Banking

Real-time settlements – the final piece of the puzzle for unlocking truly global transactions

Published

3 weeks ago

May 5, 2022

By Dave Sissens, Chief Executive Officer at RTGS.global

Much attention has been given, globally, to setting up retail banking for the new post-Covid world. This is no surprise. The pandemic has had a massive impact on us as individuals, businesses and even national economies. It drove people online and as such has expedited innovation in finance, including significantly increasing the demand for seamless cross-border transactions.

However, as the industry’s focus remains on retail transactions, wholesale interbank cross-border payments have lagged – despite their critical role in enabling rapid transfers of money. If this critical component of the cross-border transaction equation is overlooked, costs will remain high and efficiency will be low. To see a meaningful shift in cross-border payments, including in the retail sector, the industry must now focus its attention and energy on the wholesale market.

Domestic transactions

When the pandemic was rife in 2020, the G20 (an intergovernmental forum comprising 19 countries and the European Union) made improving cross-border payments a top priority, recognising the enormous benefits that this will bring to people and governments all over the world.

To make this happen, financial institutions are increasingly relying on technology to create frictionless real-time payments and settlements. Such transactions reduce costs and complexity for all parties involved. Unsurprisingly, domestic transactions were the first to benefit from this banking technology revolution.

Central banks have adopted more efficient methods of transferring money within their own jurisdictions, whether for consumer and small business transactions or large-value commercial transfers – it has made money transfers more efficient. In both scenarios, central banks will rely on Real-Time Gross Settlement. This refers to the continuous process of settling interbank payments on an individual order basis across the books of a central bank.

In various jurisdictions around the world, approximately 60 faster payment solutions based on Real-Time Gross Settlement are currently operational. This is a significant improvement compared to the handful that existed just ten years ago. As a result, instantaneously trading, settling, and transferring monies in a single currency transaction, all in real time, has now become commonplace for domestic transactions.

Real-Time Gross Settlement models for cross-border transactions

While significant progress has been made, removing the barriers to facilitating efficient interbank transactions have been a challenge in the cross-border space. These points of friction include settlement risk, capital requirements, access to liquidity, regulatory compliance and security concerns, reliance on multiple intermediaries, and an overall problem that many transactions take days to settle.

That being said, efforts are already underway to address these issues. The Bank for International Settlements’ (BIS) Innovation Hubs are working with domestic payment system operators, member institutions, and service providers to link countries to existing rapid payment transfer networks. The projects are looking to enable seamless, real-time and interbank cross-border fund transfers.

At the same time, companies such as RTGS.global are launching their own solutions. RTGS.global has developed a bilateral atomic settlement service for cross-border wholesale transactions that leverages the cloud, a global private infrastructure, and streaming technologies to enable instant bilateral settlement of one currency for another without the use of a financial intermediary. Bilateral atomic settlement will make it feasible for banks in separate jurisdictions, using different currencies, to complete settlement in seconds. It ensures that payments are facilitated in the fast, transparent and seamless manner which the G20 identified as the aspirational standard for modern cross-border transactions.

Facilitating change for the future of payments

The banking industry must embrace today’s digitally evolving landscape by adjusting its infrastructure, systems, and communications in accordance with the G20’s call to prioritise cross-border payments.

Many regulatory authorities, such as those in the UK, have adopted a proactive and strategic approach in adapting their regulatory frameworks to accommodate technological advancements and embrace novel business models. When it comes to innovation however, fintechs and other would-be disruptors of normative practice do not need to embrace a ‘move fast and break things’ mindset that ignores existing legal frameworks. Instead, transforming legacy processes should be at the heart of innovation.

In spite of this, we have indeed reached a turning point. With technology, we can finally break through the long-standing stumbling blocks of the wholesale value chain. A frictionless wholesale cross-border payment system is on the verge of being a reality; banks are now at the helm of building a better system and embracing the new development.

