Industry attitudes to collaboration between fintechs and banks in the payments space have turned a corner in recent years. bobsguide sat down with Tony McLaughlin, Managing Director at Citi’s Treasury and Trade Solutions and Nick Pedersen, Managing Director, EQ Global, to discover how banks and fintechs are partnering to generate new payments propositions.
Have you considered how PSD2 might affect the working relationship between Citi and EQ Global?
TM: PSD2 has two aspects; account aggregation and payments initiation, and we are particularly interested in the payments aspect.
For a business such as EQ Global, you are either paying on behalf of a client, or you are receiving money on behalf of a client. PSD2 will open up new ways to receive money on behalf of a client, so there is definitely an opportunity.
NP: I think that is where collaboration becomes so necessary. You can be a small fintech playing around with open banking infrastructure, not really know what you are doing, and quickly fail. When you are able to collaborate with a bank that is going through the same thought process you quickly understand what PSD2 means for us as a fintech and the bank.
TM: We see PSD2 in a global context. Understanding a new market factor is reliant on having a framework for understanding it – you can only understand something if it looks similar to something you already understand. We understand PSD2 in the light of Alipay in China, in the light of UPI in India and in the light of faster payments developments all around the world. These create reference points so when PSD2 is implemented it is not a strange animal.
What do you think are the issues or trends that are going to have the biggest effect on international payments in the next 12 months?
NP: The concept of being able to pay and receive from the same institutions – the outbound payments space and the collection space - have been quite separate for a number of years. You have our traditional competition which is primarily focused on outbound international networks. Then you have the card acquiring networks that focus purely on the collection side, but there is no one place for the next eCommerce giant to go to in order to solve both problems of paying and receiving money overseas. I think this is the dynamic many of us are trying to work out, without becoming all things to all people but instead solve it in particular niche areas.
TM: For Citi there are four macro developments in the payment space that we are tracking very closely.
First is the proliferation of faster payments schemes. We’ve had faster payments in the UK since 2008, but many countries are now implementing faster payment schemes. By 2020 there will be an incredible global structure for making and receiving payments in real-time that will benefit national economies, but also what you’ll see is people who are running global networks such as Citi tapping into those networks to enable real-time payments and receivables across the globe.
As Citi lays those pipes locally (and we’re likely to be members of more of these faster payments schemes than any other player), we will make that network available to partners like EQ Global and that will take EQ Global’s proposition to the next level.
The second is the development of bank APIs and sometimes that is being encouraged by regulators such as with open banking in the UK and PSD2 in Europe. The trend goes much wider - many banks are deploying APIs, so that creates another layer of infrastructure into which Citi can connect to provide new services that become available to our partners such as EQ Global.
A third area of interest is the developments that are taking place in the distributed ledger space. At the moment these are in a sandbox mode rather than production, but they might have relevance in the payments space with further development, so we’re studying those things very deeply.
The final potential development people are talking about is national digital currencies – digital dollars, pounds and yen. These are more at the conceptual stage at the moment and already there is much commentary on their potential unintended consequences, such as damaging commercial banking systems.
The first two trends are in production, and are creating usable infrastructures, while the second two are more conceptual or experimental at this point in time.
Do you foresee blockchain being a potential competitor in international payments?
NP: I would only see blockchain as a tool from a back office reconciliation perspective, I don’t believe in blockchain as a cryptocurrency tool. We would only look at it to make our back-end processing more efficient.
TM: Blockchain is a new technology and new technologies can take some time to find their feet. The relational database was invented in 1970 and only commercialised in 1979 by Oracle. Now almost all of the technology that we take for granted contains relational databases, so it shows that many foundational innovations go through long gestation periods.
Payments are made up of two layers, a messaging layer and a settlement layer. For a blockchain or distributed ledger to be adopted by the marketplace it has to be superior in at least one of those two layers.
On a settlement layer, the usage of a cryptocurrency for payments is problematic. For example, what is the currency worth? How easy is it to steal? Are banks expected to hold that currency on their balance sheet? There is a bid/offer spread every time you make an exchange, and by buying and selling a cryptocurrency you add an unnecessary currency exchange into the transaction.
Many of the blockchain providers are moving away from the idea of using a cryptocurrency in their payment schemes, but if you take out the cryptocurrency element then you are back to normal settlement routes. Settlement is either done through commercial bank money or central bank money, so in a sense by not having cryptocurrency you remove potential benefits from a blockchain solution.
From a messaging perspective, blockchain electrons move at the same speed as any other electrons, so there is nothing about blockchain that is inherently faster. The payments world has spent a lot of time building very ‘fat’ and extensible message formats, ISO 20022, where you can fit thousands of lines of invoice data. If you want to write ISO XML messages to a blockchain, you may have to build new power stations to power the computers doing the cryptographic calculations.
In addition, we also examine likelihood of adoption. There are two SWIFT networks; the FIN network and the IP network. It would appear that some of the benefits of blockchain would be delivered if every bank in the world connected to the SWIFT IP network and adopted XML message standards.
NP: Global payments networks are so complicated with so many incumbents already in place solving a lot of the problems, I would rather see blockchain solve a smaller problem first, such as reconciliation of air miles, and that might generate some adoption in payments.
TM: If a tool cannot solve a simple problem it seems a stretch to extrapolate it to very complex problems. Let’s see the demonstrated use of blockchain in a simple domain in production, not in sandbox, and then that tool may move up the curve of complexity. But to my way of thinking, attacking very complex domains before you solved very simple domains isn’t the correct approach.
NP: If you look at the main criticisms that are levelled at cross border payments, they are price, speed, and accuracy. Those three issues are steadily being solved by other methods to blockchain. In principle a blockchain concept could solve some of those things, in particular around speed and price, but what you have seen in the past few years is the drive of price down in any case; you can send money overseas as a consumer at extremely competitive prices.
The big challenge for cross border payments going forward is not price, it’s more speed, potentially the accuracy of delivery, but particularly using technology to solve an end-to-end problem around making a payment.
Part one of the interview with Tony and Nick is now available online.
The full interview with Tony McLaughlin and Nick Pedersen will be published in Payments R[E]volution magazine, published later this month. Sign up to our sister site PaymentEye's newsletter to find out more about this publication