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Financial Services

Technology and Innovation

and Implications – A Discussion

Mid-Atlantic AFP

March 14, 2017

Laura McGortey – Managing Director, Business

Development

BNY Mellon Treasury Services

2 Information Classification: Confidential

Discuss financial services technology innovation implications via BNY

Mellon’s payments modernization journey.

• Drivers for financial services innovation

• Digitization

• Distributed Ledger Technology

• Other Emerging Technologies

Agenda


Traditional Challenges…

End to End

Cost Timeliness

Managing Payee

Information Risk Transparency

Client

Experience

Millennials with

New Expectations

2008

Financial Crisis

Fraud & Cyber

Attacks

Globalization of

Trade Flows

Advancing

Technology

Growing

Regulation

Growing Pressures on an Imperfect Payments System

Market Forces…

Payments System


Opening the Door to Potential Disruptors Who Promise a

Better Client Experience

Note: All trademarks used are owned by their respective owners.


Digitization - Improving the Ease of Doing Business

Improve the User

Experience

Improve Interoperability

Expand the Solution

Technology Needs • Automation across internal and

provider platforms • Better visibility into payment and

liquidity flows • Leverage existing technology

investments • Effectively manage integration costs

User Experience Needs • Integrated access to all of BNY Mellon • Cohesive user experience for similar

functions • Accessibility to all functionality from all

types of devices • Quicker access to critical information

Evolving Needs • Actionable data to improve business

performance • Keep pace with emerging payment trends

and options • Access to a wide array of payment, cash,

and treasury management solutions

Gateway

• TreasuryEdge® and Trade migration to our consolidated BNY Mellon portal

• “Unified Payment” for consolidated payment initiation

• “Unified Cash” for improved reporting • Responsive design creating a better

mobile experience • Incorporation of dashboards and widgets

Application Programming Interfaces (APIs) • APIs providing direct access to our

payment and reporting platforms • More capabilities and integration options

compared to traditional file transfer • Built on ISO 20022 standards

Leveraging Technology

• Centralized data via Digital Pulse to be combined with analytic tools over time

• Deployment of Swift gpi, Real-Time Payment, and Tokenized Payment capabilities

• Incorporation of third-party applications via NEXEN App Store


Platform – Business and Foundational Services

Digital Transformation

Analytics Digital Pulse Cloud Hosting Data Cloud

Client Interface

Infrastructure Components – BXP and Workflow

Gateway API Store App Store

• Cohesive, integrated access to all

BNY Mellon business data for

decision making and reuse

• Bid data warehouse

• Can create predictive analytics and

insights into client’s back-end

processing

• Provides access to third-party apps

• APIs

• Allow system to system connectivity

• Client facing portal

• Consistent client experience

• Full mobile capabilities across all

devices

• Provides lowers cost

• Delivers resilient, secure solutions


Gateway

Manage Payments Transformation

Connectivity, Standardization and Third-party Access

Banks

US Corporates

Global Corporates

NBFIs

USD Wire Transfer

US ACH

Real-Time Payments

Global Low Value

EUR/GBP/HK Wire Transfer

Check

Payment Types

A

P

I

s

Tokenized Payments with

Zelle

Third-Party Solutions

App Store

Swift gpi

Wire

transfer

Tokenized

payments

with Zelle®

RTP

FX payments

and receipts

Global ACH

US ACH

Check

payments

and receipts


What is Distributed Ledger Technology (DLT)?

• Shared, distributed database architecture that keeps track of ledger accounts

and their balances

• Decentralization eliminates the need for central authority or intermediary to

process, validate, or authenticate transactions

• Internal and external reconciliation

required

• No restrictions

• Single point of failure and control

• Unnecessary gateways and middlemen

• Cryptography added as an afterthought

• Actions on behalf of others

• Backup process needed for resiliency

Centralized Database

• All participants have their own, identical

copy

• Changes are reflected in all copies, in

near real-time

• Records are stored one after the other

in a continuous ledger – audit trail

• Relative immutability

• Security enabled by encryption and a

combination of public and private keys

DLT – Decentralized Database


DLT Network Protocols

Public Distributed Ledger

• Also known as “unpermissioned”

• No single owner

• Can be accessed by anyone

• All participants possess an identical copy

• Anonymity is an attractive feature

• Requires cryptoeconomics to run ledger without central authority

• Best example: Bitcoin Blockchain

− Blockchain is a database structure which can be updated only by appending a new block of validated transactions to previous blocks of validated transactions

Private Distributed Ledger

• Also known as “permissioned”

• Identical copies of ledger only distributed to a limited number of trusted participants

• Can have one or more owners

• No cryptoeconomics required; shared benefits provide economic incentive to run ledger

