What the FinTech? | S.7 Episode 12 | Preparing for a multi-money future: NatWest on the digital asset revolution

Hello and welcome to another brand new episode of What the Fintech, the podcast from the team behind Fintech Futures and the Banking Technology Magazine. My name is Paul Hindle, Managing Editor of Fintech Futures, and for this episode of the show we are recording live at Money 2020 Europe in Amsterdam. So hello to those of you with headphones on outside and listening to this recording live. and today I'm joined by Lee McNabb, Payment and Digital Asset Lead at NatWest.

Lee, welcome to the show. Hello Paul, thank you for having me. It's great to have you here and just to get started would you like to quickly let us know a bit more about yourself? Sure, yeah sure.

So I actually last Friday got an email notification saying I've been eight years at NatWest Group which was a big surprise to me but I am a recovering career banker. I've been at multiple banks. I've always worked across the product side really although I did a bit of risk, bit of policy, managed the schemes at my old institution and then at NatWest I've led everything from being involved in innovation to payment strategy and now I lead digital assets for the group from strategy to industry engagement to delivery of our core capabilities and our products and propositions.

Excellent sounds great again great to have you and thanks so much for taking the time out to speak with us today as we record it's day two of the money 2020 conference how have you been finding it so far? Day two, well, my feet aren't as sore as last year, Paul, to be honest with you. It's probably a scaled back version of what it was previously, although previously it was probably a little bit too big in terms of footprint. So it's been good.

It's manageable. We've had great interactions with existing partners, potential partners. There's been lots of interesting debate, really good presentations. And so, yeah, it's a really good kind of community networking feel.

And so it's been enjoyable. It's an important part of the calendar for us as an institution to get out and be visible and talk about what we're doing, what we're doing for our customers. Excellent. And yesterday you took part in a panel session as well on building cross-border payment systems that scale.

For those not in attendance, what were the key takeaways from that session for you? Key takeaways. So I was with Wise, Lloyds and European Bank. Key takeaways are the importance of trust and the importance of the guardrails and appropriate framework in the movement of money internationally.

The importance of the focus of the collective, because we need to do things together both with private institutions and our central banks and we'll talk about project agora later no doubt but also competitively how we need to focus on what we're doing from a customer journey perspective i think too often we forget about customer and we as a group have it kind of tattooed upon us that it's always about what's the customer outcomes you're driving if you're looking at future innovation is it really differentiating from what you have now or can you improve what you have now in a in an evolutionary manner so yeah it's a it was a really good panel actually very well attended and lots of good debate excellent i guess diving into some of the questions i had in i mean one of the you've got so many multiple payment rails down new payment lessons like stable coins obviously a huge topic of discussion digital assets picking up more traction how should banks approach their cross-border payment strategies and future proof their systems be able to scale effectively do you think with all these payment systems out That's a really good question.

I think as well, I do worry about the increased level of fragmentation and complexity that we kind of face into. It came up on the panel yesterday and it was something I kind of honed in on. If we do not look at the existing infrastructure we have now and the future infrastructure that we could have and look to, I guess, sunset some of the older infrastructure, then we'll just face added complexity. See, one of the panelists said the customer doesn't really care about what's behind it.

And to a degree, that's correct. But actually, they will do. As banks, we need to continually invest in multiple rails. So if you're invested in multiple rails, ultimately, there's a cost that needs to be borne and passed on somewhere.

I think of domestic payments. In the UK, we still have cash. We still have checks. We now have cards.

We have wallets. We have chaps. We have a multitude of opportunity, right? But at the same time, that's cost.

and as we layer in new forms of money, new rails, we have to look at whether there are existing rails we can simplify and streamline so we can ensure that we are as efficient as we can be. What banks need to consider is strategically where is the world going to be? And it is a bit of a crystal ball type moment. It's very difficult to go.

