FinTech will upend banks! Nothing new in that prophecy. There is no such thing as the SSI, Standing Settlement Instruction, Cup, but if there were the FinTech community would win.
In last week’s post, I offered some views on how hard our industry makes it to deal with SSI’s. Every institution manages them, matching them is often required and they have to be included with every payment or settlement instruction.
Even after that last post, which centred on SSI’s for CLS related trades, somebody managed to do something that added fuel to the fire of what an awful set up we have. SWIFT published an updated directory, in which, inadvertently a BIC was shown as “deleted” rather than “not listed”. Many institutions read in that data automatically with the result that many FX trades were not matched and a lot of remedial work was needed in many FX shops.
Quite separately, I have been using a wonderful new app from the Swiss banking community. Paymit allows me to send money to my kids via a Smartphone. All I need to know is: first, that they have the app installed and second, their mobile phone number. On their side, it is all self service and user maintained data; as recipients, they set the details to credit funds to an account of their choice. It is even possible to set different accounts for debits and credits. Then when money is received, it is instantly available in their account via the Swiss payments system; they can use it to pay electronically or take the money out at an ATM.
Paymit is really easy to set-up and use. Perhaps too easy, as the kids now know we can beam money over instantly if needed, fulfilling one of the five disciplines for parents of teenagers: Food, Money, Laundry, Transport and Internet. That would be a whole different discussion.
Lessons Learned: To end the year, a study in contrasts. Traditional Financial Services has clumsy processes to manage settlement instructions, FinTech has managed to produce something simple. Of course, there are differences between the worlds of Retail and Commercial & Investment Banking (CIB), but it is worth pondering what the ingredients are that make Paymit successful:
- An unique key: for retail clients, a mobile phone number is a good unique key. What happens if you change numbers? Though I have no idea how Paymit has solved for this, this would be much easier if there were something really constant. No need to invent things here, because a wonderful thing exists already; the LEI, the Legal Entity Identifier. This is a unique key for any entity. So instead of I want to pay mobile number X, you would have, I want to pay LEI X.
- Self-service SSI’s: “No need to know or care”. In my kids case, they manage their settlement instructions centrally. I do not need to know where they want the money and I don’t care if they change them. The SSI’s are never distributed, they simply come into play when a instruction passes through the system or platform.
- One settlement method. Apart from being the world’s oldest RTGS system, the Swiss payments system has another virtue; there is one and only one payments system or platform for the Swiss franc. One for big interbank payments which is the same as for retail payments which is the same for securities settlement which is the same for all ATM transactions which is the same for credit card transactions. One. On the settlement side of life, too many options are a dangerous thing. One is the right answer.
Now just imagine how you could mix up these three key ingredients in the world of Commercial & Investment Banking:
Payments: send an instruction via SWIFT. LEI A, wants to pay CHF 100’000 to LEI B. No SSI’s to store. Where B wants those CHF is of no interest to A. Now, maybe we need to allow for Treasury payments (MT2NN) vs. Commercial payments (MT1NN), but you get the picture. Nostro information for each of LEI’s A & B might be added inside SWIFT or perhaps at the end point, the Swiss payment system.
FX via CLS: send an instruction via SWIFT. LEI A, wants to settle CHF 1’000’000 vs. USD 997’000 for value date Jan 4th 2016 with LEI B. LEI A just has to know that LEI B uses CLS, but does not mind if B is a Settlement Member or a Third Party and if so which agent is used.
Securities: Here we would need to add one extra piece of information, namely settlement location, for those cases where there is more than one place to settle. But, this is simply a variation on the CLS theme; LEI A wants to sell 30 million ISIN X value date Jan 4th 2016 via Euroclear / Clearstream /Fedwire to LEI B.
The world of CIB needs a re-think on SSI’s; it is not a matter of improving the current process, it is a matter of a complete re-think. Store SSI’s centrally and have owners manage them themselves. FinTech is pointing the way.
Enough said for 2015. It has been a great year. Wishing all readers a relaxing holiday season and a successful 2016.
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