BlockChain solutions for banking

What is the problem?
Current payment processing especially cross border transaction creates a few problems for the banks especially on the management of correspondent relationships, Nostrol accounts maintenance, inefficient settlement process and regulatory issues in today's landscape.

Correspondent relationships
The traditional method for cross border transaction is processed via correspondent banks. Relationships with these banks recently become expensive due to regulatory issues. Blockchain/DLT can solve this problem if all banks in the world join the network.

Interestingly, the recent case between Danske and Deutsche where Deutsche Bank was their correspondent bank used by Danske’s Estonian branch where money flows (euros 2 billion) from Danske are suspicious and whether Deutsche should be held responsible for processing these transactions.

I guess most banks are interested to know the end result of the investigation whether banks should be held accountable for the actions of their correspondent customer and fear if they could be penalized for breaking AML regulations from the actions of their customer's customers.

Nostro accounts
To start x-border transactions processing, each of these accounts are pre-funded with the country's domestic currency which creates an opportunity cost for the banks.

SWIFT DLT proof of concept is working on this to reduce nostro-vostro liquidity. Ripple introduce their own cryptocurrency to solve liquidity issue in NOSTRO accounts as well.

Settlement process
Every MT instruction will move through each correspondent agents based on their technology capabilities, time zone, AML management procedures, reconciliation process to check if funds arrive etc. Furthermore, as instruction passes through each agent, costs increases due to fees impose from each bank and delays in settlements. These create uncertainty in costs.

DLT can resolve this where their technology is able to provide real-time settlement as highlight by Ripple. Of course, provided all banks join the same DLT network.


Ripple Distributed Ledger Technology (DLT)

Ripple is one of the first solution providers which I touched base focusing on enhancing x-border payments processing. Therefore I would want to touch on them below after attending their seminar.

From what I have understood, their objective is to solve these problems which I mentioned earlier by building a real-time gross settlement system for cross border transactions with lower costs, near real-time settlements.

Some of their product solutions are:

RippleNet
one network with all banks participated that forms a network to send and receive payments using their DLT platform with a common set of SLA agreed upon by all participants.

Correspondent relationships can be reduced if most banks participate in this network

X-current
It is their enterprise solution which consists of several modules to act as an RTGS system to facilitate real-time settlements and tracking of payment instructions end to end. The modules include validator, messenger, fx ticker and interledger protocol

Settlement time can be reduced or even in real time with this solution

XRP currency
In my view, XRP currency can resolve the issues of banks parking their funds in different currencies for each domestic country where their Nostro is held thereby creating opportunity costs. By using XRP, banks can allocate less liquidity in domestic currency to process the same volume of cross border payments.

However, using cryptocurrencies invite many questions and debates partly due to the stability of the value with political challenges as well.

xRapid
Its uses their cryptocurrency, XRP to offer financial institutions a reliable liquidity solution to service cross-border payments. Created for liquidity market makers who provide liquidity and exchange between XRP and any other currency so that banks do not need to hold local currency in their NOSTRO accounts.

Final views about DLT solution
DLT is an excellent solution but the major uphill tasks are getting the banks to join these network, going against industry norms as banks are using SWIFT.

SWIFT has already had a roadmap for their GPI to close the gaps surfaced for the past 20 years. However I do not think this is the end of DLT as Singapore has embarked on project ubin to explore the uses of DLT.

Project Ubin Phase 1

It's interesting to read from MAS report about their trial with Ethereum DLT using tokenization SGD currency for payment processing (processing is decoupled from our RTGS system) without creating any monetary inflation in balance sheet bt recategorizing the cash balance to depository receipts.

Tokenization SGD
Before this, digital money exists electronically in stored value cards (Ezlink for example) for retail.
The proof of concept touches on using digital money to process payments instructions with the central bank and its implications.

Money from participants are kept in a collateral account with central bank to reduce credit exposure. Participants are free to convert these digital currencies to fiat anytime as well

How does it works?