I know exactly what's going to win in five, 10, 15 years. What we as a group do is kind of try and consider our strategy in the most customer focused way, not kind of build pilot and experiment for headline but build pilot experiment for proper genuine credible customer outcome and that sounds kind of cliched and fairly obvious but there are a lot of institutions out there that will just look to kind of gain press coverage and interest and actually when you scratch beneath the surface you kind of go well what is there is it ready yet we want to we want to talk about something that when a corporate then comes up to us they kind of have that product you go yes it's ready here it is that's really important but we are at a moment now where we are moving from kind of experimentation and paper-based thinking to genuine credible tangible movement of money and that's very important because if you get that wrong there can be seismic impacts yeah i guess building on that front as well you recently wrote a blog post on the future of digital assets that describes money as undergoing one of the biggest transformations in history can you unpack what that means for the moment then and i guess what makes it so transformative compared to previous religions of payments as well yeah i mean i've been in banking now for probably too long to remember actually maybe 25 years payments from maybe 15 of them and you always see change and you see regulatory elements coming like pst2 and iso etc but a lot of the time it's just it's evolution of existing money and rails what we're seeing now is actually new money and rails alongside existing money and rails if we you think about the stablecoin explosion there was a time when you looked at it for it's never going to go anywhere but actually with regulatory and policy change it's now genuinely credible and tangible and customers are using it at scale and yeah it's still maybe used in and out of defy and in certain international corridors but the growth is quite surprising when you look at the percentage rate so you can't really ignore that's why i say it's probably the most fundamental change because it's not just competitors coming in it's actually competitors of a different type of money that doesn't run in the existing way to help bring that to life a little bit banks only really do free things i know there's lots of conflicts around that and people debate me on this but we ultimately move money hold money and lend money that's kind of it and they're all linked customers come to us to have the ability to move money and to hold and protect and then ultimately to get credit from us That how the economy works right When businesses want to grow they come to an institution like ourselves to get lending And we do that based on the deposits that we hold, based on the money that we've moved.

Now that's our money that sits with commercial banks, it's backed by the central bank. When you start to bring actors into the mix that have a different type of money, that's issued in a different way, backed in a different way, It's not to say it's wrong because ultimately competition is great and it drives innovation. But actually, at the same time, it's a different way of creating lending and the ability to lend. So it's fundamental because it's changing the model that banks may face into in the future and how they get their funding sources to be able to lend and grow the economy.

So that's why I say it's transformation. I've had a few conversations so far this week about tokenized deposits as well. So I wanted to look into that a bit specifically. I mean, for someone unfamiliar with the concept, can you explain what tokenized deposits are, what tangible benefits they could bring to both retail and corporate customers?

Of course. I can use a great example because of the work we're doing in the UK with our peer banks on the great British tokenized deposit. But firstly, what they are. So tokenized deposits are effectively a mirror of the deposits that we hold already, but they have the ability to move in a world on-chain.

And what I mean by on-chain effectively on distributed ledger technology. So we have payments now that are electronic, not really 24-7. It's effectively messages at the same time. It's not really the payment that's happening.

Tokenized deposits gives out that opportunity to almost instantly send the money programmable and 24-7. But it does need the settlement aspect. So where they kind of differ, this will help bring it to life. If you think of a CBDC, a central bank digital currency, that's effectively central bank issued public digital money.

right so it sits on the balance sheet of a central bank the stable coin is similar it's a bearer instrument so it moves wallet to wallet doesn't need an account behind it and that's backed in different ways depending on what jurisdiction you're in in america it's mainly backed by like t-bills treasuries etc in europe it's a mix of commercial bank deposits and central bank deposits and tokenized deposits are kind of liked by banks to be candid because they retain that link between deposits and money creation to my point on the free things and central banks like especially the bank of england because it settles in central bank money so it has that end-to-end kind of trust atomicity for one of a better phrase there's still things that need to be done in central bank world to help that so it is truly atomic but it gives that credibility that existing money doesn't really do so to bring that to life even more with gbtd so gbtd is kind of the six major banks in the uk seven of year if you count some people around the kind of fringes led by UK Finance.

And we've been on this journey for two and a half, three years, and it's evolved and changed and pivoted slightly. But it's now how can we get tokenized deposits into the kind of hands of customers in the UK? Now, tokenized deposits are different from stablecoins in that they're not bear instruments. So they need an orchestration that allows, when I send my five tokenized deposits to you and you're with a different bank, it converts into that bank's money, as commercial bank money does today.

We are looking at piloting free use cases later this year, two in the retail space and one in the wholesale space. The retail space is, one is a remortgage transaction. So in theory, the money is locked and near marked before it gets sent from point A to point B. So there's no need to send it to the conveyancer to them to send on and the kind of pain and challenge that causes and the cost that causes.

