Paul Margarites is an Executive Director at J.P. Morgan Chase who founded and led the Treasury Ignition program and possesses over 12 years of experience driving digital transformation at global investment banks and management consulting firms. In this week’s episode of the If I Ran the Bank podcast, Clayton and Paul discuss data security, blockchain in financial services, and the power of the information exchange.
Don’t miss this episode with Paul Margarites, listen below.
I'm now in the blockchain world and part of J.P. Morgan's onyx team, which is our new business line under wholesale payments where we're taking a number of initiatives across our blockchain assets and changing the future of banking.
What's really interesting and what excited me about the role and the opportunity here at J.P. Morgan is the fact our approach early on was really to say, "Look. There's kind of two elements here, right? There's the crypto element and the value exchange. For now, let's put that aside."
Blockchain is an underlying technology that when built and deployed in the right way, has a lot of interesting use cases, particularly in the financial services sector. These use cases could really change the way we do a lot of different banking activities, particularly around payments.
There are two elements to a payment. There's the value exchange, which again, we could put to the side, but there's also the information exchange. The information exchange across banks, across multiple hops, across languages, currencies and countries, is hard. That's where technology and the ability to have a secure information network, where banks can share information in a peer-to-peer manner, can take away all those challenges.
That's what was really interesting because we were able to say let's look at the underlying technology first. Let's focus on the challenges in the industry and in the information exchange, and then, which we're seeing now, maybe we can layer the value exchange on top of that.
We had a conversation a few episodes ago on this show about the nature of correspondent banking and how hard that is, and how from a regulatory and compliance perspective, it is probably just getting harder day by day. It's not even a technology problem in some ways. It's about the network and how the network interlinks.
Is that what you're trying to do? Use what the blockchain is good at and stitch together the network of global correspondent banks, the J.P. Morgan kind of banks, into something that could then exchange data in a very modern way?
You got it, there's the pitch. That's exactly how we approach the problem.
J.P. Morgan's correspondent banking network is tremendous. We work with all the different institutions out there and around moving money across borders. We saw the different regulatory regimes present different challenges and different banks using different types of data assets present challenges. Ultimately, it's the end customer that is hurt in the process because you're trying to send money from one place to another, but that could be delayed due to a single problem within that corresponding network. A number of issues could pop up along the way — the money could reach a fraudulent account.
The tech allows us to agree to who's going to be on this network; they're going to be a financial institution or a large corporate. We also agreed that for data security purposes, the information shared cannot be viewed but only by those asking for and receiving the information.
Once we had that structure, we said, "What would be our approach to that network?" And what we came up with is that, yes, it's J.P. Morgan's link network, but it's not about J.P. Morgan. It's about the network participants. It's about deploying applications and capabilities across that network that allow the industry to move forward — that allows all the participants and their clients to benefit. That's really been our approach in terms of how we've established that network and how we're trying to deploy capabilities on that.
It’s interesting when people complain about international payments or corresponding banks being broken because it’s actually amazing that it works at all. You can wire money to the Philippines without having any concept of how hard it is underneath.
What are those issues that happen end to end, to get a payment cross-currency into another country?
Let's say we're talking to a corporate treasury team in the United States, we know their processes, we've spoken with those clients, they get an invoice. That invoice might have new banking details to pay a vendor that's in Indonesia.
Is it the vendor that actually sent that invoice? Did they get spoofed via email? Did they actually get it from that vendor? Aside from picking up the phone and calling that vendor, there’s no other way of really knowing. What we'll find is that they'll enter that information and generate the payment, the payment will go through the various hops it has to go through in the correspondent banking network.
What the institution and treasury team originating and initiating the payment doesn't know are the different rules that exist in the countries that those correspondent banking banks reside, or even the beneficiary accounts reside. Indonesia is a great example because there's a local requirement that the name that the payment is going to fully matches the name on the account. Does every treasury team know that? Does everyone trying to make that payment Indonesia know that? Probably not.
Is there a system or service within the financial institution previously that would exist, that would allow them to check that? No. That's why the network is so important. That's why those pain points exist across that correspondent banking network. There are all these rules.
There's different kind of technology assets and there's no single way to come together to say, "We can completely validate that payment, we completely take out the risk of a return”, where one of the correspondent banks may stop the payment, we can dramatically reduce the risk of fraud.
Those are the kind of hiccups that exist and that's why the information exchange can be so powerful.
There's also this idea in these sort of correspondent type payments of, an RFI or request for information, which is this payment may be well-formed, but along the way, everybody that's touching it is nervous for whatever compliance burden they are bearing. That's often where these payments get held up — going back through the chain to clarify these extra points of information, which it sounds like could be automated in a perfect world.
It's a giant game of telephone. Depending on how many legs in the correspondent banking network that RFI occurred, it is going to initiate where that request comes from. And then it's going to go back through the network, and that takes time. You have to reach out, email or go through a secure platform to request from the first institution behind you and the network. That institution needs to go behind them. That doesn't add seconds to the transaction or information exchange. That adds hours, that adds days; in some cases, that adds weeks.
