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Using Replicated Ledger to Reduce Swift Costs

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Using Replicated Ledger to Reduce Swift Costs WHITE PAPER USING REPLICATED LEDGER TO REDUCE SWIFT COSTS Abstract Nientibus et harum la aliquos que dunt harunte nat qui assimin ctincti nimoloratur? Quis sin enim expello rescitis aliberiosam, sumendu cienimil es ab in pelibus antiunt, eatur sit volorec tetur, occus asi suntiss imporer eperis dolupta que quid quatis mo volorit quas maio. Im acest, eos si beat. Ur? Nonseque reribus. Itatium re, nissi nullupietur audis sit adis con non corrum fugias eosae nones nonsenimus Itate esto moluptatur autatis sinctota dolent labo. Sum autem reriossum eos acerestectur rem que et haribus vel etur Introduction This paper proposes an approach to build a payment product that could be deployed across units of same bank or banks which have correspondent relationships, to reduce SWIFT message costs and to conserve liquidity by reducing need for Settlement and Nostro accounts. The paper proposes an outline of a product that implements a replicated, single wrapper around existing ledgers of such bank units to enable quick, irrevocable, tamper-proof approach to managing electronic payments between correspondent bank units. Existing ledgers of the bank would not be replaced or disturbed. Instead a wrapper application would be deployed that tracks specific entries in the ledger and replicates the changes to all members. This enables each member bank to see the same ledger at the same time and also be guaranteed of its accuracy. For this purpose, it is recommended the product be built using Blockchain for established and proven security. Such a replicated ledger would reduce active, recurring costs of using SWIFT network to pass payment messages. This will also reduce the much larger passive cost of holding funds in a non- remunerative settlement a/c with the correspondent bank. External Document © 2018 Infosys Limited Challenges part of the transactions, the view they messages between Commercial banks. The have is similar to the “six blind men and an Central bank (for a given currency) is used Existing ledger schemes, developed during elephant”. to settle payments in central bank money. the 1400s by Luca Pacioli, are based on individual ledgers for each business, thus To overcome these shortcomings, and Both are trusted 3rd parties which do not preserving its own version of truth. There process payments between unrelated have a financial stake in the concerned is no “common” agreed-upon version of parties, a central trusted 3rd party is Commercial banks which transmit the truth. With each bank seeing only its own necessary. SWIFT exists to pass payment messages and handle settlement. Background of payments Sender / Payer CI (Central Infrastructure) Receiver / Payee Settlement bank Exhibit 1 – Current payment schemes representation The above diagram is a representation and netting payment messages before Commercial banks using the settlement of how current payment schemes work. retransmitting confirmations/denials to account to reflect the changes. This approach is called 4-box Model and Commercial banks. The settlement bank offers finality of is common to all payment schemes and The scheme provider offers finality of payment. If it is settled in Central bank systems. The CI comprises of the Payment message transmission. In this case, SWIFT. money, it offers a guarantee that funds will scheme and scheme provider. be available to the receiver. To reduce risk There are three parts to a payment Payment reconciliation to itself, the settlement bank expects all mechanism: The CI or the PSP (Payment Scheme member Commercial banks to fund and maintain funds in a settlement account a) Payment message transmission Provider) typically acts as the super-agent of all individual Commercial bank ledgers. which is funded with enough money to b) Payment reconciliation It calculates and reconciles payments to/ meet daily obligations. The settlement c) Settlement via Central bank’s from various Commercial banks and then bank could also offer to lend its own settlement accounts and ledger sends the amounts to the Settlement money at overdraft charges to meet entries. bank (Central bank in most scenarios). The temporary/overnight shortfalls. It can also reconciliation ledger entries calculated by demand collateral in addition to settlement Payment message CI and sent to Commercial banks and also account funding to ensure enough funds transmission to the Settlement bank. are available to avoid a freeze in payments. Payment messages between Commercial Individual ledger entries of banks have This is solely because no single bank, not banks are typically fulfilled by the scheme to be reconciled with what the CI entry even the settlement bank, has a single provider’s schematics and