The other is a peer-to-peer marketplace transaction. So think of you buying some goods on a generic marketplace that may exist online no quote anyone there but there's always that confusion between i don't know the person that's buying them off me the buyer doesn't know the seller there's always a kind of like you've got this awkward transaction like do you take cash can i transfer the money to you what are the options think of a world where you can actually lock and earmark those funds so seller knows the funds are ring fenced buying those are not going to the seller until everybody is happy with that transaction so kind of like an escrow but we've got the need for escrow and then you can sell it So in the UK, globally, we have a huge problem with app scams and fraud.

So in theory, it can help mitigate some of that. In the wholesale side, and this is where we as a group see kind of huge benefit as well. If you think about what Treasury are doing, HM Treasury in digits, so digital guilt, they're going to issue debt digitally, so on-chain. There's never really been that cash solution to be able to do that end-to-end digital seamless transaction.

So removing like counterparty risk, credit risk, etc. sure gbtd can do that and that then can fear you can start to move into international use cases as well and we'll probably come on to agora but you can in theory see how tokenized deposits can be used not just domestically but internationally as well to bring that benefit but retain that trust that link to credit creation and ultimately like what banks do excellent yeah i mean we can maybe cover agora now then as well what work have you been doing with that project what are the key takeaways from that budget itself that you've been working on?

So Agora, for those that don't know, I mean, I would encourage you to read the report that was out last week, shameless plug there. I'm sure BIS will be happy with that. So it's led by the Bank for International Settlements and the Institute for International Finance. Where it differs, even from the likes of GBTD, is that not only are the private institutions around the table, the public ones are around the table.

So we have seven slash eight central banks. The Bank of England, obviously, is one. The Fed is another example. ECB are there in some other countries.

And then each of those countries are our private institutions like us. We are there representing the UK with a few other banks. And that, again, has pivoted and evolved over the last, it's probably been two and a half, three years. But the idea was, can we use DLT to effectively build a unified ledger globally where money can move seamlessly between jurisdictions?

You can kind of centralise things like KYC, sanctions, AML. cross-border payments are actually hugely complex behind the scenes and so that getting those guard rails right is really important we've progressed significantly i've been involved in quite a few pieces of consortia work it's very difficult to get people on the same page you might look at a bank and think well all banks are the same we might look sound and smell the same but a lot of the time our strategic aspirations are quite different and the levers we want to pull and focus on can be are quite different, so difficult.

So getting those people aligned is a very difficult task. So GBTD has six, seven, Agora has like 44, 45, I think. So it's quite difficult to do that. But in terms of where we are now so again read the report we effectively kind of proved the technical feasibility through testing And that about a unified ledger across all but then an individual ledger within each of the jurisdictions What we need is the ability to do tokenized deposits, but also tokenized reserves.

So to my point earlier around, it's all well and good doing kind of one part of the payment leg in a digital format. If you've got to then come back out and go back into old school RTGS and there maybe isn't the settlement times that you need, Because that's the big challenge with international payments, different settlement times across the globe. And they don't all match up to make truly 24-7 transactions. You have to start to improve that to do it.

And that's what we're testing. And we'll move in now to a phase where we do real value transactions. So we are moving real money across institutions to prove the technical capability and prove the benefits. To my point earlier, we have to evidence that there's true differentiation.

we have to evidence that you're not just building the same car, but in a slightly different way, and it's still going to perform in the same way. We have to really challenge ourselves to make it better for the customer and ultimately as cost-effective as it can be so everyone benefits. Fintech leaders, this is your moment. The Banking Tech Awards 2026 nomination deadline is fast approaching.

You have until the 10th of July to submit your entry and secure your place among the industry's best. Whether you're innovating in AI, regtech, paytech or banking technology, this is your chance to be recognised on a global stage. So visit the Banking Tech Awards website now and get those nominations in. From a technology standpoint, when it comes to implementing digital assets, tokenised deposits, programmable payments, as you've been talking about so far, into your existing infrastructure, what are the biggest technical and operational challenges in modernising systems that must maintain 24-7 availability when serving millions of customers as well?

I smile. I need to be careful how I answer this so I don't offend any of my technology peers. I used to say I'm not a technologist and I learned actually you can't say that anymore in banking because ultimately it's all about technology. There's kind of different skills of thought.