On the link network, that was the actually first kind of application that we rolled out, it was called Resolve. Resolve was around sanctions inquiry. An RFI, a request for additional information would come up around sanctions, and our correspondent banking network is kind of that game of telephone I mentioned. By using blockchain and by using a network like the link network, what we're able to do is deploy an application that facilitates exchanging information.
You could go directly to the requesting institution, directly to the institution initiating the payment and request that information — that request can be connected to their back-office systems, so that in near real-time and via API, they could provide that information.
The institution asking me for information could add that to their investigation and can clear it off in a much quicker and seamless matter, and that payment can continue on its way rather than being held up for, what could end up being weeks.
How do you see this coinciding with the pre-existing kind of industry utilities that do some of this?
What's interesting is the applications we're building. They're new and unique, not only in their data or the ability to transfer data, but also in the commercial models that exist for financial institutions.
What we've built is a model whereby institutions that are providing information through our applications are actually going to receive a revenue stream for that information. We’re helping our mutual clients reduce friction in their payments process. But also, those institutions that are providing that information are going to also receive that revenue. That's a unique model across the world.
Most of the models out there are really focused on paying in for the ability and providing your data, but don't really offer that channel of commercializing your assets. Now, what's super interesting beyond that is that our network and our application aren’t necessarily competing with other initiatives out there. In fact, it's actually quite complementary to those initiatives.
You're going to work on those initiatives, you're going to share that information. If there are pre-validation capabilities through some of those global bodies, you're going to do that. But here's this opportunity to use the data assets you've built for those capabilities to also commercialize those data assets, also receive a revenue share, and also potentially resell that capability to your clients, if you so choose.
That's not something that you would ever really hear a financial institution say, which is the idea that they sit on this asset of knowing about these companies, and who can do what and what's allowed or not. It's kind of assumed to be a bad word, that we don't like to hear about people using data and monetizing it, but it just seems obvious to me as to what the business banks are going to be in in the future.
What's interesting is that there's a big effort, and rightfully so, around the client and user experience. And part of that isn't just providing banking services that we provided and will continue to provide; part of that is providing guidance, advice, and decision making tools — the best of which are those that are driven by data.
We see certain insights across our payment network, and to the extent that any financial institution is able to take those insights, rationalize, contextualize, and provide them back to the client is honestly an incredibly powerful client experience. One that could be commercialized quite honestly.
As a wholesale payments business, we always see that consumer banking experience — what we experience in our consumer banking lives — is really driving what we want in our wholesale banking experience. The data that the firm has then rationalizes for me and provides insights that allow me to make better decisions in my life, and it's the exact same concept from a wholesale banking perspective. We're trying to provide our customers with the data insights that they need to make a decision. That's effectively the future of banking. That's the value-added service that every financial institution out there is talking about.
How do you see the operating model for the network evolving over time? Will it always be a proprietary J.P. Morgan thing or will other banks take a bigger role around the world to build it out collectively?
That's the big question. This is a concept right now that we are incubating within J.P. Morgan. We’re building it out and making sure we're putting the appropriate amount of investment in it. We’re looking to our banking partners and various models where they can really participate and get the ROI out of that investment that they would like. One model that's very clear is that we are building a third party developer program where institutions will be able to create their own applications. They'll be able to manage their own commercial model of the application, and scale those as they see fit.
The main message really is that J.P. Morgan built this network, but it's not about J.P. Morgan. It's about the value that all the institutions on the network derive for themselves, derive for the industry, and ways in which we can make sure that that is always the case.
It seems we're in a subsequent Golden Age, maybe on the asset pricing on the crypto side, but what else do you think is out there that should be built, or is being built, that are valid enterprise-financial-type applications on the blockchain that are undistributed?
In a future state, if you have the information exchange and you have the value exchange, and if you're able to bring them together, that's really interesting. So, if you're able to bring the various coins that other financial institutions, as well as J.P. Morgan, are working on (distributed ledger technology together with the information exchange), you're effectively just able to instantaneously or near instantaneously move the money and move the information in a very seamless way and just dramatically change payments.
With data sharing more broadly, how do you see this evolving with banks within the next five to ten years? Particularly in playing a role with helping who's accessing your data or safely sharing it with the people that you want them to and when you want them to.
I think that's one of the critical pillars to having something like this be successful because you need to ensure that the appropriate level of controls, data security, and privacy is layered into that system. It's all about sharing the information.
When it comes to a link, for instance, it's all about sharing information for the context of a payment. I want to make sure that a payment is processed, I'm not sharing information about an account to share information or just for the purposes of knowing them or making sure I can give them my service. Everything has to do with ensuring the right controls and protections are in place to prevent that from happening. It's about taking that information to say, will this payment be successful? If it's not going to be successful, what do I need to do? If it will be successful, great — I have everything right and I don't have to worry about anything.