• Better suited for applications requiring simplicity, speed, and transparency


DLT Attributes and Types of DLT Protocols

Main

Attributes

Shared Ledger

Technology

• Decentralized, Append-only system of record shared across business network

• Can be publicly or privately shared

Public network Public network or

private

permissioned

network

Private

permissioned

network

Private

permissioned

network

Cryptocurrency • Ensuring secure,

authenticated and

verifiable

transactions

Bitcoin;

Bitcoin Cash

Ether,

user-created

cryptocurrencies

None None

Consensus

Mechanism

• Parties must agree to network verified transactions

• Once agreed upon, transaction is irreversible

Proof-of-Work

(PoW)

Proof-of-Work

(PoW);

Proof-of-Stake

(PoS)

Pluggable;

Practical Byzantine

Fault Tolerance

(PBFT)

Special Notary

Nodes

Smart Contracts • Business terms

embedded in

transaction

database and

executed with

transactions

None Yes (Solidity,

Serpent, LLL)

Yes (ChainCode) Yes – Java Virtual

Machine (JVM)


DLT in Financial Services

DLT Has the Potential to Greatly

Improve Banking, Supply Chain, and

Other Transaction Networks

• DLT allows transactions to occur in real time

• DLT provides the opportunity to distribute and enforce business rules

Opportunities for Innovation and Growth

• By eliminating third-party intermediaries and overhead costs for exchanging assets, DLT has the potential to greatly reduce transaction fees

Cost Reduction

• Data is no longer stored in one place, alleviating risk of catastrophic loss of centralized database

• DLT transactions, contracts, and other legal documents are relatively immutable

Risk Reduction

Financial Services Use

Cases For DLT

Security

Services Capital

Markets

Trade

Finance

Card

Operation

Payments

Derivative

Trading Derivative

Post-Trade

Management

Syndicated

Loan

Cross-

Currency

Payment

KYC

Security

Settlement

Post Trade

Operation

Trade

Repository

Global

Payments

Security

Services Capital

Markets

Trade

Finance

Digital

Identity

Payments

Derivative

Trading

Derivative

Post-Trade

Management

Syndicated

Loan

Cross-

Currency

Payment

KYC and

Onboarding

Security

Settlement

Post Trade

Operation

Trade

Repository

Global

Payments

and Card

Operations

DLT

DLT Exploration for BNY Mellon Treasury Services

Initiative Strategic Objectives Details

Utility Settlement

Coin (USC)

• Develop a digital representation

of fiat currency for interbank

settlements on a distributed

ledger in a consortium setting

• Asset backed 1-1 with fiat at central banks

• Facilitate delivery versus payment, cross-border

funds transfers and other market use cases

• Phase three of project underway with 12 banks

SWIFT DLT Nostro

Reconciliation

• Test applicability of DLT for real-

time Nostro reconciliations and

intra-day liquidity management

• Validate solution for potential

integration within SWIFT gpi

• POC pilot phase with six banks

• Completed September 2017

• Prove DLT in the context of multilateral use

cases in a testing environment

Cash 360 • Leverage DLT technology to

enhance operational resiliency

and data recoverability

• Exploring DLT and big data technologies to

improve resiliency of BNY Mellon payments

infrastructure

Focus:

• Payments − including cross-border and cross-currency use cases

• Trade − including trade finance, letters of credit and supply chain financing use cases

Current Projects/Proof of Concepts (POCs)

DLT as the Backbone of a New Payments Ecosystem?

RoE: Transform the cost base of incumbents.

Mutualize the costs of non-differentiating but

essential processes.

Collateral and liquidity: Benefits through

shorter settlement cycles

Efficiency: Avoid replication of business

processes. Clean data is replicated in real time

Connectivity: Bring the buy side community

closer to the asset servicing platforms

Ownership: Collapsed hierarchy of vertically

integrated players

Security: Current databases contain raw,

unencrypted data with outer security; DLT

encrypts the data itself

Audit history: Transparent ownership allows

monitoring by regulators/supervisors

24/7 potential: Due to no central operator

Promising Aspects

Legal: Does the asset comprise the property

or account for changes in ownership?

Payment leg: How to achieve RVP/DVP

without fragmented liquidity or pre-funding?

Cost/benefit: Still not proven; transition

costs may be high

Ownership: Holdings would be “owned”

based on possession of public and private

keys – lost keys?

Governance: Much more granularity

required on role definition, software

development, standards

Interoperability: Between ledger types and

asset types

Data controls: Need to balance privacy and

transparency

Challenges Remain


• Artificial intelligence

• Machine learning

• Robotic process automation

• Internet of Things (IoT)

• Platform models

Exploring Other Emerging Technologies

Potential Opportunities for

Treasury

• Cash flow forecasting

• Fraud prevention

• Robo advising

• Invoice posting/reconciliation

• Working capital management

• Debt vs equity analysis

• IoT payment enablement

• Client service “bots” Adapted from Accenture Research, “Why AI is the Future of Growth”