1. Notably. a new account(008 account) is created with central bank to serve as an account for collateral
2. Participant sends an top up instruction to MEPS to top up the blockchain account (008 account)
3. Funds will be transfer to 008 via G3
4. MAS will verify the validity of the collateral to proceed with the DR issuance via transaction agent Smart Contract.
5. Participants will exchange value with each other via DLT which is decouple from RTGS system.

Ability to process payments without RTGS
It's interesting to note that payments can continue to process in DLT using tokenize currency which adds on resiliency to processing and decreases the impact of systemic risk in case RTGS system is down.

*Both images are from Deloitte report which can be download from this website. http://www.mas.gov.sg/Singapore-Financial-Centre/Smart-Financial-Centre/Project-Ubin.aspx

Australia New Payments Platform (NPP)

Key takeaways for NPP

1. Operates 24/7 at 365 days
2. Using of ISO20022 format and the use of this format allows sending more remittance information with the payment instruction
3. Initiate payment without account number by using PayId with addressing service
4. Settlement method is not on netting basis and payment gateway of each ADI will send a settlement instruction to FSS for settlement
5. Settles real time within 15 secs via FSS allocation which is be linked to ESA accounts via a sweep to balance positions
6. Extending the access to APP via API

Accessing the platform
There are 5 ways to access the platform

1. As an end user: Businesses, corporates, fintechs, retail individuals, can use NPP to make and receive payments as an orderer and beneficiary
2. As direct participant: Consists of licensed ADI or restricted ADI that connect to the platform for clearing and settlement and meeting the technical requirements Payment Access Gateway
3. As identified institution: Offer their customers real-time data-rich payments via a directly connected NPP Participant who can clear and settle those payments on their behalf. These entities are not required to be ADI or RADI
4. As Overlay services provider: 
• A product or service that uses the NPP’s capabilities in a customized method
• The 1st overlay service is OSKO by BPay
5. As connected institution: 
   1. Connect to the NPP directly by installing an NPP Payment Access Gateway in their own environment in order to be able to send payment initiation and other non-value messages.
   2. Not required to be ADI or RADI as they are not processing or clearing the payments
   3. Able to access the addressing service
   4. These organizations can be payroll providers, share registries, retailers, large corporates,fintechs or organizations like Amazon, Facebook and Google.

API framework for NPP

1. To allow organizations to take advantage of overlay services, NPP released a framework for API development
2. Schema is using JSON for set of HTTP request messages, along with a definition of the structure of response messages
3. Payloads should be designed based on existing ISO 20022 message elements
4. NPPA in collaboration with SWIFT have launched a testing/sandbox environment that will allow fintechs and other third parties to start learning and testing the benefits and capabilities of the NPP using demonstration versions of APIs defined by the NPP API Framework
5. This API sandbox, hosted in the cloud and protected by state-of-the-art security

NPP clearing and settlement process

1. The process described below is summarized. For detailed info, refer to the links I shared below
2. Orderer agent sends a PACS.008 message for clearing
3. Beneficiary agent receives the PACS.008 message, processed and returns back a status file in PACS.002 format
4. Once clearing is completed as described in point 1 and 2, orderer agent will send a PACS.009 message to FSS for settlement unitary after receiving the status message from the beneficiary agent
5. FSS will send a confirmation message to both agents in PACS.002
6. Beneficiary agent will allow the fund to be available to its customer after receiving a positive status message from FSS

Managing liquidity between ESA and FSS accounts

1. NPP allows participants to manage their liquidity by setting upper and lower trigger points to automatically allocate ES Funds to or from the FSS Allocation
2. If FSS falls below the threshold level, RITS will automatically initiate a top-up from the RITS Allocation to restore the FSS Allocation to a Member nominated reset point
3. If the balance in the FSS Allocation rises above the upper threshold,  funds above the reset point will be automatically withdrawn from FSS allocation to ESA
4. Triggering of moving the funds when it hits the threshold levels happens during RITS operating hours
5. If RITS is not operating, funds in ESA will move to FSS allocation
6. RBA offers intraday repurchase agreements (repos), which carry no interest charge but must be reversed later that day, to help institutions manage their outgoing and incoming payment flows through their ESA

Calculation of ESA interest

1. ESA interest is will be calculated on the basis of total EOD balance in ESA accounts, at midnight, seven days a week. 
2. ES Funds in both the RITS Allocation and FSS Allocation will be included in the end of day calculation. 
3. Interest will be paid monthly in arrears on the 1stRITS business day of each month.

