The future end state of payments

According to BNP Paribas’ Praneuf, it is currently “impossible” to have a conversation about the payments industry without mentioning AI.

“It’s useful for us because we have massive volumes of data to analyse from different sources,” he says. “AI can help. For instance, in the fight against AML.” It can crunch the numbers to spot suspicious patterns more easily and indeed help with many other compliance functions including sanctions screening and enhancing process efficiency.

“AI can fight terrorism financing or help avoid false positives adversely impacting clients’ experience among a myriad other end uses,” says Praneuf. “It will definitely improve the present situation. We see many AI opportunities in the payments industry. Our cash management business is even building its own AI platform to integrate into our payments offering.” 

Aside from AI, CBDCs, stablecoins, digital assets and programmable money in the wholesale and retail arena are also promising to change how a corporate bank operates. These emerging technologies are altering what is possible for a treasurer. Aligning payment data with other services to feed cash optimisation, better supply chains, and financing becomes possible as new technologies arrive  and interoperate better with instant payment platforms that adhere to ISO 20022 messaging and with the general trend towards open APIs.

“AI will play a part in the future end state of payments that I envisage, adding context and helping to run data services more efficiently,” says Ferguson’s Da Costa. “For instance, it can enhance cash flow forecasting accuracy, especially if allied to digital currencies, which are also on the horizon.” 

CBDCs and connected liquidity tools 

“I do think the future end state of payments will look very different, as central banks launch their own digital currencies (CBDCs), which can improve forecasting; stablecoins proliferate; and digital marketplaces – aping Alibaba where everything from credit to goods is integrated on the same platform – expand,” says DaCosta. “Digital labelling can merge the physical and online e-commerce world as well, as Amazon Fresh has demonstrated in its stores.” Liquidity can flow more easily across such blended ‘phygital’ business structures.

Everything will become more connected in future. The digital pound, euro and dollar will eventually come onstream and there is much interconnecting work being carried out by Swift and by the Bank for International Settlements (BIS), which is predicting 15 CBDCs by 2030, to try to ensure digital currencies and tokens are useable, interoperable, and actually come to fruition. Retail and wholesale iterations are under development. BIS’ Project mBridge, which utilised CBDCs for cross-border wholesale transactions and involved many participants, also recently examined the international aspects of this emerging blockchain-based technology (see TMI’s separate CBDC feature for more on this topic). 

“Additionally, banks will offer more overlapping 24x7 value-dating payment, asset, and liquidity services in the digitised future,” says Da Costa. “I’m thinking here of J. P. Morgan’s Onyx blockchain-based services for wholesale transactions based on its JPM Coin and moving assets digitally. But I know HSBC and many others have their own versions.” It’s not only CBDCs that will impact the future. Indeed, it could be argued they are a response to ensure central banks keep hold of the money supply.

The HSBC offering referenced by Da Costa is its Orion tokenisation platform, which has already been used for the institutional and retail trading of gold and for the world’s first multicurrency digital bond, according to HSBC’s Yiu.

In emerging payments, HSBC has also been busy participating in the e-HKD Pilot Programme. This is a key component of the Hong Kong Monetary Authority’s (HKMA) three-rail approach in paving the way for a possible future implementation of a retail CBDC. The pilot programme enables HKMA’s collaboration with the industry to examine innovative use cases and maximise Hong Kong’s readiness. HSBC was one of the institutions selected and has worked with the Hong Kong University of Science and Technology (HKUST), to explore possible e-HKD everyday payment use cases, focusing on programmability as a value-add feature of digital currency, as well as payment rail efficiency. HSBC and HKUST constructed a one-week pilot on the HKUST campus, which included 148 students and five  merchants. The pilot aimed to test the following two hypotheses:

• Hypothesis 1 - A more efficient payment rail: whether a hypothetical CBDC, such as e-HKD on DLT could be a more operationally efficient payment rail, including if it could achieve near-instant transfer of value and lower transaction fees, which merchants could pass on to consumers.
• Hypothesis 2 - Programmability of digital money: whether a hypothetical CBDC could enable more effective discount and reward mechanisms using programmability, enabling merchants to provide savings promotions to their customers to drive customer loyalty and repeated business. 

