EP 160: Demystifying Cross-Border Payments, Tokenisation, and the Future of Global Banking

Speaker A: Welcome to Dave and Dom Demystify, a fintech futures podcast helping make sense of the world of fintech and digital finance. Please sit back and listen as the two Ds take a subject and discuss it to make it clearer and easier to understand.

Speaker B: Demystify.

Speaker C: Welcome everybody to Payments Past, Present and Future with Banking Circle. I'm joined here today with Michael Bol from Banking Circle.

Speaker B: Welcome Michael, thank you very much. Thanks for having me.

Speaker C: Can you give us a little bit about yourself, a little bit about your background, what you currently do for Banking Circle?

Speaker B: Yeah, my current role is head of uh, clearing technology. I've been with the Banking circle for almost 10 years so I filled in a lot of roles over the years from when we were only like 20 people as Ah, a startup in here and now we are above 800 people so we've gone through a massive maturing phase. My background is very classical bank trained and then I've been in capital markets as an fx, uh, money market and derivatives dealer and at the tender Age of 26 I got moved over as the head of back office in a small regional bank dealing with everything from a post trading perspective. And then the last 15 years I've been solely sort of occupying myself with payments, cross border, local payments, whatever virtues that are within payments all the way from regulatory to the sanction screening and actually the tech stuff. I was with our former owners, an investment bank called Saxo bank in Copenhagen where I was the head of payment services and then I moved over to join first as an analyst and then basically covering a lot of roles within Banking Circle. So I've been doing pretty much everything that can be done with account to account payments. I would like to believe so yeah.

Speaker C: Fantastic. So we definitely got the right person here. For those that don't know me, I'm Dharmesh Mystery and I run a podcast called the Dave and Dharm Demystify Show. So I would pull in people like Michael to explain this stuff to me in simple terms. So I definitely got the right man here. So we know a little bit about you now for those people that don't know Banking Circle, what do they do? Why do they exist?

Speaker B: I think sort of the problem statement that was put up many years ago, how come a cross border payment to Porting E Commerce, why does that need to take five days and cost €50 basically to transfer money around the globe? Here it's just moving a bunch of digits around. So we would like to do that in five seconds and for less than 50 cent instead of that. That was Sort of our mission to begin with, making global payments instant. So Banking Circle started out as a psp. We were built as a bank from day one and our claim to fame were we would like to integrate and obtain licenses in as many countries, establish central bank relationships in as many countries and jurisdictions that we found prudent and then also joined the clearing systems, both the batch and the instant clearings where they were available for doing credit transfers. And in that way we would utilize our own platform to gain the benefit of all of our over 850 clients to transfer money to each other. Sort of like a platform strategy seen before as elon Musk and PayPal. That was basically their strategy on making a platform there but also giving the option to reach all the other banks and all the other banks accounts to give the users and the consumers the agnostic feeling of not being bothered. Is this a Banking Circle client or not? Banking Circle is not a client facing brand as such. It's only PSPs and banks or anything that has a payment license in the various jurisdictions where we are present that can onboard with us. So you can't get a car loan, you can't get a children's savings account. Sorry about that sir, but we bank the professionals in that sense.

Speaker C: So just going back a step, why does it take so long with an existing bank to send money across the globe? What is this? Five days? And like I sent some money through HSBC and it literally took two weeks and it cost me £17 just to have the ability to send it, let alone the commission fee as well.

Speaker B: But then I am preaching to the choir. I can hear with that problem statement there is not only one truth to that in that sense but it's building on legacy systems where what has the incentive been? I don't know the HSBC story, but what's the incentive for HSBC to upgrade their systems? They have some critical mass to support whatever they're doing. So there's not really been a push in that direction. So there's some legacy technology around it and there's also been sky high set of rules that has been implemented sort of on the back of there's been some rather unlucky um, or some cases with AML or fraudulent behavior here where the bar has been set quite high in what you need to do from a due diligence, from a sanction screening from a profiling perspective. So. And basically the banks haven't invested in making that STP straight through processing. That's sort of the index benchmark in there. So They've sort of said, well, if you don't key it in right the first time, and we haven't really invested in how right looks like via our online solutions here. Well then it would land into some vortex about manual handling in a back office outside of the country where it's very hard to communicate even with your local bank or your local branch here, because it's basically lost somewhere in between.

Speaker C: So, uh, so normally when you do like an international payment, let's say I'm paying you from the UK and let's say I'm paying you in Denmark, then my money would leave, let's say my Lloyd's bank account and end up with a correspondent bank potentially in Denmark who has an account locally and they would send the money to you. Is that, that's roughly how it works. Right.