1. https://www.rba.gov.au/publications/bulletin/2018/sep/the-new-payments-platform-and-fast-settlement-service.html
2. https://www.rba.gov.au/publications/fsr/2018/apr/box-d.html
3. https://www.nppa.com.au/the-platform/accessing-the-platform/
4. https://www.cuscalpayments.com.au/news/white-papers/using-the-new-payments-platform/
5. https://www.theglobaltreasurer.com/2015/11/26/australias-npp-and-its-impact-on-payments/

Australia Corporate Treasury Market

Australia has diverse markets for its economy with the majority within services covering 61% of its GDP, construction 8.1%, mining 6.9%, manufacturing 6%.

Though mining is only approx 7% of its GDP, Australia is the world's largest exporter of coal. Australian mining companies are essential to China's growing economy and strong investment from China has tightened relationships between these 2 countries, making China Australia's largest trading partner. That also explains why the recent trade war between US and China will negatively impact Australia.

Corporate treasury services

1. There are no exchange controls on its currency and foreign entities making direct investments in Au are cross-checked by the foreign investment review board. 
2. Its financial service is supervised by Australia prudential regulatory authority and RBA is responsible for monetary policy with the objective of maintaining a strong financial system and stability.
3. AU is a founding member of FATF and played roles in drafting FATF recommendations
4. Australia has anti-money laundering and counterterrorism-financing legislation in place.

Banking service
A highly competitive sector with 54 authorized banks where 40 are foreign owned and 14 domestic with Commonwealth Bank of Australia, ANZ, Westpac and NAB having the majority.

Taxation
Tax on corporate income is 30% with capital gains are taxed as income. Interest paid to Non-resident has 10% withholding tax and thin cap maximum allowable debt is 3:1. Interest expenses that are used for business purposes are generally tax deductible. Australia has tax treaties with more than 40 countries and territories.

Accounts
Accounts are available in domestic and foreign currency with no restrictions. For non-residents, they can hold foreign and domestic currency accounts and domestic currency accounts are freely convertible to foreign currency.

Liquidity management solutions

1. Interest optimization, notional pooling, and cash sweeping are allowed for resident and non-resident.
2. Banks offer interest-earning accounts and able to move surplus to higher earning accounts overnight. 
3. Allow short term investments via CDs, government securities, bank accepted bills and commercial paper

Regional treasury centres

1. Its financial centres are in Sydney and Melbourne with an established legal system, highly skilled English-speaking workforce and excellent business infrastructure.
2. In 2017, Australia positioned itself as a renminbi settlement hub for the Asia-Pacific region. 
3. Their foreign-exchange market is liquid and the established clearing and settlement systems to facilitate smooth financial transactions
4. They have also recently launched NPP in 14 Feb 2018
5. Australia is also a member of APN (Asia Payment Network)
6. Electronic and internet banking are very prevalent in the country and available from all major banks

Payment systems

RITS

1. RITS, AU RTGS settlement system operated by RBA
2. Final settlement is done through exchange settlement accounts (ESAs) maintained at the RBA.
3. Processes participants' transactions in the securities settlement systems, Austraclear and the Australian Stock Exchange's Clearing House Electronic Sub-register System
4. Perform settlement for participants' net balances from other clearing houses.
5. Settles interbank transactions in real time and with immediate finality if funds are available in ESA
6. Recently FSS, FAST Settlement System is launched with 24/7 service

NPP

1. Recently launched payment system to settle payments for business, retail consumers and governments
2. Payments are cleared and settle in real time unitary
3. PayID feaure to initiate payments without account numbers

High value clearing system

1. Processes high value and urgent interbank transfers for the AUD currency portion of FX transactions
2. Payments processed in real time and immediate using the SWIFT Payment Delivery System (PDS) and then settled unitary with RITS.

