Platforms of The Future
Payments – diagram or list of all the different payments market infrastructures across Europe?
New technologies and digitalisation are creating a revolution in many areas of financial services, but when it comes to securities market infrastructures, we should be realistic and understand that change is difficult and will not happen overnight. To say market infrastructures will change ‘completely’ may be valid only over a relatively long period; radical transformation is unlikely over the short and medium terms. It makes more sense to talk about an evolution that has been under way for several decades now. This evolution intensified in Europe with the introduction, 20 years ago, of the euro, which sought to encourage market integration and efficiency by harmonising procedures, formats and regulations.
The European Post Trade Forum (EPTF), a group of experts mandated by the European Commission in 2017 to draw up an inventory of the progress made in removing the Giovannini barriers, have observed that progress towards harmonisation has continued but with varying degrees of conviction and willpower from various stakeholders – public and private. The market is heading in the right direction, it says, but not enough in view of the objectives of removing the barriers to integration of European financial markets that Professor Alberto Giovannini identified in 2001 and 2003. The Inventory showed that, not only are most of the barriers still in place, for example connected to legal and tax matters, but new ones have appeared over time,. The working group made recommendations to the European Commission and it remains to be seen what the Commission plans to do with this information and at what pace, depending on the fields in question.
Beyond the European Commission, two other types of stakeholders are seeking to push the ideas of harmonisation and integration forward. These are the European Central Bank, which having successfully completed migration to the T2S platform is now focused on projects including the integration of T2 and T2S, collateral management in the context of monetary policy operations, and instant payments. The other stakeholder is the industry itself, which is setting standards, for example in corporate actions and general meetings, and reviewing the format of ISO messages exchanged via Swift, which is helping with the migration toward the ISO 20022 format. Implementation of these projects will occur over the next four to five years, or even longer for some. The goal is to unify and modernise the platforms, to harmonise and automate processes, and to reinforce security and accelerate transaction processing. Rightly or wrongly, at no time do these projects call into question the traditional organisation of the markets and their stakeholders. Modernisation will be costly and many smaller actors will be unable to make the required investments. What can be expected is an intensification of competition between stakeholders which, on the regional level, will be accompanied by the disappearance of some of them at all levels of the value chain, and gains in terms of costs, efficiency and security.
The emergence of distributed ledger technology / Blockchain is revolutionary, but it appears that the traditional securities market infrastructures will be with us for a long time to come. There are several reasons for this, including the constrained regulatory environment, particularly post-financial crisis. Revising, or even calling into question, the underlying principles of market infrastructures will be slow and difficult. Technology evolves at an increasingly faster rate compared to regulatory adaptations. The level of security required for processing market transactions cannot be compromised by new technologies or the implementation of innovative solutions. Also, the investment cycle in the post-trade area is not favourable in reconsidering recent investments; there is no consensus between the many concerned stakeholders to invest to adopt DLT / Blockchain. Finally, the latter, although promising technology, is not yet mature enough to handle the constraints and complexity of transactions processed by market infrastructures, especially in the securities space. Many ambitious initiatives have been undertaken in this area, but nothing has yet proved that it will lead to an overall reconsideration, at least in the medium-term, of the current organisation of market infrastructures. We can, however, expect solutions to be developed around and/or in addition to the current structures.
Development of solutions based on new technologies with a more ‘transformative’ potential should come about by encouraging a collaborative approach between the various stakeholders, including the regulators, but also FinTechs and RegTechs. This is what the recent achievements in the financial field in general appear to demonstrate, with progress made in big data, artificial intelligence and machine learning.
I do not see a FinTech today that from a technical and regulatory point of view could provide services comparable to T2S, for example. The ECB alone has invested €500m in the platform and additional investments have been made by the different market players including banks and CSDs. Even if an alternative solution was presented to the market, it is unlikely that the participants would be ready to reinvest at once in a new solution.
Head of Strategy for Market Infrastructures
Payments Market Infrastructures
In the payments industry, several drivers are influencing the evolution of platforms. Among these is regulation aimed at increasing competition, including SEPA in Europe, or ‘self regulation’, such as the ECB’s request that financial market stakeholders deliver an instant payment solution for credit transfers in Euros. Changing customer habits and expectations also influence the development of platforms. Customers want velocity and transparency in payments and the ability to transact anywhere, anyhow and anytime. SWIFT’s gpi project is an answer to this, bringing greater transparency in payments and setting deadlines for end to end payment processing and settlement. Other drivers include technological evolutions with standards such as ISO 20022 and new devices like tablets and smart phones. More recent drivers include the need to improve platform security, as cyber threats increase, and compliance with more stringent regulatory requirements around AML, counter terrorist financing and sanctions. These trends will continue in the coming years and consequently payment platforms will continue to evolve too.
To adapt to change, privately- and publicly-owned payment platforms are being significantly reengineered, with a focus on value-added services. Efforts are under way to improve harmonization between platforms by standardizing on ISO 20022. The High Value Payments Systems (HVPS+) workshops organised by SWIFT’s Standards team is leading efforts to improve data exchanges between infrastructures, increase operational speed, enhance communication between parties, and define rules to ensure conversion between legacy messages formats and ISO 20022 without losing critical information.
Payments market infrastructures, as well as securities market infrastructures, are seeking ways to improve cost structures. New technologies allow less costly maintenance and offer scalability opportunities. Platform managers are mutualising non-competitive activities to the advantage of their members, for example, helping participants to prepare regulatory reports. While lowering costs, platform operators are also increasing the value proposition for participants, extending operating hours in response to an increasingly global business world, enabling the detection of abnormal payments patterns, providing liquidity management assistance and strengthening platform robustness.
Mutualisation can only go so far, however as corporate clients and their customers have different approaches from time to time that require customized ways of doing business. Consolidating on to a single, standardized platform is thus not always seen as being the most appropriate solution. And that is probably why, in Europe, there are still more than twenty platforms for standard payments in euros and there will be about seven different euro instant payments platforms active by the end of 2017.
The development of new payments infrastructures requires the payments community – platform operators, market authorities, banks and their customers as well as new entrants to progress together. Platform evolution is not about to stop.
Head of Interbank Relationships
Every stakeholder – infrastructure operator, bank and corporate customer – has a role to play in the evolution of payments platforms – it is not the role solely of the platform operators. Continuous investment in infrastructures will be demanded so that stakeholders can develop their payment activities to include the ability to send more complete data within payment messages and develop straight-through processes on a 24X7 basis. FinTechs also have a role to play as a forge of new ideas to improve customer experiences and to spur incumbents to improve their offerings. FinTechs are too often described as “friends or foes”; this is too simplistic a way to describe them, as typically, they work on given segments of payments activity and are not in most cases proposing complete and integrated payment solutions. On a case by case basis they can become partners of platform managers or their offerings can be used directly integrated by platform users.
The evolution of market infrastructures is not only a technical issue; legal differences between jurisdictions also must be addressed. Payments market authorities will continue to facilitate the trends towards speed of transaction execution and richness of payment data by further harmonising laws between different jurisdictions in the EU. Harmonisation is a tough role for authorities as they must find the right balance between fostering innovation and ensuring the security and stability required by the financial markets.
The development of new payments infrastructures requires the payments community – platform operators, market authorities, banks and their customers as well as new entrants – to progress together. Platform evolution is not about to stop.