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Mastercard, R3 to Develop Blockchain Cross-Border Payments Platform

Payments giant Mastercard is to develop a blockchain-powered cross-border payments platform in partnership with enterprise-focused blockchain firm R3.

In an announcement on Wednesday, Mastercard said the two firms have inked a deal to “develop and pilot” the payments solution. It will initially be aimed at connecting faster payments schemes and banks backed by Mastercard’s clearing and settlement network.

The platform will be built on Corda Enterprise, the commercial version of the platform, as opposed to the open-source Corda Network, R3 told CoinDesk.

The partnership is planned to merge R3’s expertise at developing blockchain solutions with Mastercard’s existing payment systems and network. Ultimately, the firms hope the new platform will help tackle industry issues such as costly payments processing, liquidity management and a paucity of standardization and connectivity between banks and domestic clearing systems.

R3 CEO David E. Rutter said:

“All institutions – large or small – rely on the ability to send and receive payments, but all too often the technology they rely upon is cumbersome and expensive. Cross-border payments can be a particular pain point. Corda was designed specifically for enterprise use cases such as this, and we look forward supporting Mastercard in bringing blockchain-enabled payments businesses across the globe.”

Citing its July acquisition of international payments firm Transfast as a boost to its network, Mastercard said the deal to utilize Corda Enterprise will further expand its capabilities in the payments arena.

The news of the partnership also comes just days after Mastercard joined the Marco Polo trade finance blockchain network founded by R3 and TradeIX.

Peter Klein, executive vice president of new payment platforms at Mastercard, said in the announcement:

“Developing a new and better cross-border B2B payments solution by improving worldwide connectivity in the account-to-account space is central to Mastercard’s ambition. Our goal is to deliver global payment infrastructure choice and connectivity as demonstrated through our recent strategic acquisitions and partnerships, including our relationship with R3.”

The rise and rise of artificial intelligence

Recent announcements from some of the largest banks show artificial intelligence (AI) working its way further into financial markets.

Credit Suisse has announced it is to deploy 150 new ‘robots’ over the course of the year, with an overall aim of cutting CHF 4.8 billion (GBP 3.7 billion).

UBS has unveiled a new AI system which uses machine learning to develop strategies for trading volatility on behalf of clients. The bank claims that this is the first ‘adaptive strategy’ product offered by an investment bank.

J.P. Morgan is developing a machine learning technology called LOXM which aims to improve execution quality in the bank’s European equities business. As the buy-side increasingly focuses on execution quality, this is driving ever greater adoption of algorithmic trading across asset classes. LOXM is programmed to learn from historical trading patterns and tweak its algorithmic strategies accordingly, using a technique J.P. Morgan calls ‘deep reinforcement learning’.

The ability to adapt and learn without human intervention allows LOXM to optimising the execution gains of algo trading.

Mosaic Smart Data is looking at how AI can improve trading across asset classes, taking on the challenge of providing machine learning capabilities to the FICC markets, which have far less standardised data and a greater portion of voice trading.

Mosaic provides both real time and predictive analytics insights for sell-side FICC traders, giving them a view of their market in a way that takes in far more data than a human being is able to comprehend. This augments the human trader’s capabilities and could lead to significant performance gains for sell-side FICC departments.

While initial uses of AI focused on process improvements, it is significant that the technology has reached a level where its insights are now helping to influence trading itself.

Although we are still some way from a fully automated robo-trader, this represents a significant increase in confidence in AI technology.

Bank of England to boost fintech by opening up RTGS

The Bank of England (BoE) announced a framework to open up its interbank payment system to fintech firms.

The UK interbank payments landscape is currently dominated by CHAPS, a same-day sterling settlement service used to transfer large amounts between businesses, as well as for property purchases.

CHAPS’s central position in the market, processing 92% of interbank payments, however, represents a degree of risk to financial stability. In 2014, the system was suspended for several hours due to technical problems. This resulted in payments being held up and caused delays for house buyers as payments were not processed on time.

Newer fintech companies and challenger banks are also concerned that they will be at a disadvantage when working with the company, as it is owned by the UK’s four biggest banks.

In response to these concerns, the Bank of England last year announced a plan to widen access to its real time gross settlement (RTGS) payment service, the system which enables large sterling transfers on a real-time basis. This will allow non-banks to bypass systems like CHAPS and access a range of payment services directly from the BoE.

This week, the Bank took the next step with the release of a detailed technical framework for how the new system will operate.