Australian Paper Clearing System

1. Processes AUD-denominated cheques and MICR paper-based instruments
2. Deferred net settlement system and settle on next business day or same day via Bulk Electronic Clearing System

Bulk Electronic Clearing System

1. Processes low value electronic transactions, regular direct debits and direct credits for consumers and businesses with max cap  value at AUD100 million.
2. Deferred net settlement system
3. Final settlement done through Australia's low value clearing systems across participants' ESAs held at the RBA

Payment instruments include

1. Credit transfers with majority electronic based
2. Direct debits mainly for insurance and utility payments. 
• Consumers in the past have the reluctance to use direct debits but it has been changing in recent years. that is why we can see bundle promotions from utility companies to offer discounts if using direct debits for payments
3. Credit cards are increasing based on RBA reports and widely used electronic payment
4. Digital currencies are thriving in Australia where AU has a cryptocurrency market.
• The government has introduced regulations which require digital currency exchanges to register with Australian Transaction Reports and Analysis Centre (AUSTRAC). 
• Cryptocurrencies are legal tender in Australia
5. Cash, cheques are currently declining

Australia Payments Development on NPP and its consumer market

It's been a while updating myself with recent changes to APAC payments landscape since I have moved on to a product management role.

In my previous role as a lead business analyst, I used to keep myself up to date with recent changes to the country's payment developments. As a payment product manager, all the more I need to keep abreast of the changes.

Recently, Australia has joined Singapore and UK, rolling out a new payment system capable of processing payments within seconds. Australia's New Payments Platform (NPP) went live on 14 of Feb, rolling out solutions that allow customers to make instant payments.

The new platform also allows the transfer of funds from one person to another in real-time, using a phone number which is similar to Singapore's Paynow. Australia named this service as PayID and the ID can be either phone number, Australian Business Number (ABN) or an email address. BPay also uses PayID which they called it OSKO.

I will go into NPP in another post but let me shared what is Austalia market like after my research for past few days.

Use of cash
RBA has undertaken a study to find out on usage of cash payments since 2007 and subsequently in 2010, 2013 and 2016. Results has shown that cash used is declining and payments via cards are on the increased.

The image below is from https://www.rba.gov.au/payments-and-infrastructure/payments-system.html

Younger Australians tend to use less cash
https://www.rba.gov.au/publications/rdp/2017/2017-04/trends-in-consumer-payments.html

From the data below, I see that credit cards are rising due to

1. less friction in making payments
2. Convenience
3. Credit availability
4. Rewards point system

Why use Cash and Cheques?
Another question I'm asking why traditional payments, cash & cheques are still in used. from RBA report, the majority of the merchants are accepting these types of payments. Reasons, why merchants are still accepting these payments, could be due to the following reasons:

1. They get to have the value on hands immediately
2. They do not have to pay fees for accepting cash unlike cards

Older consumers tended to use cheques with around 70 percent of the number of cheque payments recorded in the 2016 CPS were made by participants aged 65 and over according to the report. Reasons, why cheques are still in used, is also the same with cash. Results consolidated show merchants still accepted it.

In summary, traditional payments are still prevalent is because of habits (especially for the older generation) & merchant acceptance of traditional payments. Increased usage in other payment types are mainly due to immediate value & frictionless to payers.

I will touch on treasury perspective for Australia markets in my next post.

POBO & COBO: Payments On Behalf Of & Collections On Behalf Of

What is POBO?

POBO it's actually referring to Payments On Behalf Of. It is actually a method of centralizing payments initiation to maximize cost savings & operations efficiencies usually through payment factories or Shared Services Centres.