“It’s a very exciting time in the payments space,” enthuses Yiu. “Phase two of the e-HKD pilot programme was recently announced. HSBC and other industry players will build on the success and experience of phase one and explore new use cases to solve merchant challenges at a deeper and broader scale.”  

HSBC has also built tokenised deposit-based treasury management capabilities in a test case with Ant Group, part of the Alibaba digital marketplace, where it was deployed on intra-group payment transactions within the group. It links to the firm’s blockchain platform alongside other partners in a search for improved turnaround times, cost efficiency, and visibility.

The aim was to explore the potential of deposit tokenisation in enabling always-on, real-time treasury fund movement between accounts held by a corporate. The test was conducted under the HKMA Fintech Supervisory Sandbox and encompassed the issuance, transfer, and redemption of deposit tokens. It could pave the way for future research on how blockchain and tokenisation can drive further efficiencies and innovation in corporate treasury management.     

Keeping pace

“Fintechs offering CBDCs might even be the future end state of payments, if FIs and FMIs don’t keep pace technologically,” speculates Ferguson’s Da Costa. 

“Internationally, the present cross-border Swift interbank network won’t disappear. But it’ll look very different in future, as not all of their 11,000 member banks will be around in the future. Technology will lead to consolidation. Swift has to respond to Ripple and banks’ own enhanced cross-border services by opening up more innovation and access to data on their platform.” Swift’s CBDC interconnector project, GPI, and other initiatives show they are aware of the challenges.  

“You cannot bury your head in the sand,” continues Da Costa. “Change will happen sooner than you think. In a decade the payment landscape will be changed radically. Within three years I think you’ll already be seeing some CBDCs, likely from China first. Then a slow move towards critical mass adoption of fully digital systems will begin, including fintech solutions that can release trapped cash via a fiat conversion – something treasurers would definitely be interested in.     

“At present, two days to make an expensive currency payment isn’t good enough. Ditto with having to authorise transactions pre-pandemic, but digital signatures being accepted afterwards. 

“This is why fintechs gain traction. Currency Cloud and Wise, for instance, gained a foothold in cross-border payments for a reason. Interestingly, the latter signed a deal with Swift in September 2023, whereby the organisation’s members can use the fintech’s network to optimise payouts. This is perhaps an illustration of the collaborative future that awaits. Likewise Swift’s recent deal with Visa on B2B payments.

The collaborative dance 

“From a corporate treasury perspective, using a fintech is risky. We want the technology and nimbleness that fintechs are offering but not the risk of being the first to move away from using a bank. That is why they need to collaborate,” stresses Da Costa. “Combining the innovation of a tech firm with the nous, compliance knowledge, and scale of a bank is a win-win for a treasury. They can be complementary and bring new technologies and services to market.” 

Collaboration is the name of the game. “The question is, who will survive: banks or fintechs that have evolved to become bigger finserv firms?” asks Da Costa, while pointing out Wise and others are no longer startups. “It will be the best companies of whatever type that survive, regardless of what you call them. It’s simple evolution. The best payment service providers will attract volume and thrive.” 

The collaborative dance happening between fintechs and banks will speed up, argues DaCosta, while pointing out technology-led consolidation will mean some players won’t survive. “It doesn’t matter to a corporate, as long as the technological and business evolution benefits accrue.”       

The future end state of payments may well include CBDCs, tokens, and increasingly digitised, interconnected marketplaces. But first payment processing professionals – whether with a fintech-enabled PSP or a tech savvy bank partner – are most focused on the modernised instant payment platforms, which are still coming onstream with ISO 20022 messaging. Where that doesn’t deliver the functionality a treasury wants, the possibility of using open APIs as an alternative connector or an add-on way to bring more data into processes, is being explored. These are the present challenges, alongside regulatory compliance with strengthened sanctions, instant imperatives, and other such obligations.

Keeping an eye on the future end state of payments and 21st century business, involving CBDCs and digital marketplaces, is no bad thing however, as the future will arrive sooner than anticipated.

Making a payment may be simple in theory, but there are lots of complicated back-end processes and aligned compliance activities that have meant it isn’t always seamless up until now from an end-to-end perspective. Hopefully, it will be more seamless, faster, and easier in the future – as well as cheaper, with enhanced cash visibility and optimisation tools, which are key considerations for corporate treasurers.