Emerging AI Technologies

AI Technologies Illustrative Solutions

Virtual Agents

Identify Analytics

Cognitive Robotics

Speech Analytics

Recommendation

Systems

Data

Visualization

Sense

Comprehend

Act

Computer

Vision

Audio

Processing

Natural Language

Processing

Knowledge

Representation

Machine

Learning

Expert Systems


Agenda

• SWIFT gpi

• Real-Time Payments

• Tokenized Payments with Zelle

• Same-day ACH

• Paymode-X

Appendix - BNY Mellon Payment

Solutions


SWIFT gpi in Action

Timeliness and Deductions of Payments

• Unique End-to-end Transaction Reference (UETR) number onto each payment that tracks:

− Where the payment is in the payment lifecycle

− Payment status

− Deductions taken by each beneficiary

Pathing of Payments

• SWIFT gpi provides the names and locations of each bank along the payment path.

• Payment information can be used to determine the most efficient and cost-effective payment path.

Rising Investigations Costs and Reconciliation Breaks

• SWIFT gpi payment information will:

− Enable clients to tie the end amount received on each payment to the amount sent by the originator

− Provide needed payment details to lessen the large volumes of reconciliation breaks

Regulatory Environment

• SWIFT gpi provides payment information that follows the global regulatory trend for greater

transparency, predictability of charging and timeliness of payments.


Agenda

• SWIFT gpi



• Same-day ACH

• Paymode-X

BNY Mellon Payment Solutions


Live Planning/

Development

Domestic Real-Time Payments Set the Stage for Global Clearing

Real-Time Payments – A Global Trend

Global Standards

such as ISO 20022

formatting will provide

the foundation for

domestic real-time

payment networks to

interoperate.

This will enable select

countries to achieve a

global real-time

payments experience.


The Clearing House Real-Time Payments

Real-Time Payments provides businesses and consumers the ability to send

and receive funds immediately 24/7/365 directly from their bank account

Features

• Credit push only ($25K limit)

• Irrevocable

• USD domestic payments

• Real-time messaging

• Immediate notification and funds availability

• 24/7/365

• Directory services

• ISO 20022 formatting

Real-Time Payments in the U.S.

Request for Payment:

“You owe $XX.xx”

Credit Transfer

Remittance Advice

Acknowledgement:

“Payment Received”

Request for Information:

“Incorrect Amount”

Response

Request for Return of Funds:

“Duplicate Payment”

Response

Messaging


Real-Time Payments Benefits and Use Cases

Use Cases

Business to Consumer

• Refunds and rebates

• Emergency payroll

• Investment distributions

• Loan distributions

• Disaster relief

• Insurance claims

Business to Business

• Urgent payments

• Conditional payments

• Payments after hours

• Contingency option

Consumer to Business

• Premium payments

• Ecommerce/POS

• Investment account funding

• Utility payments

• General services

• Late/due bill pay

To/From Government

• Government distributions

• Tax payments

Person to Person

• Friends and family

• Account to account transfers

• Informal services


Agenda

• SWIFT gpi



• Same-day ACH

• Paymode-X

BNY Mellon Payment Solutions


Payment initiation (e-mail

or mobile phone #)

Validates

registration

One-time registration

Funding

received

next day,

within

minutes or

one to three

days

Payment

Confirmation Tokenized Payments

BNY Mellon Tokenized Payments with Zelle

Originate business-to-consumer (B2C) payments:

• Without needing consumer banking information

• To almost any consumer that has an account with a U.S. financial institution

• With quick notification and settlement either within minutes or one to three days

Provide quick notification and faster payments to consumer accounts

at almost any U.S. financial institution

Zelle and the Zelle related marks and logos are property

of Early Warning Services, LLC.


Insurance

Claim Payments

Workers’

Compensation

Annuities

Disability

Human Resource

Disbursements

Healthcare

Refunds

Rebates

Wellness Incentives

Test Study Participants

Corporate

Rebates

Account Refunds

Human Resource

Disbursements

Broker Dealer

Distribution Payments

Client Requested

Funds

Asset Managers

Redemption Payments to

Investors

Tokenized Payments with Zelle B2C Use Cases


Tokenized Payments with Zelle

Client Benefits

• Migrate your disbursements to electronic payments without collecting/storing consumer banking information

• Modernizes the payments process via tokenized payment solutions

• Reduces costs

• Deters fraud associated with checks and cyber security concerns

• Eliminates escheatment process/costs

• Enhances customer satisfaction

• Pay virtually any U.S. consumer using their email or mobile phone number

• Zelle currently has over 85 million consumers registered in their network

• Payment will settle electronically via either ACH or through the debit card networks

• API and file based origination services

• Daily reports providing visibility and transparency of payment status

• Email/text messaging services to facilitate sign-up of unregistered users

• Optional automatic default to check issuance for consumers who do not register

Key Attributes

25 Information Classification: Confidential 25 Information Classification: Confidential

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the State of New York, and operating in England through its branch, in London, England and registered in England and Wales with numbers FC005522 and BR000818. The Bank of New

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