Payments are made from the 1 orderer's account held in a central location on behalf of their subsidiaries or entities rather than from individual accounts held in the name of the ultimate orderer.

To allow the beneficiary to identify and reconcile the payment, usually, the ultimate orderer (entity on whose behalf a payment is made) is identified in remittance information for older formats eg: SWIFT MT. For ISO20022, ultimate orderer name can also be display under Ultimate Debtor <UltmtDbtr> element with details under remittance information <RmtInf>.

What is COBO?

The concept of COBO is similar to POBO. The difference is the collection of receivables on behalf of other entities and reconciles centrally.

One common solution for COBO involves Virtual Account solution where a corporate maintains one physical account in a centralized location (the collecting entity)  and each entity (subsidiary)is provided with a unique Virtual Account number to which customers make payments to.

Operationally, back-office has to reallocate the funds received from several legal entities to the correct ultimate creditor using intercompany accounting. To reconcile the account, the treasury or shared service centre uses the virtual account number to identify the legal entity which collection they collect from and use the account number to automatically reconcile.


What are the benefits of POBO/COBO?

1. Centralized payments/collections in one location to better manage the payments outflows and better control of cash
2. Reduction of number of accounts opened with banks
3. With fewer accounts, admin cost of maintaining the accounts are reduced and achieving economies of scale
4. With economies of scale and fewer bank relationship, treasuer can negotiate better pricing
5. Fraud risk reduce as treasurer know where the payments are flowing to

What are the challenges for POBO/COBO?

1. Not all payments can be centralized by POBO. For example tax payments as they need to pay locally
2. Regulatory challenges such as restricted currency, resident/non-resident accounts, WHT, intercompany lending rules & reporting to the central bank
3. Company internal process
4. Operating hours of the shared service centre or treasury centre which created time differences for different countries
5. No standard formats or process for COBO solutions as each bank in different jurisdictions has different ways of maintaining the collection information

What are the objectives of cash management to consider POBO & COBO?

1. If you are leveraging on technology to centralize the operations
2. If you are looking to reduce costs by reducing resources in each country and concentrate in 1 country
3. If you are looking to maximize liquidity management
4. If you want to reduce the number of accounts and banking relationships to achieve economies of scale
5. If you looking to standardize working capital SLA and metrics with specific KPI
6. Improve payment efficiency and automation
7. Improve collection efficiency by automating reconciliation and posting to sub accounts quicker

https://www.treasurers.org/ACTmedia/Oct13TTdeutsche38.pdf
https://www.theglobaltreasurer.com/2016/01/27/the-benefits-and-challenges-of-pobo-and-cobo/
https://www.ingwb.com/insights/articles/innovation-and-digitisation-the-treasurers-imperative
https://cib.bnpparibas.com/adapt/putting-pobo-into-practice_a-2-12.html

Transition from Business Analyst to Product Manager

I have decided to write this blog to document the journey of product manager to see how much I have progressed in future.

The role of Product Manager (PM) is totally different as a Business Analyst (BA).

As a business analyst previously, my objective is to use my cash management knowledge to advise and implement a product based on requirements and tweaks to the requirements to ensure it works correctly. It's so straight forward.

Now taking on as PM, the mindset of a BA is no longer applicable to this role. Why? Because a PM has to make it happen, start something. Below are some of the traits I found.

1) You are wearing multiple hats at the same time.

Previously as mentioned, I'm only responsible for gathering requirements and make sure the end product is working and correct. As a product guy, its more than that. Sometimes I have to take on as a designer, project manager and business analyst roles. 

Different situations required a different method of handling and as an owner of the product, I realised that the decisions I made previously will impact the outcome of how the product becomes and the performance it will bring in future. And you have to manage it throughout the lifecycle.

2) You have to be a self-starter

Not everyone will agree with you. Not everyone will want to spend time with you to meet your objectives. Mindset is extremely important. Even I encountered problems along the way, I still need to pick myself up to keep things going. A product guy has to make it happen really. No one will give instructions.