and insurance bosses view the limited availability of key skills as a threat to growth.

This makes people-based decision-making paramount to achieving the best possible business outcomes. Reams of research support this, with several studies showing that more diverse workforces outperform others, and that happy workers are markedly more productive in their day-to-day roles. The upshot is that the firms which rank best to work at perform better on stock markets.

Ian McVey

Putting people first at Standard Bank

Standard Bank is a pioneering example of how financial services organisations can leverage workforce data and insights to make better employee and business decisions.

It is a huge business. As the largest African banking group by assets, the company has around 55,000 employees operating in 28 countries around the world.

Digitisation and modernisation have been central to the business’s strategy, both in how it provides services to customers and operates internally.

Prior to the pandemic, the company already had a solid reporting structure and process in place, but there was a crucial problem – access to reports was limited to a small number of people and they were often out of date by the time of use.

Standard Bank needed clear, real-time insight that connected their workforce decisions to business value. It was faced with two options – leaning on analytical tools already in the business which provided monthly reports, or deploy a pre-built people analytics solution that could provide instantaneous insights.

The company chose Visier to implement the latter. Here, the adoption of on demand people data analytics has been scaled across the business, empowering line managers who make important daily decisions that shape the employee experience. So far, more than 6,000 line managers are using these insights to make informed people and business decisions.

Indeed, through the pandemic, the outcome-focussed insights offered by Visier’s people analytics solution have shaped the work-life balance and hybrid working policies for the company. It underpinned a key support system for employees, from tracking sick leave to issuing gentle reminders to take all important annual leave.

Progress continues in 2022. Having a holistic view of the workforce has been influential in enabling Standard Bank to develop its digital landscape – it has highlighted where skills are needed and what processes need transforming to facilitate the journey to becoming a truly digital bank.

Proving the power of people analytics in financial services

What Standard Bank’s experience shows is that it is possible to create an agile banking investment workforce that can pivot on demand with accurate, real-time people analytics capabilities at your fingertips.

Developing an industry-leading financial services workforce is no easy undertaking. However, gaining insight into what employees are feeling and how to keep them engaged has never been easier.

By leveraging a pre-built people analytics platform, managers can create plans based on projected growth, skills, and expected turnover, and share them securely across the business with role-based permissions.

And with all employee data stored in a single system, managers can view the entire workforce picture without having to wade through spreadsheets, enabling them to make decisions with greater confidence using the information to back them up.

Across our customer base, we see a 50% greater return on equity in comparison to other solutions (23.6% compared to 15.4%), as well as a 17% lower manager turnover which collectively saves millions on recruitment processes.

That said, recruitment processes can be transformed by people analytics, too. It enables organisations to identify the traits driving turnover and discover where their best candidates are coming from – and, crucially, how to keep them engaged through the hiring process.

From obtaining talent to keeping staff engaged and on-board, a data-driven people strategy is central to all stages of building the best financial services team possible.

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