Speaker B: I could start elaborating on all the cases of funny business that we have seen, but roughly speaking. Roughly speaking, yes. Then there's the first point on saying how did you instruct it? Did you use an Iban and a big code or did you just use the account number here? If you only use the account, it would definitely go non stp. Next thing would be your bank could start guessing because it's a Danish Iban. Then my account was being Danish Kronos. So they will do a conversion which will typically be two days because a spot trade, meaning selling off the sterling, buying the Danish krona to accommodate the amount, that would take two days. But I can have a sterling account with a Danish Ivan. So maybe when it lands again, it could be a subject of another conversion. So it would go from Sterling to Danish Corner, from Danish Corner to Sterling. We have seen all sorts of sub optimizing and guessing because people want the effects on these trades here on these transactions.

Speaker C: So the fees I can get and also the timescales now because what we're saying is that in the old days, or actually for most banks, the current day still, um, is that they'll use a correspondence bank that sits in between as an intermediary between your account and my account. Then there's some currency conversion along the way which adds to the fees. Plus my bank will want to take some. Your bank will want to take some. That's where all the fees add up. Right. So what is it Banking Circle is doing to change that? I mean, how do you reduce the cost and the time frames? Yeah, it's uh, fairly significant.

Speaker B: Agreed. So going back to the cross border business, that's also been done a lot from an EU perspective, I'm just going to go out of that tangent and then come back to your question here. So there's been a lot of attempts on harmonizing this especially within the EU in the old days, I can say that now I'm um, one of the oldest getting there payments was treated a little bit as a commodity and banks would make agreements with each other for, and I know this sounds wrong but for kickbacks. So you would set up an agreement between two banks and they were saying okay, if Dharmis transfers €1,000 we'll just take 20 off the top. So only 980 arrives and then the last 20 I get 10, you get 10. High five. And then that's basically what they did. They liberated or deducted the principal amount. In that sense the EU sort of prohibited that. But now that for example UK is not no longer part of the EU then it sort of a free game again. On some of these points this is treated as what you would in, in the trading world called over the counter or otc. There's no real regulations bound to this. It's more like building on a range or a net of bilateral agreements between those things. If you take that in and clear it via the scheme. Let me give you an example. For faster payments, for example, they have the option in the UK to do a pool payment, a payment originated overseas. So if I was a Danish bank, I could actually use my gateway bank or my sponsor bank which could be Banking circle itself. You could take from one Banking circle account to another and then if I were transferring money to you in sterling we could fix that and we could clear it via the faster payment scheme. And there are very descriptive rules on what you can do via the faster payment scheme. That is not otc meaning that you're not allowed to do principal deductions here. So you're always sure that the full amount would arrive. There would be full transparency around this. Basically meaning that my Danish IP and big name would be pertained be visible for you. You will see it. And faster payments, well it's instant. So if you could put together the Danish instant world or at least a platform here, then you could clear your payments under scheme rules rather than going the traditional way of clearing funds here. So that is for sure our mission to make the global cross border payments local or get that local flavor. Because many of the local clearing systems they are operated with that governance. It's not like cowboys and Indians and free for all kind of game, in essence.

Speaker C: Cool. So we kind of covered a little bit about the way that has worked or it's still working in some ways. But when I walk around this conference and actually I like the four last four weeks I've been at conferences and there's been two hot topics. One is AI and the other is tokenization. So I know there isn't just one type of tokenization but what I hear at ah, a very high level about tokenization is that payments get settled almost instantly, like almost near real time. They can travel the globe, it's extremely cheap compared to traditional mechanisms. I mean how much of that is true? And if it's true then is it not going to impact your business?

Speaker B: A lot of it is most likely true in those small secluded ecosystems. But the complex part is giving the user that agnostic feeling. So I would agree if everybody would go onto the. If everybody in the world would be on the same tokenized scheme. Well absolutely. But you could turn it around saying if everybody was on the correct. You have CP instant in that sense here which is also. And also real time settlement. There's a lot of some issues with the stability of the participants and their 24 7, 365 back to the investment or the willing investment of capital from the established players here. So if tokenization should sort of take off in a sense, absolutely then that would be a great success if everybody invested equally in that. But I don't see that just around the corner. But that being said, I think it's a very important space to be in and we at Banking Circle we continuously invest and explore. We use I wouldn't say 10%, maybe a little bit less of our capex our development budget on actually exploring new ways of doing payments where digital assets or uh, stablecoins have a prominent role because we don't want to be left at the station if the train takes off. We were also the first bank and I do say bank because Circle was one day before us. Uh, but Banking Circle was the first bank to issue a mica regulated stablecoin in euro. So it's something we've been exploring for years. It's something we uh, have invested in even before it's super mature. But it's important for us to have the finger on the pulse sort of thing. And we have seen trends in the past where established players would then think well we have the capital just to hire 100 people. So if it becomes a success we'll just hire 100 people and then implement it into our organization. Where I'm saying well great and you do have the bankroll to, to make that happen. But if it hasn't been thought through and being embedded in your organization, both knowledge wise but also how it has its natural space organically and grows with your other products and your other technical capabilities, sometimes it gets hard to rush even though you have 100 people and I wouldn't say infinitive bankroll but a deep pocket sort of thing and that's it. So that's important. It's an important space for us to be in and we'll continuously be there.

