Succeeding in the ‘brave new world’ of digitalised finance

Wed 20 July 2022
3 MIN READ

Clearing and settlement services

ASX

Succeeding in the brave new world of digitalised finance

The digitalisation of Australia’s financial services industry is challenging norms that have underpinned commercial transactions for decades. ‘Tap and go’ solutions have disrupted traditional banking. Unprecedented demand for automated settlement and payment is also pressuring incumbents that still take days to process documents, clear settlements or even move a single share.

To examine these latest developments, ASX hosted a discussion with the Australian Corporate Treasury Association. The session covered insights on developments in distributed ledger technology (DLT), and smart contracts, as well as how organisations can build toward these capabilities by integrating their data in order to share information more efficiently.

Towards automated solutions

Tim Hogben, Group Executive of Securities and Payments at ASX, expressed confidence in the industry’s capacity for reinvention. He cited the ASX’s own early shift to computer-based trading, terminating an era when share certificates for signature were “walked around the city in leather pouches”.

Yet the pace of change is only intensifying. Transitioning from a nascent phase, DLT (also known as blockchain) enables financial dealings – such as the transfer of cash or shares – to be digitally recorded and validated in multiple places simultaneously. This leads to greater optionality for how transactions are processed and more choice for the customer. “That’s quite powerful,” Hogben said. “It saves people from having to prove the transaction they have in their databases is the same as everyone else.”

Smart contracts that perform automatically based on pre-set rules and trigger conditions extend this concept. Businesses can raise funds instantaneously, bridging the gap between decision making and execution. As a result, transactions are less vulnerable to market movements. Potential use cases also extend to electronic property conveyancing, central bank digital currencies, instant international transfers, and streamlined regulatory reporting.

“Many companies’ operational expenditure currently involves curating data from multiple sources and providing it to regulatory agencies,” Hogben explained. “If everyone could rely on where that information was coming from, you could permission parties that have the data rights to come in and access certain information that it wanted. That definitely has a lot of interest from ASX customers.”

Assembling the building blocks

Automating data flow between organisations isn’t simple. It requires consolidating a labyrinth of applications, databases, networks, and processes into a ‘single source of truth’, able to be shared rapidly with those that need it.

“You’re taking a legacy product and digitalising it,” said Rodolf Salem, Chief Operating Officer for Lygon, a Sydney-based start-up that uses DLT to issue same-day bank guarantees. “You don’t have to connect everything on day one. But part of our challenge involves educating people who have been doing jobs manually for years.”

The key for organisations is getting their data into shape for new technologies. ASX began looking at standardising and opening its data in 2017, so others with the right permissions could use it to create innovative payment solutions.

“Amazon is a business based on distribution, but it didn’t build the roads and transport,” Hogben said. “This isn’t about everyone having their own distributed ledger, but relying on organisations to create the infrastructure so you can build the applications on top.”

Speakers noted that software intermediaries, known as application programming interfaces (APIs), are increasingly vital to facilitate information flows between different payment channels. ASX, which owns 50 per cent of electronic property settlement provider Sympli, is developing interoperability APIs linking with competitor PEXA. In Hogben’s words, “it’s a bit like someone using their Optus phone to call someone on Telstra”.

A decentralised future

Beyond facilitating automated transactions, digitalisation is spurring new competition in emerging areas such as open banking. For example, under new Consumer Data Right (CDR) legislation[1], traditional sellers of banking and insurance products could lose market share to rivals that aggregate data and present customers with more compelling offers.

Rodolf predicted that the “decentralisation of finance is going to happen”. “The driver will be API capability, getting the data right and transferring it faster with better visualisation,” he said. “If I’m a corporate organisation that is multi-banked, I don’t want to go into any particular banking system to obtain data. I want to see that data comes into my own ERP (Enterprise Resource Planning) system, so I can use it to make a better decision.”

Incumbents will be challenged by new players, but customers and ultimately whole industries and economies will benefit. As Hogben concluded, “It’s a brave new world and I don’t think we would want it any other way.”

[1] The CDR was enacted by the Treasury Laws Amendment (Consumer Data Right) Act 2019 (Cth), which inserted a new Part IVD into the Competition and Consumer Act 2010 (Cth). The Competition and Consumer (Consumer Data Right) Rules 2020 (the CDR Rules) provide the framework for how the CDR operates. The CDR Rules define the elements for consent, outline the accreditation framework and elaborate on the privacy aspects of the scheme.