It's About Time: Disruptive Settlement Technologies Are Coming to Banks

The race is on to reinvent settlement. As customer demands for faster settlement times increase, and new technologies come online, banks are under pressure to meet their clients’ heightened needs

It's been more than 20 years since the Internet’s arrival transformed the way people access information, manifested in search engines that deliver the world’s information to our screens and fingertips instantaneously. However, although instant information transfer has become ingrained in people's lives, value transfer has fallen behind. While email, news, and independent movies can flash across the planet with a keystroke, settlement of cross-border currency transactions still takes days. 

That lag is evident wherever you look, from institutional finance to retail. T+2, or “trade date plus two days,” is still the standard timeframe for most stock trades, meaning that settlement occurs two full business days after the order has been executed -- the rule of thumb for even the most reputable brokerages. Meanwhile, expectations for cross-border payments must be similarly tempered, with the best-known international money transfer services requiring 3 - 5 business days to coordinate a cash wire across countries.

That's too much time in a world where instant access to information is now the norm. Unfortunately, banks often take an unfair brunt of the blame for these bloated timelines, even though their systems only have one part to play in a patchwork web of mechanisms that serve to slow things down. Pre-funding requirements, a polyglot of currency exchanges, and a minefield of intermediaries all play into the slow pace of cross-border payment settlement.

For stocks and securities, T+2 settlement is far too long. The wait for settlement can take billions of dollars worth of assets out of play, a lag that can severely strain liquidity. The more funds that are tied up in settlement, the less money that institutional investors, retail traders, and financial institutions have at the ready to fully execute their strategies.     

It's about time for banks to move forward: new technology is arriving to make the next era of settlement a reality, an era in which this essential financial mechanism plays out in real-time.  

In Search of Alternatives

Today’s state of cross-border remittance provides a clear window into legacy settlement systems’ problems. Since every mainstream fiat currency has its own independent cross-border payment settlement system, cross-border payments move through many agency banks -- located in different countries -- before settlement can be achieved.

The legacy organizations that have handled global settlement for banks, investors, and enterprises are well known. They include the Society for Worldwide Interbank Financial Telecommunications (SWIFT), which clears five trillion dollars a day, and the Clearing House Interbank Payment System (CHIPS), which is responsible for another 1.5 trillion dollars of interbank payments in cross-border and domestic settlement daily. Meanwhile, on the securities side, the Depository Trust and Clearing Corporation (DTCC) oversees transactions totaling trillions of dollars worth of securities every day.

Each of these entities has played an important role in the forward evolution of global finance. However, they are also primarily using outdated backend technologies and starting to show their age—DTCC and SWIFT were both launched in 1973, while the roots of CHIPS run back to 1853. All three must work through an often torturous maze of multiple currencies, platforms, regulations, and markets, in a way that generally lacks cohesion or efficient international interoperability. The onset of the Web has made all three of them better, but it can still take hours or days to measure their asset transfer response time.

A major wave of next-gen technology has arrived for the banking industry in the form of distributed ledger technology (DLT). Coincident with the increasing sophistication of digital assets, including breakthroughs like cryptocurrencies, DLT has piqued both the interest of banks worldwide and that of the innovators seeking a better way to serve banks’ settlement needs.

Entrants into settlement on the DLT side include the high-profile Ripple, which is looking to solve the sector’s problems with the RippleNet global payments network. However, mass adoption of Ripple has arguably been slow so far, with the volatility of its XRP cryptocurrency making banks nervous to employ the system, save for its XCurrent Messaging technology. The emerging DLT competition can also be seen in players like Baton Systems and Copper, the latter of which recently announced its ClearLoop system for instant settlement of crypto trades off-exchange. Roxe is a new entrant that goes beyond DLT and fully leverages blockchain technology to create a unified clearing and settlement network that connects banks and the global financial system at-large. Roxe will purportedly enable instantaneous, and more reliable, global asset transfers for banks.

A Better Way for Banks 

Are banks ready to rethink how they can speed up settlement and satisfy increasingly impatient customers? 

The benefits are immense. Faster settlement  reduces the exposure of banks and their customers to value swings in currencies, stocks, or any other assets being transacted. A Blockchain approach also provides a clear and open transaction history, as opposed to the opaque processes that still prevail today. All stakeholders win when banks reduce risk and increase transparency.

Ultimately, network effects, in addition to technology advances, will dictate how soon upgrades take flight, and how far they fly. As more banks realize that they can trust the next wave of technologies and move forward together, settlement’s time will truly arrive.