With financial institutions around the world facing liquidity challenges during the pandemic, efficient settlements and liquidity visibility have moved to the top of bank’s priority list. Bobsguide spoke to Nick Ogden, founder of Worldpay, ClearBank and most recently RTGS Global – a cross-border liquidity network – about building a global settlements system and tempering an economic crisis.
RTGS Global recently launched phase one of its operational rollout with Microsoft. Is the goal of the system an overhaul of legacy systems, or is it to build upon old systems and incorporate them into something more efficient?
When we first started trying to do this, we didn’t know whether we could achieve it … We knew that we had to achieve these massive processing speeds, automatic reconciliation of transactions and the rest of it, and if we hadn’t been able to achieve it then frankly RTGS Global system wouldn’t work. If we’d tried to build this two years ago, we couldn’t have done it simply because the technology didn’t exist – it’s only now as a result of enhancements and developments in technology that you can actually start to get into this environment.
The fact that we’ve got it working does then [ask]: ‘Does atomic settlement improve existing payments systems and real time gross settlement (RTGS) systems and domestic payments routes around the world?’ And my view on that is yes it probably does, but we didn’t set out with a big sign on the wall saying ‘global disruptor.’ What we wanted to do was prove that the technology worked.
But it’s interesting because since our announcement just over a week ago, a number of major organisations have reached out to us and we have engaged in conversations with them now to really discuss the attributes of atomic settlement, to really see whether it’s appropriate to the way that they are looking to re-engineer and develop their schemes and their networks worldwide.
You mention that you weren’t setting out to be disruptive. Do you think that mentality would be off-putting to banks, having to discard legacy systems and adopt something completely new?
I don’t think that ever happens in reality; I think anyone who thinks they can walk into a bank and say ‘here’s something bright and shiny, throw away what’s working now’ – that’s just not going to happen. All banks are aware of concentration risk … Until we put together the ability to see real time liquidity, there weren’t other options. What we imagine and certainly from the discussions we’re having is that banks will maintain their existing systems, start to use our systems in a number of different ways and potentially run different systems in tandem for a period of time.
I certainly wouldn’t advocate any bank that we’re talking to if they say they want to throw out ABC and just go with you – I would be cautioning them about that because we are 18 months into a tech build on something brand new and revolutionary. We’re confident in our technology but you should always have an insurance policy.
Even if it isn’t an overhaul, do you think banks are looking for a solution like this in the current climate, or is there some hesitance to onboard a new system now?
What we’re doing is a business transformation … There are some very strong arguments for actually moving and using the RTGS Global platform: liquidity visibility, speed of transaction, reduction in internal process, automated reconciliation, the ability to give service level agreements to customers, the ability to offer multi-currency payments to currencies which today they potentially don’t offer because of the way the correspondent banking system works, capital reductions in relation to regulatory transparency – a whole raft of different things.
If we just come at this as wanting to make a messaging system that works like other messaging systems, it’s hard to try and come up with something that is different apart from saying it’s cheaper and it’s faster. I think everybody gets a bit bored by those statements.
Could you tell me about the liquidity lock function of RTGS Global?
How do you know that both banks in relation to an international payment have the money? If you could actually look at the monies that are held – the synthetic liquidity – within a central bank account, if you can look at a bank and say ‘have you got $10,000?’ logic will say they’ve got that money. But the reality is, have they got that money and can you effect a transfer of ownership dynamically on it? The only way you can do that is by locking the liquidity.
If it’s a customer of Citibank in the USA who asked [the bank] to do a transaction, Citibank will ask us to lock $10,000 of their liquidity on their behalf in their accounts. We don’t hold their money, it still remains within their bank. We effectively freeze that $10,000. We do exactly the same on the opposite side in relation to say Barclays Bank … We lock both sides of the transaction and that occurs in microseconds, so both banks know that they’re both good for the money.
What then happens is the banks set their own rates. We have structures in place where they use our systems, we don’t get involved in the foreign exchange (FX) rate setting and we don’t take margin on that. The customer gets given a price … and if the customer accepts the transaction, that produces then a technology called liquidity block, which a combination of both of the liquidity locks with a tonne of time stamping. That’s the piece that effects atomic settlements. What that does is flip the ownerships of these funds in both of the synthetic central bank accounts instantaneously and concurrently.
Do you think banks have learnt any lessons from the liquidity issues that arose during the 2008 crisis? And would that make this more of an attractive solution?
I was in a meeting with a senior person at the Federal Reserve bank and he said to me: ‘If this had been in existence during the last global financial crisis, it wouldn’t have stopped it but it would have helped us unravel it much more quickly.’
The problem is, you need to create a global network that becomes interoperable to achieve interbank visibility. I think that since the last crisis, the capital requirements of banks have increased so they’ve become more resilient as a result of regulatory capital perhaps rather than real knowledge of interbank liquidity.
You mentioned the importance of having a global network for liquidity, but that banks always have a fear of concentration risk – how do you balance those two aspects?
At the moment the concentration risk is that there aren’t many network providers, probably there’s only really one, so I think concentration risk gets eased by having two networks do different things and it’s potentially complementary. We filed some patents last year in 150 odd countries for some of the technology around the processes that we’re building, which we believe are going to hold firm … it will be interesting to see how this develops and it may well be in multiple different ways.
We are having different discussions, not in relation to risks and concerns but in relation to collaboration and how this thing could potentially move forward. If you look at some of the emerging markets around the world where they don’t have domestic RTGS systems, we can drop in a complete domestic RTGS system and payment rails using the RTGS Global technology that we have today. What that does is with countries that are seeking to improve financial inclusion, it gives them a kickstart above even places such as North America – I was intrigued by a Forbes writer last week who said that commercial businesses in the USA will be able to send money internationally faster than they can send it domestically.
Have regulators been receptive to your solution?
We went and talked to regulators around the world to make sure that they were comfortable if we engaged with commercial banks in their country. They were comfortable with what we’re trying to do and we gave all of the regulators the option to say: ‘Please don’t talk to banks in our country’ or ‘supply us with more information first’ or ‘feel free to go talk to banks in our country’. It’s very supported – and that includes the People’s Bank of China as well, so that gives you the spread of bank regulators we’ve talked to.
Based on conversations over the past several months throughout the pandemic, have you seen more or less appetite for a solution like this?
We have been asked whether we’d be in a position to bring this on stream faster than we were initially talking about, and from a commercial point of view, the answer is always going to be yes. But from an honest, practical point of view the honest answer is ‘we will see what we can do’, which is where we are now. The stage one environment that banks are using and looking at at the moment does allow them to use desktop, as opposed to doing a technical integration. And there is an opportunity potentially later this year for us to start doing some real money trials, but frankly I would prefer that even despite the global pandemic, I wouldn’t want to be responsible for adding to the crisis by trying to go too quickly – I think it’s more important that we actually get it right within the timescale that we’re working to in 2020, and then potentially move that rollout into Q1 of 2021.
Where do you see RTGS Global in a year’s time?
What I do know is we need 50 banks in 50 countries up and running to make this a success, and as we’re talking to way more than that already the chances are that by the end of 2021 we’ll get there. And the reason for that is because of the market advantage, which is a bank serving business customers in a particular country can go out and say ‘We can answer the question you always ask us which is where is the money?’ and actually ‘We know where the money is, and we know that the money will be in your customer’s bank account or in your bank account in less than a minute.’ And that is a major transformation.