On one hand, you can actually say the technology is the easy bit. And if you, again, my Agora experience, you look through and go, well, actually, the technology has been difficult to implement, but it's been achieved. actually the legal regulatory guardrails that exist around movement of money across different jurisdictions that's the really hard bit that we still need to kind of fully nail so there's on one hand technology is easy and you can do anything i know that's not necessarily the case and technologists will be kind of screaming at me but there is a little bit of that in the reality on the other hand what you've got especially within banks you've got legacy infrastructure that's existed for decades because you've been around for decades and hundreds of years and you've got complex infrastructure that does fantastic work but above all else needs to be resilient and scalable and it just cannot fail so when you start to look at well can you touch that or change that it becomes very difficult we've done we've made great strides at natwest to effectively ring fence our infrastructure so we have like an api layer that kind of plugs into it and that's ultimately how what we need to do now in technology make it as as adaptable as it possibly can be so it is just modular and plug and play as opposed to you have to literally rip out the engine and rewire it and then reinstall it we don't want to be to have to do that so it's important that we kind of manage it in that way and agora and gbtd are proving that infrastructure challenge i think also we don't want to just sit and build so my responsibility in digital assets in that way is to kind of build the core capabilities for us to exist and competitively in this market at the same time we've got the legacy infrastructure I don't want to just build over here and completely ignore that but at the same time I can't wait for kind of the evolution of our core mainframe into a real-time state to be able to do that and all banks would be in the same situation so it's working with the architects and the engineers to make sure you're not kind of building complexity and legacy debt that's going to need to be replaced that's a real kind of architectural challenge and we have some fantastic people at NatWest that are helping us how we ultimately do that and the final point on the kind of technology build is kind of the buy build partner debate now banks have been through it many times we'll just build that ourselves actually especially in the digital asset space there are credible scaled resilient regulated parties that exist to do certain things and banks have now for a while thought you know what if there's better people out there to do this for us in a plug and play flash fashion and it drives better customer outcomes then let's use them and let's do it in that way.

Excellent and I guess just building on that slightly as well I mean looking at your or NatWest digital asset and payment strategy how are you managing the transition then how are you prioritizing where to invest in experiments and how are you approaching innovation there? So that's quite a few questions so NatWest is a huge organization we're a market maker a market function we've got we're a GBP clearer a euro clearer we're now one of the biggest asset firms in the UK with the acquisition of Evelyn into our wealth book we've got an international arm so we're kind of many things to many different organizations so the challenge that brings is kind of getting people on the same page and what we've had in the digital asset space over the last decade is kind of pockets of experimentation but being candid probably no kind of central strategic owner I was leading a lot of things from a payments perspective like GBTD like Agora but then when you come to what's our strategy and tokenized deposits to be candid we didn't really have one and that's kind of probably kind of self-critical in many ways so i when i was given that kind of task the first thing i did was let's get the group together to understand the strategic implications of different types of money and actually we had a great knowledge base both technically and just through people capability across the group so my job was made really easy because a lot of the knowledge was there it just hadn't really been brought together so that was kind of task number one and then it was about articulating to the executive what the risk and opportunities were in this world and how we as an organization could kind of maximize that so that's kind of part of the strategy we said about well where do we play as a uk plc member as a systemically important uk bank versus a bank for our customers and they both overlap with the consortia work we're now much more proactive in shaping things like gbtd and agora heavily involved with the central bank with the fda in terms of shaping the regulatory outcomes to encourage a competitive, innovative, and customer beneficial market, right?

