What an atomic settlements boom could mean for the payments industry

George Iddenden

As the UK continues to try and place itself as a leader in the payments industry and fintech, maintaining a degree of pace, security and efficiency must remain a priority.

With the growth of blockchain technology and fasterpayment solutions, the concept of atomic settlements is promising to usher in a new era for secure, digital payments.

Touted as the next move in the financial sector’s faster payments revolution, atomic payments have the opportunity to reduce settlement risks, increase efficiency meanwhile slashing costs.

However, like most new concepts, there are currently some significant barriers to widespread adoption across the industry.

The concept of atomic settlements relies on all parts of a transaction being completed, or none of it occurs. This process is mainly used to maintain the integrity and security of financial systems while new technology such as Faster Payments and blockchain becomes more influential.

Businessfinancing.co.uk managing director Ian Wright likens the technology to making an in-person transaction with cash.

He tells Payments Review: “Atomic settlements happen instantaneously, you could compare it to the act of paying for goods in person; in cash, the transaction happens simultaneously and reduces risk as both parties have to have their side of the trade available.”

Why is it important that the UK gets atomic settlements right?

The UK has done well to position itself as a dynamic centre of finance for the globe so far, with London fostering a new level of innovation in the fintech and cryptospace over the past decade.

Among the many groundbreaking concepts that have gained momentum in recent years, atomic settlements have quietly and persistently been reshaping the financial landscape in the UK.

Despite its tentative introduction to the UK sector paying dividends, the technology hasn’t yet exploded across the sector.

The importance in the UK leveraging the power of atomic settlements is pivotal to maintaining its reputation as a global financial hub.

Its role as an innovation centre and a hub for research in the financial industry benefits businesses worldwide.

With any new, positive unharnessed technology impacting the financial sector, the UK should be at the forefront of adoption.

Atomic settlements have the potential to transform the global financial sector by offering banks, fintech firms and other financial services institutions exchanges that are faster, more cost-effective, accessible and trustworthy.

“For instance, there have been major partnerships between firms such as Swift and Wise, and Visa and Currencycloud, all teaming up to enhance cross-border money movement and respond to demand by speeding up these payments processes. These trends highlight why digitisation is so vital to turn atomic settlements into more than just a pipe dream.”

The need for intermediaries diminishes with atomic settlements; this can help reduce transaction costs, enhance transparency and improve security in the long term.

While there is no doubt that there are challenges in the way in the forms of regulation and issues surrounding scalability, an atomic settlements boom in the UK would go a long way in building a more efficient, secure and inclusive financial system for all.

What’s the appeal?

For the majority of financial institutions, the appeal of the industry adopting atomic settlements is fairly black and white; increased financial security benefits all.

A rise in digital commerce, online banking, and a decrease in the usage of cash during the pandemic means that the demand for transactional integrity has never been higher.

Historically, inconsistent or unreliable exchanges have plagued the reputation of the financial industry, but atomic settlements offer an agreeable solution.

The technological underpinnings of the concept mean that the idea that all parts of a transaction are completed or none are at all, greatly reduces the opportunity of an unreliable transaction.

For payment companies operating in the cross-border sector, atomic settlements can help to bridge different ecosystems and increase interoperability.

The technology can also help to facilitate cross-border transactions given that they are not subject to the restrictions of traditional banking operating hours nor currency exchange rates

A lack of a need for an intermediary will help the payments sector streamline its processes and a potential for errors moving forward. Extra costs, delays and other inefficiencies can all be removed with a wider adoption of the technology across the global payments system.

The speed of transactions can also be increased greatly, outpacing traditional financial settlements which are often held back by banking hours and cross-border difficulties.

An adaptation towards a more atomic-heavy system will mean an expansion to the possibilities of real-time global commerce.

The role of blockchain technology

While blockchain technology is primarily associated with the cryptospace and digital currencies, its potential extends way beyond both.

There are three main pillars of blockchain tech that make it perfect breeding ground for atomic swaps; decentralisation, unalterableness and transparency.

When it comes to the first, blockchain operates through a network of ‘nodes’, making it difficult for the system to be manipulated by one single entity, increasing its security.

The fact the tech cannot be altered means that once an exchange has been recorded on the blockchain ledger, it cannot be deleted, this means that all participants are able to view the transactions, helping with transparency.

