Maurice:

Hello everybody and welcome to another edition of C&F Talks. Today, I'm going to be speaking with Natalie Lewis, who is the Partner and Head of Fintech, Market Infrastructure and Payments at law firm, Travers Smith. And Natalie is going to be speaking at the AI in Financial Services Leaders Summit on the 21st of May at Guildhall, London. And this of course forms part of City Week 2024.

Natalie, welcome.

Thank you very much Maurice, it's a pleasure.

Really nice to have you with us today. Let's turn to our first question.

Maurice:

What do you think are the principal factors currently driving the focus on innovation in cross-border payments?

Well, I think cross-border payments actually is one of the big focus areas at the moment in fintech and for good reason. If we actually take a step back, I think there are probably several factors at play here. So firstly, obviously the inefficiencies, or frictions as they like to be called, in the existing cross-border payments infrastructure are well known.

So, we've seen various reports from the FSB, from the CPMI, identifying the challenges in cross-border payments. So namely cost, speed, access, transparency, we're all familiar with those. And there are calls for improvement at an international level with a roadmap that's been published to help the industry try and get there.

So, I think in a nutshell the innovation is firstly happening at least to try and address those core issues identified. So, to facilitate for example increased adoption of PVP, improved direct access to payment systems, extending and aligning operating hours for payment systems as well. And actually, we've seen a lot of initiatives in the UK targeting that specifically.

So, with consultations on all of those topics and also things like the move to ISO 222. But I think you know that's one factor if you like, that's the regulatory landscape factor. But I think we have another factor which is the huge swathe of new and emerging technologies.

And these are technologies that didn't exist previously and certainly when the correspondent banking framework for example was devised. So, we now have quite a lot of new entrants to the market who are considering the feasibility of new multilateral platforms and arrangements for cross-border payments. And we see a lot with DLT, so distributed ledger technology and digital assets.

But, of course, I wouldn't be a reg lawyer if I didn't say that I don't think technology alone is the answer. I think we also need to really capitalise on this innovation by a broader legal regulatory and supervisory framework and cooperation for all of this as well.

And I think, you know, lots of the focus on innovation in payments does focus on the new technologies, so DLT, digital assets, digital currencies. But actually, it's important not to lose sight that there are some really good innovative solutions in the market at the moment, that actually don't use DLT or digital assets.

And a really good example of this is RTGS Global. So, they are a new entrant to the market, and they want to develop a non-DLT cross-border payment system, that's still targeting those inefficiencies in the correspondent banking market that we spoke about earlier, but actually using legacy technology to do that. Obviously new and improved legacy technology, but it doesn't necessarily have to be a DLT solution.

Maurice:

Okay, so the new emerging technologies won't necessarily displace existing technologies.
But what about, you mentioned digital currencies and Ripple obviously is one of those. And that's being used for cross-border payments at the present time. Do you think, you know, what's a competitive landscape like? Do you think that they will displace existing technologies over time? Or do you think there's room for both?

I think the starting point is there is room for both. I think it's really important to start on, start from the business use case. What is the use case that we're trying to fix and then choose the best technology to fix that use case. I think that's the starting point.

That said though, there is definitely a trend, as you say. There are a number of highly sophisticated projects that are looking to use digital currencies or other types of digital assets to revolutionise cross-border payments.

And Ripple, as you say, is a great example. And actually, they're using their tech. So, it's been so successful that they're using their XRP ledger, in some of the blockchain solutions that they are now onward selling to other banks, other financial institutions. So, we're seeing even further development along those lines.

But I think what's particularly exciting in the kind of digital assets, digital currency space is just the broad range of applications. And actually, it can be used in very different ways. So, if we go back to the Ripple example, obviously they use truly native assets to facilitate their cross-border payment solution.

So, if you like pure digital currencies, is probably the best way to think about them. Whereas others use DLT in a different way. So they rely on the tokenisation of existing assets.

What we're all familiar with, your claims on your commercial bank, your claims on your central bank. And then they transfer those tokenised assets using the DLT platforms. So, I think actually, there are many use cases for these, and some aren't actually far away from where we are at the moment.

I think I often say, that we've almost created our own CBDC already inadvertently. We already have claims on the central bank and certainly in the wholesale markets that are used in cross-border, well domestic payments, at least today.

Yeah, interesting. I mean in a sense is there any need for a brick coin or whatever if these solutions are already doing part of the job.

Maurice:

Moving on perhaps to another technology which is rapidly evolving, artificial intelligence. What sort of role do you think that might play in both domestic and cross-border payments?

I actually think the potential of AI is huge and very exciting, actually.

I think we've recently seen certainly from a regulatory perspective in the UK, various regulators putting out their approaches to how they're going to regulate AI. So, the Bank of England and the FCA for example. And I think what that does is show the increasing momentum, and the thinking and the direction of travel in this area.

But in truth actually, I think it's hard to predict exactly how and where AI will have the largest impact. And that's again because technology moves so fast. There are new use cases emerging every day.