That's really, really important. And at the same time, understanding from a NatWest group perspective across that kind of very broad range of customer what are the products and propositions that don just exist in the next six nine months but in the next three five plus years so we really doing that considered what the long-term trajectory here and then underpinning those products and propositions what are the core capabilities we need technically operationally to be able to deliver them and big banks have a problem sometimes of kind of running off in silos and partnering there and never really speaking to each other and I think we are probably one of the leaders in just getting people together across the organization I've got a community of about 350 people from all the different parts of the organization that kind of feed into the work that we're doing so we can ensure that when we're building the capabilities we're building an enterprise level and we might have different prioritization where some parts of the organization are ahead of others but the core capability will still be there to serve both now I recognize that's quite a utopian view of the world and it will probably end up like that because there'll be challenges and speed bumps along the way but that's the kind of culture i've tried to embed and then flipping it slightly and i think this is probably where we differentiate a little bit as well there is a market out there where these digital asset native providers already exist but they need banks now they're disintermediating us and that's fine that's competitive as innovative that no issue because it ups our game but they do need banks so we have some great decades built experience of fx spot effects reserve management access to just basic bank accounts access to central bank access to payment schemes we're doing it for years it exists in the payments world already where we'll do access to schemes we'll give them fx etc a lot of it you don't see so we're doing that behind the scenes as well so we're effectively open for business for customers and yes we have to risk appetite is a hugely important aspect into that the regulatory position is hugely important as well but we're looking to ultimately partner with those guys because we recognize this will be a multi-money world we have to embrace that i think if we just head down purely focused on tokenized deposits as an example i think we'd miss the bigger picture it takes a big bank to do that it takes a cultural shift to do that it's a very specific mindset but that's how we're focusing our efforts strategically so we're effectively across the full gambit.

Excellent. And your blog post emphasizes avoiding fragmentation. Obviously, as you just mentioned there, at Multimoney World, what does fragmentation look like in this context? What are the risks of the industry doesn't get interoperability right from the start?

I mean, interoperability is really important. It's a bit of a buzzword, right? You can't really avoid it. The Bank of England talk about it a lot.

If you go to any panel here, you'll probably hear interoperability, standardization, framework, whatever you want. You'll hear it frequently. but it is fundamentally important if we don't provide that interoperability between different types of money then the customer will be impacted and that's the kind of mantra and if there's going to be that multi-money market you have to make sure that what you're building can talk to each other because again if you don't you just end up with silos you end up with confusion you know with complexity and you end up with cost you've got a great opportunity almost a blank piece of paper great opportunity to try and get it right from the start and that's my message and mantra Let's not overcomplicate now.

Because again, to my point earlier, if we do, we'll end up with multiple rails and the cost of multiple rails. And ultimately, that's not going to help anybody. And in your blog post as well, you mentioned a survey that found over 60% of NatWest's retail customers don't understand digital assets. How do you bridge that confidence gap without overwhelming customers with technical jargon?

And what role should banks play in building that literacy? please. Yeah, I mean, if you flip it, it's a good percentage of people that do understand digital assets. But education is really important in this market, kind of internally and externally.

You hear a lot of, I was going to say hype, it's not hype, there's a lot of noise around the opportunity. There's a lot of hyperbole that exists. Our role as a bank and a kind of trusted institution is to try and educate our customers as much as possible. Part of that research said there's a good chunk of percentage that holds digital assets, but a good percentage that would hold if a bank was involved because you bring that kind of trust aspect.

So there's that role of actually not just the addressable market, but the addressable market that we're not yet fully aware of, if that makes sense. And that's really important. And again, that'll be different across customer base. If you speak to our wealth, our hold and our high net worth, the percentage is much higher in terms of holding and understanding than it is in our core kind of retail base.

and that's fine but you have to be cognizant of building the capabilities and the products relevant to the demographic of your customer base as i said earlier we kind of cover everything excellent and just to finish off here then as i know we are running low on time with our booth section here we're going to get kicked out in a minute it's like five minutes we've got a five minute sign being shown it's the moment looking ahead then what does success look like for nat west in the digital assets arena and what does the payment space look like i guess as we move towards the future what does success look like i think success looks like a considered strategic approach to products and propositions driven by credible customer demand and need at the same time a relevant tangible industry position that we can all get behind to my transformational point in the article i think it's important that we're kind of at a uk plc point here and it's almost like a sterling slash dollar debate slash euro debate that's existed and that's again a uk plc challenge so there's a part of the panel yesterday was talking about we need conviction collaboratively to be able to make benefit at a customer level and that's not just the nat west for our customers that's nat west for uk plc as well awesome well thanks again lee for chatting with us today i'll let you get back and enjoy the rest of the conference now thanks again so much lee for chatting with us today and it's been a pleasure anytime mate thank you thank you everyone thank you Well, that's all we have time for this week.

Thanks, of course, to Lee for joining me. As for Fintech Futures, you can find us online at fintechfutures.com. Be sure to follow us on LinkedIn to keep up with the latest fintech news.

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As always, thank you very much for your support, and we'll see you soon for another episode of What the Fintech. But until then, goodbye.