technical shows, thus making the CI as a super- picture of all ownership of funds. This requirements. ledger of all ledgers. The CI provides finality means no single bank/CI/settlement Here we take the example of LV local of reconciliation. bank can know the assets and balances of payments that involves using RTGS Commercial bank beyond what is held in protocol. Settlement via Central Bank the settlement account. and ledger entries Commercial banks wanting to make The only account the settlement bank payments or receive payments (Push and The Settlement bank (Central bank can trust and access immediately is the Pull), send the messages to the CI. The mostly) receives the settlement figures settlement account of each Commercial CI acts as a Hub for receiving, collating and transfers the money between the bank held with it. 1Netting is not done for RTGS payments. The Central bank typically owns the CI and runs it. It also acts as a settlement bank. External Document © 2018 Infosys Limited Ledger activities during the transfer Bank W&G Bank RBS Asset type Counterparty Amount owed(owing) Asset type Counterparty Amount owed(owing) GBP Bank RBS 1,000,000 GBP Bank W&G 1,000,000 GBP Bank Barclays 5,000,000 GBP Bank Barclays 2,000,000 GBP Bank HSBC 5,000 GBP Bank HSBC 10,000 GBP Bank SCB 5,000 GBP Bank SCB 5,000 Bank HSBC Bank Barclays Asset type Counterparty Amount owed(owing) Asset type Counterparty Amount owed(owing) GBP Bank RBS 10,000 GBP Bank RBS 2,000,000 GBP Bank W&G 5,000 GBP Bank W&G 5,000,000 GBP Bank Barclays 1,000 GBP Bank HSBC 1,000 GBP Bank SCB 5,000 Bank SCB Asset type Counterparty Amount owed(owing) GBP Bank RBS 5,000 GBP Bank W&G 5,000 GBP Bank Barclays 1,000 This is how individual ledgers will look like when transferring funds to/from other banks or units in a country or a currency. Same principle happens in cross-currency too. Exhibit 2 – Ledger activities during transfer Shortcomings in As-Is process Many of these are branches and f. A Central bank typically insists that subsidiaries of same bank group. commercial banks maintain massively a. Since no two banks can agree on a funded settlement accounts with it transaction based on their own ledger, d. Banks seek to reduce cost on payment processing and a good starting point to cover the payments due from the SWIFT came into being to guarantee is reduction or zero cost on transfers Commercial bank. and confirm message transmission. between subsidiaries. Central banks operated as settlement g. Central banks play the role of agents to guarantee payments. e. A trusted 3rd party with powers to arbitrator of ledger, guaranteeing overwrite and overturn ledger activities payment with their central bank b. SWIFT charges the Bank for processing needed to have a unified view. In UK, the money. This results in high costs the payment orders of both receiving CI transmits the amounts due/from each of payments and also forces the and sending banks. bank at end of every settlement cycle. commercial banks to deposit The BoE makes entries in the settlement and retain large sums of money c. Commercial banks’ paid SWIFT about accounts of each bank which is final and $600mn to transmit 5.6bn payment binding. This enforces a cost on the entire in settlement accounts to cover messages between 10,800 institutions. payments mechanism. payments via Central bank money. External Document © 2018 Infosys Limited Domestic transfer through the central bank (BoE) as example Central bank RBS Settlement HSBC Settlement A/c a/c Direct Bank RBS Direct Bank HSBC Agency bank’s correspondent C D E account Agency Bank A B A B C D E Exhibit 3 – domestic transfer through the central bank. Dotted line represents To-be Value Proposition / Introduction to the Technology and Approach Scope of coverage of instruments Cash Cross border Mobile Payments Direct Debit Money order Digital currency The scope of instruments covered are outlinedDirect in Credit blue. Those notCard in Paymentsscope of this paper are outlined in gray background and white text. Exhibit 4 – Scope of coverage of instruments External Document © 2018 Infosys Limited External Document © 2018 Infosys Limited Sender / Payer CI (Central Infrastructure) Receiver / Payee Settlement bank Exhibit 5 – The 4-Box model with Blockchain A better way would be for a single view history. the banks to have a bilateral visible, of the ledger of all participants, with immutable, transfer of value, adjudicated The proposed technology concept is the ledger state replicated between the Blockchain. Blockchain can be used to by the settlement agency. The central bank participant banks, monitored by central implement a replicated ledger between in this case would move away from the role bank. This approach needs to be tamper- Banks with all the safety measures listed of a settlement agency and instead act as proof, irrevocable and
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