Leveraging Digitized Banking in Pursuit of Real-Time Payments

As seen in Institutional Investor

Asset managers have cash on their minds more than usual these days, and that can spell 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 along varying time horizons – from ASAP to long-term – and across jurisdictions globally. In a happy coincidence, innovations in the digitization of banking are keeping pace with expectations around access to cash.

“There’s a huge appetite to maximize cash usage across all of our clients and product types at the moment,” says Justin Chapman, Global Head of Digital Assets and Financial Markets, Northern Trust. “Transactions stuck in payment networks or payment cycles are not an efficient use of cash. There’s demand now to maximize cash output to make sure cash is positioned appropriately. For example, you might have a cash position on one system or product but need to use it for instantaneous settlement somewhere else.

Demand for improved liquidity and super-efficient movement of cash through various processes is likely to continue to grow in the current economic and investment climate. And that’s a differentiator for leaders in digitization, such as Northern Trust, which expects that by 2030 between 5% and 10% of its assets under custody and administration could be digital assets – either cryptocurrencies, stable coins, central bank digital currencies (CBDCs), or tokenized/natively issued digital assets.

“Creating digital assets and other activities within a new environment is pretty pointless unless we have real time autonomous cash delivery,” says Chapman. “There’s no point in settling a transaction automatically on a security when there is a cash lag of two days. That creates an imbalance in the market’s structural support and denies clients the capability to utilize their liquidity as they should be able to do within a digital environment. In terms of evolving solutions, we’ve seen a lot of movement recently in how networks themselves can support digital cash transactions, which in turn can support financial institution transactions.”

Hiding behind the cash lag Chapman cites, are regulatory challenges in deploying innovative technologies, particularly when it comes to enabling real-time, cross-border payments.

"Most of that is the result of local clearance,” says Peter Sanchez, Global Head of Banking and Treasury Services, Northern Trust. “In the world of CBDCs, that will diminish. And as machine learning and data improve, we’ll see more synergies in the digitization of the payments business and digital currency.”

With all the attention digital currencies garner it’s interesting to consider them in parallel with banking digitization. They are not one and the same – parallel advances aren’t occurring in a cause-and-effect manner, but mutual benefits could appear in the future.

“CBDCs and the demand for real-time settlements will leverage distributed ledger technology (DLT) and other methods to create real-time payments,” says Sanchez. “That’s the ultimate objective in the transactional banking business. To achieve that, it’s important to optimize the account opening process, make sure you don’t have any mishits in sanction reviews, and so forth. Eventually, with effective digitization of currencies, cross-border settlements should be simplified and move toward being real-time.”

In the nearer term, advancements are taking place with direct banking application programming interfaces (APIs) that will aid in creating more efficient transactions across the investment landscape. For example, by improving transparency for traders into whether there is sufficient cash in a counterparty account to satisfy a real-time transaction.

“An open API network gives us the opportunity see into cash positions to make sure that cash is where it needs to be to meet obligations,” says Chapman. “We’re starting to see that level of technology being deployed within some cross-platform ecosystems. That’s interesting, because not only are transactions being digitized, but it’s adding an extra level of assurance.”

While the optimal goals of digitization are pursued, another embodiment of innovation coming into its own is the use cases around stable coin networks to underpin payment networks, which are disjointed globally.

“There may be interim opportunities to mobilize around a token that will allow settlement or servicing of contractual cash to achieve the benefit of a real transaction but with the cash movement afterwards,” Chapman says. “Combining that with APIs could see instantaneous movement of cash and liabilities across balance sheets and accounts, which is quite dynamic.”

In the end, digital banking will continue to focus on security, resiliency, and efficiency, and over time, digital currencies will likely drive digital banking to the promised land of straight-through processing and real-time payments.

“Tremendous strides are being made,” says Sanchez. “The ultimate iteration may leverage SWIFT and ISO20022 and lead to real-time payments utilizing CBDCs and DLTs, but it can also go beyond this to include efficiencies for the account opening process, anti-money laundering requirements (AML), sanction reviews, and “know your customer” due diligence procedures (KYC).”