But I think it is conceivable for payments, and that's both domestic and international, that AI could actually play a role at every stage of the value chain, in payments. So especially where any process can be automated. I think that's the obvious example, isn't it? There could be some use case for AI there.

But I think if we're talking about immediate impact, I think probably it's more in the domestic payments landscape. And I think that's because the most obvious application of AI in the short term is facilitating and improving the products and services that sit at that top level over existing infrastructure. So, these lower levels of the ecosystem, the PSU level.

And actually, in that context, there's loads of powerful use cases for AI, whether it's personalising the payment experience for your consumer, KYC, AML checks, fraud detection and analytics. So, I think actually, although all of those things could be applied to cross-border, I think we'll get there quicker on the domestic landscape.

Yeah, no, no, I'm sure you're right on that.

Maurice:

But of course, I suppose that the flip side of the coin is the threat that AI may pose to the payment systems in the hands of bad actors. How much of a danger do you see there?

I think there is a danger. I think it's the sad but unavoidable reality, I think, of new technologies or any technology for that matter, that as well as good, they can bring about bad or significant harm in the wrong hands.

And I think one of the most discussed issues, of course, is financial crime and the use of AI in financial crime and the serious risks that are associated with fraud, deep fakes, hacking, sophisticated phishing scams. But none of this is new, of course. But I think what the explosion of generative AI does, and that's in the widest sense, so not just the large language models, is that it's making these risks even greater.

And I think we've seen that with WormGPT. So, it's now possible for a chat bot to write a very, very persuasive email from your CEO asking you to make a fraudulent payment. And I think the broader point here then is because we're existing in this increasingly digital world now, the more digital payments become, the more important cyber security becomes, actually.

And I think we were talking about digital currencies just now. And actually, if they do become central to our national wealth, then we need to make sure that they are protected from hacking and other cyber attacks. And actually, that becomes all the more critical, I think, the more we adopt the digital payments landscape.

Now, I realise that that's a lot of bad. That's a lot of negative thoughts all at once. But actually, the good news is that AI can also be used as a powerful defence equally against these AI attacks.

So, there is a balance there. And I think the key is going to be making sure the technology that fights these attacks is more advanced and quicker than the actual attacks themselves.

Yeah. Well, that's a challenge, I guess, isn't it?

Maurice:

Finally, just looking into your crystal ball for a moment, Natalie, what do you think the biggest developments in payments will be during the rest of this year, over the course of 2024, or maybe even 2025?

So, I think we've obviously talked a lot about cross-border payments so far. And there are significant and exciting projects in that arena. I think we, you know, recently, I couldn't kind of end this interview without mentioning Project Agora, obviously, which is the joint kind of commercial bank and central bank projects to try and make tokenisation of deposits better used and to transform the landscape.

But actually, I think many of those projects, including Project Agora, which is at its very early stages, are multi-year. So actually, I don't think that the biggest development is going to be in cross-border payments in the near term, at least. So, I think what I am drawn to, though, is one of the most talked about topics in the moment in payments, certainly domestically anyway, which is the UK National Payments Vision.

And this is obviously the brainchild of Joe Garner's payments review, and HMT are tasked with producing this vision for the industry. And I think it's hard to actually overstate the anticipation of this vision. It has, I think, whether intended or not, had quite a significant impact on the industry, so including pausing innovation, ironically.

So, the new payments architecture project has been paused while the industry awaits, for this vision. And so I think, what I would say is that has the potential, certainly, to be the biggest development in payments, certainly of this year. But I think that it's absolutely key that it delivers some key things in order to actually deliver on that promise, if you like.

So, I think finally, we need a vision that reaches beyond just guiding principles. We need clear mandates. We need firm and achievable milestones for delivery.

I think it also needs actually, a clear and appropriate accountability framework. And I realise that is quite controversial. But I think HMT actually has to grapple with that. It's all very well isn’t it, you know, introducing a vision, but who's responsible for it and who will be held to account if we don't deliver it?

And I think also, finally, and I think everyone in the payment industry ought to agree with this, is all of these aspirations that we have, have to be balanced against commercial reality. You know, we can come up with all of these great ideas for reshaping the landscape, improving products for consumers. But actually, unless those products are commercially viable, they're just not going to succeed.

And the obvious example here, the elephant in the room is obviously the kind of uptake of payment issuation services and, you know, the difficulties there of trying to get a correct and fair, commercial framework that supports that open banking initiative.

Yeah, absolutely. So much change, so much potential. It's clearly a fascinating time in the payments industry.

For our viewers, we very much hope you'll be able to attend the AI and Financial Services Leaders Summit on 21st of May at Guildhall, London. That's obviously next week.

Further information available on the City Week website, www.cityweekuk.com, where you'll be able to hear much more, eventually if you attend the event, from Natalie and from a range of stellar speakers.

So, it just remains for me to say, Natalie, thank you very much for joining us today.

Thank you very much.