Speaker C: Yeah, I mean I think especially like in the uk the bank of England kind of uh, brought out processes and tried to accelerate people getting licenses and so we had a plethora of startup banks, etc. And some faulted just because they didn't manage to scale but others, people like Starling Monzo, uh, and a few others even Revolut have struggled a little bit post license with things like KYC and aml. And I guess we kind of forget that actually this isn't about I'm sending some money from one bank to another, therefore it's trusted. We can't trust the parties if we haven't done the checks. Right. So uh, is that part of the problem?

Speaker B: It's a big part of the problem. And one thing is what you need to live up to with the central banks and the clearinghouses that's very prescriptive or descriptive. They have a long, very long checklist around that. We've just gone through our own CHAPS application. We're going live this Monday.

Speaker C: Oh wow.

Speaker B: Yeah. And as I think 37 or 38th direct institution, we're the first one going live after the RTGS renewal program on the ISO 2022 standard. But my point with this is saying we have submitted plus 500 pages just in documentation. They're just interested in which buttons are back office clicks. So the governance or the administration around this process is quite big. It's huge. You would need to invest a lot of resources in getting there. But that's very descriptive. It's just long and resource heavy on the AML on the transaction monitoring, the sanction screen bits in here it's not that descriptive. So there's also a little bit of a lack of regulatory framework because the regulator was saying you would need to do this and the banks would say how? We don't know, figure it out. But if you don't do it right we will come back with effect in the past. And what can you say? Knock you on top of your head in here with massive fines and massive sanctions so it's also part of why this whole cross border e commerce, it's a bit stigmatized this game here because of course there's been some massive fines that have either had economical consequences or reputational consequences in here and no bank want that. They don't want to be the next. Did you wash money for Putin? I don't know if you saw that The Belgium based company Wise basically dropped over 20% the other day because the Belgian regulator, the Belgian Central bank have started asking questions. There's been no evicted. I was just saying there's been no evictions, there have been no proof, there's been no. But they're being questioned about their AML capabilities and being put in connection with some money out of sanctioned territories as such.

Speaker C: Yeah, I mean we saw several American banks, we saw even Amra, we saw HSBC all getting in the hundreds of millions of fines. It makes me wonder how a ah, startup or a new bank will be able to stomach that kind of fine. I guess it's relative to their size but still it would be massive impact.

Speaker B: Agreed. Of course as you're saying it's relative to their size and if you have no hair the regulator can't pluck it or sort of thing in that sense. So some of the new ones have nothing to lose but they also have a better condition from their tech perspective and building the setup where they're not bound to legacy systems or hinderings as saying we cannot do that due to X, Y, Z, uh down in our technology stack they can greenfield it from day one so that's an advantage. But also when you're in the startup phase you don't have any in unlimited bankrolls you also need to generate some income and you would need to take risk on that. So it's a balance even though you have the tech then you need to obtain critical mass. And how do you do that if you don't have the licenses you would need to go via partner banks and here's the merry go round again. Why the bigger banks? Because they have the infrastructure, they would be banking some of the PSPs here and if they feel at risk they will crank up so they can feel comfortable with having manual people sitting looking at this. Hence back to your two weeks and 70 quid for a cross border transfer here.

Speaker C: Right. I mean I'm going to go back to this kind of tokenization thing again because I guess apart from the promise of almost instant settlements globally at a uh, fraction of the cost, we also want the money to go across Safely. And let's say people do follow those regs. Let's say everything did happen smoothly. Doesn't it mean that the banks lose a lot of revenue from the payments that they were getting, like otc? Or is that a small part of.

Speaker B: I don't think it's a small part. I think it's big business, billion dollar business in that sense.

Speaker C: Right.

