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Blockchain comes of age in treasury: Umar Farooq, J.P. Morgan

Umar Farooq, Global Head of Digital Channels, Analytics and Innovation of Treasury Services at J.P Morgan

We spoke with Umar Farooq, Global Head of Digital Channels, Analytics and Innovation of Treasury Services at J.P. Morgan during the firm’s 2018 Asia Pacific CFO and Treasurers Forum in Singapore. He explained how emerging technologies like blockchain are maturing and making a difference in treasury.

Umar Farooq

Global Head of Digital Channels, Analytics and Innovation of Treasury Services
There is so much happening in the technology space, how would you quickly sum this up for clients in transaction banking?

Corporates today are facing a rapidly evolving landscape where emerging technologies are maturing and becoming effective tools in the payments space. This is changing the expectations of their consumers who want to transact quicker and more efficiently and in turn impacting companies looking to upgrade their transaction models in order to adapt.

J.P. Morgan has been investing heavily in emerging technologies for a number of years, whether it’s artificial intelligence, data science, robotics or blockchain, and is among the first banks to bring their uses to market. This combined with our longstanding relationship with clients puts us in a unique position of providing not just cutting-edge innovation but advisory solutions as well. We are very much viewed by clients as a trusted partner when it comes to technological trends and managing disruption.

Distributed ledger has been talked about a lot over the last few years, but seems to have had limited impact on corporate treasury.

There was certainly hype around distributed ledger technology at the beginning of its development. Many were talking about how blockchain can solve everything. In reality, blockchain is a very powerful but specific type of technology that provides unique benefits, such as reconciling data between parties efficiently, creating trust across a network and in some cases reducing the need for infrastructure.

If you think about the corporate world – with the exception of the mega corporates – not many companies have the in-house expertise or potential funding to extensively invest in research and development of distributed ledger. For J.P. Morgan, we have been investing in blockchain and its applications for a while now and are one of the top players in this space. I do believe the momentum in building meaningful solutions from this technology will start from both large financial institutions as well as mega corporates. From there, as the technology develops, more parties, including the broader corporate world, will join in.

Is J.P. Morgan’s Interbank Information Network (IIN) one such project that aims to use blockchain technology to solve problems in payments?

That’s right. The vision with IIN is to address the pain points associated with cross-border payments around information exchange. To be clear, this is not directed at the payment in itself because when payments go straight through, they are extremely efficient in the current infrastructure. The problem we are trying to solve here is when payments are stopped for some reason such as a compliance check that requires banks to go through the onerous process of verifying information, often with multiple financial institutions along the payment chain.

With IIN, J.P. Morgan has developed a blockchain network where banks can access information securely without other banks knowing what’s being exchanged, ensuring privacy of the data. IIN is able to reduce the time taken to satisfy inquiries from days to minutes, enabling cross-border payments to reach beneficiaries at a much faster rate and at reduced costs.

We currently have more than 120 banks signed up for the service, the largest number of banks to join a live application of blockchain technology. We are building the network starting with our correspondent banking clients but will eventually reach out to other banks and corporates to determine interest. We are live and are developing new applications and functional services to deploy on IIN.

What about one of the more recent technology buzzwords, AI (artificial intelligence)? What will AI mean in practical terms to corporates?

In my view, AI is one of those terms that are misused and misunderstood. Many people equate AI to human intelligence but they are two very different things. I tend to use the term AI less often than I use data science or its subset, machine learning – an application of AI that more accurately describes how we are using this technology.

A big focus in the application of machine learning is fraud detection because fraud is ultimately a pattern recognition problem. If someone is sending the same amount of money every day at a certain time, you know that is normal behaviour. But how far they deviate from that behaviour could be an indicator of potential fraud. Whereas a lot of these patterns in the past had to be manually understood, coded and tracked, you now have machine learning software that can learn them.

We have also done quite a bit of work in machine learning and pattern-recognition, especially when it comes to corporates projecting their own flows and understanding how they are transacting various currencies. More recently we have rolled out a smart Virtual Assistant that uses machine learning to interact with our clients in our digital portal. We believe it is the first such assistant rolled out specifically for the large corporate clients.

I understand J.P. Morgan is investing a lot in your internal payments infrastructure; why are you doing this?

We believe very strongly that infrastructure should be highly scalable, and the marginal cost of pushing one more transaction should be extremely low. What limits us in some ways is the fact that we have multiple payment systems across the world. One of our biggest projects is to build a global payments system that standardises and connects all of these different systems together. It upgrades everything using state-of-the-art technology to set us up for the next 20 to 30 years – it is cloud-enabled and has machine learning and lots of data power built into it.

If you have a global platform that is flexible enough to handle every payment type in every country, new value-add services that are rolled out on the system will go global straight away. That is the rationale behind the platform. We believe we are the only ones investing this heavily in building a brand-new global payment system.

What advice would you give corporates managing the technology disruption today?

I think it is very important for corporates to want to understand how technology will impact their business. Technology is disrupting businesses; many that were once B-to-B are now going B-to-C or C-to-B and incumbents are having to change their business models quite dramatically as a result.

As you adopt these new technologies, it’s important to be able to tell what’s real from what’s not, or short term versus long term. There are a lot of people running around selling technologies to corporate clients, hence a need for the expertise to be able to ascertain where to engage and where not to engage.

Hiring talent to manage this is an option but cost can get in the way especially for the treasury or finance departments that typically do not have big investment budgets. This is where a bank like J.P. Morgan can help, given our expertise in both innovation and our clients’ business.