Under the plans, a payment service provider (PSP) will be given access to the RTGS system) if it can demonstrate appropriate anti-money laundering checks and can keep customers money safe.

The Bank hopes this new approach will relieve some of the financial stability pressures from CHAPS, while giving smaller PSPs more confidence in their payment service relationships.

The move is a further boost to the growing retail fintech sector. Combined with the European Union’s second payment services directive (PSD II) next year, it will help to put these companies on a more even footing with their bigger competitors and open up competition in retail banking services.

With greater access to customer data through PSD II, and the ability to transfer large payments in real time, fintechs will now be able to compete far more effectively with their larger rivals.

The effect could be to push greater innovation from both banks and fintech companies. This can only be a good thing for end users.

Cybersecurity: Is a flaw in human psychology to blame?

A fascinating analysis of cybercrime and cybersecurity this week from Michael Daniel, the president of The Cyber Threat Alliance.

Writing in the Harvard Business Review, Mr Daniel postulates that we have only just begun to comprehend the scale of the issue and that it is our perception of the online world versus the physical which is to blame.

Cyberspace operates according to different rules than the physical world and is more than just a technical problem, but is as much about economics and human psychology.

“The borders in cyberspace don’t follow the same lines we have imposed on the physical world –  they are marked by routers, firewalls, and other gateways. Proximity is a matter of who’s connected along what paths, not their physical location. The same principles of cyberspace that allow businesses to reach their customers directly also allow bad guys to reach businesses directly”

He poses six key framework questions which he argues need answering before we can effectively tackle the problem:

  • What is the right division of responsibility between governments and the private sector in terms of defence?
  • What standard of care should we expect companies to exercise in handling our data?
  • How should regulators approach cybersecurity in their industries?
  • What actions are acceptable for governments, companies, and individuals to take and which actions are not?
  • Who is responsible for software flaws?
  • How do we hold individuals and organisations accountable across international boundaries?

In our experience, financial firms which are typically hyper-competitive are highly adept at solving industry issues when they recognise the group threat and work together.

Co-operation and co-ordination across borders backed by resolve, human capital and investment is key to solve these issues is critical.

The financial systems, both systemically and at the individual firm level, remain at risk and it is clear that any system is only as strong as its weakness link.

R3 trials blockchain fixed income trading with 40 banks

Chatsworth client R3 CEV has successfully trialed five distinct blockchain technologies in parallel in the first test of its kind, as reported this morning by Wall Street Journal, Forbes and Reuters.

The trial represented the trading of fixed income assets between 40 of the world’s largest banks across the blockchains, using multiple cloud technology providers within R3’s Global Collaborative Lab.

This marked an unprecedented scale of institutional collaboration between the financial and technology communities exploring how distributed ledgers can be applied to global financial markets.

The banks connected to R3-managed private distributed ledger technologies built by Chain, Eris Industries, Ethereum, IBM and Intel. They evaluated the strengths and weaknesses of each technology by running smart contracts that were programmed to faciliate issuance, secondary trading and redemption of commercial paper, a short-term fixed income security typically issued by corporations to raise funding.

Each of the distributed ledgers ran a smart contract based on identical business logic to enable the banks to accurately compare the difference in performance between them. Cloud computing resources were provided by Microsoft Azure, IBM Cloud and Amazon AWS to host the distributed ledgers.

The R3 member banks involved in this trial included Banco Santander, Bank of America, Barclays, BBVA, BMO Financial Group, BNP Paribas, BNY Mellon, CIBC, Commonwealth Bank of Australia, Citi, Commerzbank, Credit Suisse, Danske Bank, Deutsche Bank, J.P. Morgan, Goldman Sachs, HSBC, ING Bank, Intesa Sanpaolo, Macquarie Bank, Mitsubishi UFJ Financial Group, Mizuho Financial Group, Morgan Stanley, National Australia Bank, Natixis, Nordea, Northern Trust, OP Financial Group, Scotiabank, State Street, Royal Bank of Canada, Royal Bank of Scotland, SEB, Societe Generale, Toronto-Dominion Bank, UBS, UniCredit, U.S. Bank, Wells Fargo and Westpac Banking Corporation.

Further exciting developments are set for the months ahead, as R3 continues to work with the banks in its Global Collaborative Lab to test and develop applications based on distributed ledger technology for the financial services industry. The Lab has quickly become a center of gravity for collaborative applied blockchain efforts in the financial services and distributed ledger technology industries.