Speaker B: So we're back to saying, yes, that's a risk. So how long can you sort of hold back back on, on these things here? And when are you at risk of not boarding that train? So it's a bit of a balance because of course that would be better if everybody was doing it in a more efficient way. That would actually save a lot of friction, it would save a lot of money and not only for the merchants that are, but in the end it's the consumers paying for this. So everything will just spiral around. So absolutely. If we get a more frictionless system to support global e commerce in that way, obviously it will benefit everybody. And yes, if it's made easier, how can you justify taking that kind of money in here? But what would that require? I think it will require a. That the technology and the investment is there. That's going to be hard to get everybody to jump on that bandwagon. And then I think some of the things can be easily with regulatory backup. What is a descriptive way of applying your due diligence? What do I need to do in order to be in the green as a bank or a PSP here? Because if the regulator can sort of help saying if you do XYZ in a descriptive way, then I think more would also be inclined of saying, okay, if we are sure that this will keep us out of trouble if we do all of these things here, well then we dare to leap in that sense. That goes both for the tokenized, but also for the fiat currencies. But I think the tokenized have a big advantage in how you make it programmable, in how you make it traceable, in how you basically customize your user experience. And you also have the advantage of not being bound to legacy systems saying, uh, we can't do that because our mainframe, our database works in this way here. If you start from scratch, then you can build it exactly the way that you want. What are people willing to invest? And when I say people, are the PSPs globally ready to invest in this?

Speaker C: Yeah, this is like the million dollar question, isn't it? I guess, um, what do you think is going to be the main thing? Because I Guess this is the challenge is trying to get this working globally. So one country could do it for domestic payments themselves, but then to make it work internationally, you now need to have almost a reinvention of some of the old Rails, but in new technology, I mean, isn't that something that players like Swift could solve?

Speaker B: They could for sure. They could also build an offering like that, but their participants would still need to adhere to it. Right, right. Still need to do those investments in order to integrate it in a seamless way into their back office system. So yes, if uh, a big global player, who is the synonym with cross border payments would go in and facilitate this, I'm sure it would easen some of the pain around it. Are they willing to, are they able to. And they're also sitting on the market right now, so I don't know, I don't know what they have cooking over there on that part. I think they're following like everybody else and saying what's the new norm? We cannot be left out on this. And I think there are many boats set in the water towards the same port support wherever that is. And to ease the pain and make things more frictionless and still safe and still authorized in all aspects, we see a, uh, quite big trend on some of the tokenizations. We see the digital euro. The Swedish Riksbank has been quite upfront with that for years. They have sort of paused a little bit about their projects. But we do also see other central banks dipping their toes into that end of the pool. But they're also dealing with interoperability, trying to build together some of the old platforms in order to build together faster payments with the European TIPS platform or to make that bridge over to the US or even in other jurisdictions. There's been made a paper from the bank of International Settlement called Project Nexus, which is basically describing what tips cross currency around two instant platforms and that interoperability entails. So that's another boat that's been said in the water obtaining that.

Speaker C: Yeah, uh, I think just as we close out a little bit. But one of the things, I mean we've talked a lot, I guess this just now about the tokenization of money. Right. Whether it's done, um, domestic or internationally. But obviously tokenization applies to like other assets as well. It could be gold, it could be uh, property, it could be a car, whatever. So part of me thinks that as other assets get tokenized, we'll get used to trading on those tokens and money will get dragged possibly along with it. We have two minutes to close out. So just very quickly, what do you think the landscape will look like in 5 years time? Will it be very different or not?

Speaker B: I hope it will be different. I hope it will be more seamless. I hope there would be more methods out there. I hope that players will get the chance to incentivize the users to pick their payment method in here and give something back to the consumer. Me you in that sense. So I think the whole incentive of the economy and payment rails as you cut down the cost. You'll basically reinvest your savings into how do I incentivize with the bonus points or whatever in that sense of basically attracting the users into using your payment method to make that big up. Because the more payments in your ecosystem and in your world, the more significant you will be in that front here. And I do think that there would be more methods. I also think there will be more interoperability and hopefully it will benefit us all. And to bring in another thing here, AI, I think the opportunities for development that we will see an acceleration in those things, I don't think will be fewer development developers or fewer people invested in technology. And I think there will be more because now you can really start benefiting from it. But the thresholds will also be hind both from regulators and also the methods of doing that.

Speaker C: So, uh, yeah, thank you Michael. We're out of time and I tried very desperately not to mention the word AI because it's being used by everyone.

Speaker B: Sorry.

Speaker C: No, no, uh, it's fine.

Speaker B: Thank you very much. Thanks for having me.

Speaker A: Thank you for tuning in to Dave and Darm Demystify. We hope you enjoyed the show. Don't forget to like and subscribe and tune in next time as we take another topic and demystify it.