How a fintech startup plans to speed up capital markets payments
Capital markets play a key role in a modern economy because they move money, stocks or bonds from people who have them to those who need them to execute trades, secure equities or invest. But as core a function as this is, it hasn't been very fast.
These bank-to-bank transactions, whether for purchasing or selling new securities or trading them between investors, have long been complex, drawn-out affairs that can take two or more days to complete just the payment and settlement.
It can't be as simple as a P2P payment like Zelle, but the payment part of the cross-border capital markets process can certainly be faster when it is part of a complete transaction and settlement management platform, said Arjun Jayaram, CEO and founder of Baton Systems.
San Francisco-based Baton provides post-trade and payments solutions for capital markets, with global banks like Citigroup and JPMorgan Chase as clients, and a growing network of central counterparty clearing houses.
"The fundamentals are not that different from retail payments, but very large sums of money have to move in capital markets payments," said Jayaram, who built his expertise on the payments landscape and liquidity problems at banks during his previous role as chief technology officer at fintech Dwolla.
"The systems that banks use for capital markets transactions are more than 20 years old in most cases, using old mainframes and processors," Jayaram said. "Blockchain came along to solve some of these problems and it made us realize that much more could be done in this space."
To address the slowdowns and communication gaps in capital markets, where on any given day the transaction volume is between $8 trillion and $12 trillion globally, Baton developed a platform in which connecting banks can monitor transactions, communicate with each other and agree to the payment and settlement terms via a single button on the platform's dashboard.
Baton utilizes its own API across the two banks engaging in a capital markets trade, and synchronizes the payments on both sides. The complexity of a capital markets deal — in which one party may be using euros and the other dollars, or securities or properties are being swapped — make it essential for Baton to help confirm details and move the money or securities.
"Capital markets do not operate on open APIs like retail payments," Jayaram said. "When you are moving $100 million, you can't use an open API. The businesses engaging in the trade have to physically move the money to the bank and get confirmation of credit on each side, so you know the money is good."
Baton's platform allows all of the capital markets activity to unfold on a single platform, automating the agreements and terms of trades and payments through a "netting" process in which the net amounts are agreed upon, Jayaram added.
The payments are automated through Baton when the users click on an "Agree" button, and the platform then helps with the post-payment process of tying the payments back to the transaction details, much in the same manner the Swift network does with the ISO 20022 standard.
Baton, which has had products in the market since 2017, is able to settle the payment in two minutes, as compared to the two or more days it can usually take through legacy networks.
"The ability to source information from different sources and providing it on the same platform immediately makes it easier, when the payment is reached, as to what the balance might be," said Vinod Jain, senior analyst with Aite Group.
Providing real-time management of the transaction, and knowing immediately when a payment has been received would also benefit banks and their business clients, Jain said. But many potential users would likely have to build a business case to convert to something like the Baton Systems platform, he added.
"They would have to consider the benefits of speed in the process, because some banks are OK with their current process and speed," Jain said.
"Most of the money flow could be linked to collateral flow and how quickly you can use the cash of any payment to meet collateral obligations," he added. "The faster you get the money into your account, it gives you the ability to do more trading."
Swift created the Global Payments Innovation initiative to address the legacy systems within banks to at least get them all operating and communicating in a similar manner, while also preparing them for technology updates.
Baton is looking to help banks transition from legacy systems and the problems they continue to face as technology advances. Use of a single platform with connecting APIs and automated, digitized information and records can put legacy woes behind most banks when consummating capital markets transactions, Baton's Jayaram contends.
"They are using older computers that may or may not be able to communicate with other banks," Jayaram said. "Those in the bank are using older terminals, and they are sending emails or making phone calls to the other parties during the process to complete a capital markets transaction. That is how it is done, even now."