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Wealth Managers and the Future of Trust: Insights from CFA Institute’s 2022 Investor Trust Study

Published

2 days ago

May 23, 2022

editorial

Author: Rhodri Preece, CFA, Senior Head of Research, CFA Institute

Corporate responsibility is more important than ever. Today, many investors expect more than just profit from their financial decisions; they want easy access to financial products and to be able to express personal values through their investments. Crucial to meeting these new investor expectations is trust in the financial services providers that enable investors to build wealth and realise personal goals. Trust is the bedrock of client relationships and investor confidence.

The 2022 CFA Institute Investor Trust Study – the fifth in a biennial series – found that trust levels in financial services among retail and institutional investors have reached an all-time high. Reflecting the views of 3,588 retail investors and 976 institutional investors across 15 markets globally, the report is a barometer of sentiment and an encouraging indicator of the trust gains in financial services.

Wealth managers may want to know how this trust can be cultivated, and how they can enhance it within their own organisations. I outline three key trends that will shape the future of client trust.

THE RISE OF ESG

ESG metrics have risen to prominence in recent years, as investors increasingly look at environmental, social and governance factors when assessing risks and opportunities. These metrics have an impact on investor confidence and their propensity to invest; we find that among retail investors, 31% expect ESG investing to result in higher risk-adjusted returns, while 44% are primarily motivated to invest in ESG strategies because they want to express personal values or invest in companies that have a positive impact on society or the environment.

The Trust Study shows us that ESG is stimulating confidence more broadly. Of those surveyed, 78% of institutional investors said the growth of ESG strategies had improved their trust in financial services. 100% of this group expressed an interest in ESG investing strategies, as did 77% of retail investors.

There are also different priorities within ESG strategies, and our study found a clear divide between which issues were top of mind for retail investors compared to institutional investors. Retail investors were more focused on investments that tackled climate change and clean energy use, while institutional investors placed a greater focus on data protection and privacy, and sustainable supply chain management.

What is clear is that the rise of ESG investing is building trust and creating opportunities for new products.

TECHNOLOGY MULTIPLIES TRUST

Technology has the power to democratise finance. In financial services, technological developments have lowered costs and increased access to markets, thereby levelling the playing field. Allowing easy monitoring of investments, digital platforms and apps are empowering more people than ever to engage in investing. For wealth managers, these digital advancements mean an opportunity for improved connection and communication with investors, a strategy that also enhances trust.

The study shows us that the benefits of technology are being felt, with 50% of retail investors and 87% of institutional investors expressing that increased use of technology increases trust in their financial advisers and asset managers, respectively. Technology is also leading to enhanced transparency, with the majority of retail and institutional investors believing that their adviser or investment firms are very transparent.

It’s worth acknowledging here that a taste for technology-based investing varies across age groups. More than 70% of millennials expressed a preference for technology tools to help navigate their investment strategy over a human advisor. Of the over-65s surveyed, however, just 30% expressed the same choice.

THE PULL OF PERSONALISATION

How does an investor’s personal connection to their investments manifest? There are two primary ways. The first is to have an adviser who understands you personally, the second is to have investments that achieve your personal objectives and resonate with what you value.

Among retail investors surveyed for the study, 78% expressed a desire for personalised products or services to help them meet their investing needs. Of these, 68% said they’d pay higher fees for this service.

So, what does personalisation actually look like? The study identifies the top three products of interest among retail investors. They are: direct indexing (investment indexes that are tailored to specific needs); impact funds (those that allow investors to pursue strategies designed to achieve specific real-world outcomes); and personalised research (customised for each investor).

When it comes to this last product, it’s worth noting that choosing advisors with shared values is also becoming more significant. Three-quarters of respondents to the survey said having an adviser that shares one’s values is at least somewhat important to them. Another way a personal connection with clients can be established is through a strong brand, and the proportion of retail investors favouring a brand they can trust over individuals they can count on continues to grow; it reached 55% in the 2022 survey, up from 51% in 2020 and 33% in 2016.