As it stands, traditional financial systems cannot compete with similar degrees of transparency and security.

An uptick in the usage of blockchain technology is likely to provide the solid foundations needed to progress to a more atomic-reliant system for UK payment providers.

AutoRek’s global payments manager Nick Botha says: “We’re seeing more financial services firms harness distributed ledger technology (DLTs) to make it easier to facilitate atomic settlements.

“DLT is a digital system that supports the end-to-end trade lifecycle, offering speedier processes are more accurate outcomes.

“There has been a flurry of investment in new technologies to help facilitate atomic settlements, with disruptive technologies such as blockchain, central bank digital currencies (CBDCs), and smart contracts becoming increasingly integrated into post-trade activities – helping to pave the way for real-time settlements.”

Botha believes that the uptick in partnerships between both legacy organisations and the fintech sector can help with fulfilling the potential.

He tells Payments Review: “There have been major partnerships between firms such as Swift and Wise, and Visa and Currencycloud, all teaming up to enhance cross-border money movement and respond to demand by speeding up these payments processes. These trends highlight why digitisation is so vital to turn atomic settlements into more than just a pipe dream.”

What needs to happen for growth?

In order for atomic settlements growth to reach its potential in the UK, regulatory challenges must be overcome. Industry lawmakers are likely to push back against the idea of atomic payments becoming more widespread out of fear of fraud.

Wright adds: “There are clear benefits such as improving efficiency, removing intermediaries, and in some cases reducing costs.

“However, the technology to make instant settlements is not new, but historically financial institutions have favoured having delays to transactions for good reason, including to help manage fraud and money laundering.”

Adoption would currently still have to contend with regulations including Anti-Money Laundering (AML) and Know Your Customer (KYC) requirements, holding back a rise in usage.

The UK government will need to ponder its domestic regulation of the technology before looking at any potential overlap with cross-border obligations in order to avoid any compliancy shortfalls in the future.

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Paul Horlock, chief payments officer of Santander UK told a Payments Lab session hosted by The Payments Association that the nation will need to ensure that “everything works together to create a harmonious solution for the UK market”.

Wright believes that despite the current regulatory landscape, “a boom in atomic settlements is likely on the horizon for the UK”.

The challenge, he claims, is just “how well regulation can keep up with innovation”.

He says: “Regulatory bodies need to strike a fine balance between creating effective legislation to prevent abuse of changes in the system, be flexible enough to adapt as atomic settlements become embedded, while also being careful not to build in unintended consequences to new regulations.”

“There needs to be regulatory guidance provided at government level, and they need to work closely with industry to identify the best approach and clarify how new regulations will interact with existing legislation both domestically and internationally.”

When are we likely to see the boom?

The timing of a potential atomic settlements boom in the UK is likely to be influenced by a variety of factors, meanwhile several conditions need to align for such a boom to happen.

Botha believes atomic settlements are the next step from T+1 settlements, referring to the process whereby a transaction is completed the day after trade.

“The wheels of T+1 settlements are already in motion, and many believe that atomic settlements are the next logical step in the T+1 story.

“We are seeing more adoption by established markets with instant payment infrastructure and rails. For instance, FedNow in the United States, Faster Payments in the UK, the Single Euro Payments Area (SEPA) across Europe, and the Unified Payments Interface (UPI) in India.”

One of the obstacles that the payments sector must vault is making cross-border payments more efficient to pave the way for the atomic settlement push, according to Botha.

“While atomic settlements are becoming more accepted, there is still a way to go for cross-border atomic settlements to become the benchmark. All the instant payment rails listed above are typically only focused on domestic transactions. Cross-border transactions are still on their journey to become more ‘instant’, which is holding atomic settlements back from becoming more mainstream.

“Yet the nature of settlements for cross-border transactions does not always allow for instant settlements, and traditional financial service businesses rely on processes and settlements of different schemes to help facilitate trades cross border.

“It is therefore not always possible to have instant settlement through traditional financial service companies.” are actively seeking new forms of payment that are “infused” into everyday life experiences.

The growing popularity of atomic settlements in the UK marks more than just a technological, it’s reflective of a collective determination to enhance the reliability and security of financial transactions in the UK.

As a concept, it has huge potential to shape the future of the sector and ensure that the UK continues to place itself as a leader in reliable, secure payments for the foreseeable future.

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