HSBC announced on Monday that during the past year it has been orchestrating more and more cross-border payments between the various balance sheets within the federation of separately capitalized banks that make up the group using a new technology.
This has managed “to drastically increase the efficiency of these internal flows”, according to Richard Bibbey, interim global head of FX and commodities.
Like all banks, HSBC is looking to internalize more of its flows, reducing the volume of payments sent out through correspondent networks that it knows will only come back in through the bank again, and also reducing reliance on external settlement networks. Internal volumes are increasing.
However, an often overlooked problem is that error rates for internal payments are in line with external payments. And the success of JPMorgan’s Interbank Information Network shows how keen banks are to improve on this.
Having settled three million FX transactions, and made payments worth $250 billion using distributed ledger (the technology previously known as blockchain), HSBC is now taking to external clients – specifically multinational corporations with multiple treasury centres and cross-border supply chains – the solution it calls HSBC FX Everywhere.
Euromoney understands that HSBC has been partnering with a fintech provider working on a permissioned variant of one of the blockchain solutions in the market to test HSBC Everywhere internally. Clients will only see HSBC, however, if they take up its offering. They won’t be dealing with a small fintech.
Mark Williamson, chief operating officer for FX cash trading at HSBC, explains: “There are reasons why we have become over many years the trusted provider of FX, payments and finance to these relationship clients, some of which relate to our financial strength, reputation and regulated status.
“Another reason is that we provide systems that we have tested and become comfortable with internally, starting small, building them up over time, concentrating on the practical business benefits – which is all the businesses inside HSBC and our external clients care about, and not the beauty of the technology which makes most people’s eyes glaze over.”
HSBC is a bank. How is its internal testing relevant to non-bank clients?
Given HSBC’s structure, across dozens of countries and many trading hubs, when its European business does a trade with its US business, it will go through different risk management and clearing systems as if between two separate counterparties.
HSBC is one of HSBC’s biggest clients. The key business benefit of a shared permissioned ledger is that it provides a single, transparent, immutable record of a trade and associated payments that may travel across multiple systems between different group counterparties.
Williamson says: “Every financial product ends up with a payment. If a payment is queried or disputed or fails, the counterparties have to agree where the trade was initially captured, what settlement systems it is in, which payments gateways it has passed through and what messaging has been sent, received and confirmed.
It is an agreed record of payments and where they are that provides singularity, transparency and immutability. But it does not replace existing systems. Rather it enhances them- Mark Williamson, HSBC
“If two counterparties have access to a single, immutable record of the truth on that trade, that is an absolute game changer. It’s not just that it enables automation and cuts processing costs – external studies say by about 25%, which roughly accords with what we are seeing – and reduces time-consuming efforts to resolved failed trades. It also gives much greater visibility on forward cash flows. And that is enormously helpful.”
He adds: “For HSBC, having greater visibility and certainty on funds across the entire franchise means we can treat those cash flows on various group balance sheets differently.”
Williamson offers an example of how.
“Because you can consolidate your cash flows, build a cash ladder and move to net settlement, that gives you a lot of optionality, for example around hedging FX risk,” he says.
“Say I am doing a big dollar/yen trade for a client three months out, but the Asian country balance sheet I would normally use is at its counterparty risk limit. Another balance sheet may have capacity. We can now see that immediately and with confidence, and so cover the trade from there instead. It helps us optimize the internal sourcing of pricing for client risk.”
For large multinational corporations, one obvious benefit of such a shared permissioned ledger for monitoring internal cash flows is reducing overnight borrowing costs to meet short-term needs that they might cover internally.
Williamson points out that clients interested in using HSBC FX Everywhere need not worry about running parallel systems or junking recently installed treasury solutions.
“It is a check on existing systems,” he says. “It is an agreed record of payments and where they are that provides singularity, transparency and immutability. But it does not replace existing systems. Rather it enhances them.”
Williamson says that the move to provide an internal system to external clients has emerged in part from reverse inquiry.
“We have been getting message from internal HSBC business teams saying that they are talking to clients on many issues, one of which is use of distributed ledger technology and how it might benefit them. When our bankers discuss how we have used it internally, clients are keen to consider how they can adapt it in their own day-to-day work.”
HSBC hopes – and no doubt other banks will also hope – that showing clients the benefits may tighten relationships further.
Williamson says: “Say a client has done a big Aussie dollar trade two days ago and needs an update on settlement as it is now coming up to cut-off point. We can explain how we manage such queries internally and that may incline the client to outsource more of its treasury operations to HSBC as a platform solution.
“If it is a large multinational corporation, a next step might be then to extend that through its supply chain, because this solution helps build up a new and reliable source of clean data between the multinational and its partners.”