TRUST IN THE FUTURE

As the pressure on corporations to demonstrate their trustworthiness increases, investors will also look to financial services to bolster trust. Wealth managers that embrace ESG issues and preferences, enhanced technology tools, and personalisation, can demonstrate their value and build durable client relationships over market cycles.

Banking

2022 ESG Investment Trends

Published

5 days ago

May 20, 2022

editorial

Jay Mukhey, Senior Director, ESG at Finastra

Environmental, Social and Governance (ESG) themes have been front and center throughout the pandemic. While the framework has been surging in popularity for several years, COVID-19 served as a period of reflection causing many companies, investors and other individuals to take these factors seriously. It’s something that we can no longer afford to ignore.

Jay Mukhey

We are witnessing drought, adverse weather patterns, hotter climates, and wildfires with more regularity, raising the profile of the climate crisis. Efforts were renewed at COP26 in Glasgow last November to help address the challenge, with the signing of the Glasgow Climate Pact and agreement of the Paris Rulebook. As a result, we are now seeing record net new inflows into ESG investing and impact.

Evaluating ESG criteria

Long gone are the days when ESG issues were at the periphery of a company’s operations. In just a few short years, ESG criteria have become a key metric for investors to evaluate businesses they are considering investing in.

Investor money has poured into funds that consider environmental, social and governance issues. Data from the US SIF Forum for Sustainable and Responsible Investment shows that ESG funds under management have now reached more than $16.6 trillion. It’s not just institutional investors who are embracing ESG, with Bloomberg Intelligence predicting that savers across the world will amass £30.2 trillion in ESG funds by the end of the year.

Due to the multitude of divergent factors that contribute to a company’s success on ESG, it can be tricky to pin down exactly what criteria to measure. Depending on the industry a company operates within, environmental criteria could include everything from energy usage, the disposal of waste and even the treatment of animals.

Social criteria are primarily related to how a company conducts itself in business relationships and with stakeholders. For example, does it treat suppliers fairly? Is the local community considered when the business makes decisions that would impact them? Do they have a statement and policy around modern slavery?

While governance criteria have traditionally been an afterthought, this may be changing. Everything from executive pay to shareholder rights and internal controls are relevant to investors within these criteria.

Tracking ESG for competitive advantage

Many experts within the financial services industry point to the power of ESG as a major competitive advantage, if used correctly. It has been noted that increasingly corporations, from big Fortune 500 companies down to small scale-ups, will communicate on their sustainability metrics to grow their business and to attract talent. However, it’s no longer enough to just pay lip service to ESG issues, with abstract commitments increasingly being seen as insufficient. Companies must now quickly progress to concrete objectives that can be measured and tracked.

A wide range of data providers now offer detailed information and tools that can measure ESG performance and effectiveness. Yet major challenges remain around bringing together what is often extremely fragmented data and transforming it into actionable insights.

Focus areas for 2022

The ESG criteria that investors measure is by no means stagnant. Complex societal challenges regularly emerge that require the attention of companies. Contributors recognize several topics that demand a sophisticated approach, including the COVID pandemic, diversity challenges and powerful social movements.

Companies operating within the financial services sector face several specific challenges related to ESG, with contributors believing that fintech will also continue to play a central role in finding answers to them.
For example, industry experts expect customers to be more demanding of firms in SME lending when it comes to understanding exactly what impact they are having on the climate. For many financial services firms, 2022 will be the year that they will try to reduce the time it takes to bring ESG products and services to market, such as green loans and mortgages, as well as checking accounts with sustainability and carbon tracking capabilities.

When selecting a service provider, customers are increasingly interested in the ESG credentials of their bank or financial institution. Research from PwC finds that 80% of consumers are more likely to buy from a company that stands up for environmental and governance issues. Consumers are one of the main drivers of ESG and many are putting their money where their mouth is. It’s a trend that’s not going away; financial institutions need to start implementing their strategy for ESG now.