 Ladies and gentlemen, as you all experience in this case, computer, labyrinth, one can meet really interesting people here, and you all did, presumably. What I did is actually meeting people with all kinds of colors, hats. I see some hats here, green, red, orange, whatever. But this is another kind of hat this guy is wearing. He's wearing the color of money. Money is evaporating quite rapidly in my pockets, I experienced. But he's going to show us how to trade places. So trading places, sorry to introduce you like that, Mark. But he's used to talk about blockchain technology, bitcoin and whatever. And now he's helping banks to get an understanding about modern technology. Currently focusing on that kind of topics like block chaining. So we will explain us how international money transfers work. So in a way, Mark van Kijk is going to show us the money. Please give a welcome applause. Like the views, put it in play. Thank you Peter, and also thank you all for having me and being here. One thing you said, the money is evaporating from your wallet. A lot of people are saying it ends up in banks and they take all our money. But this talk is not about the politics and whether banks are good or bad or those things. We're going to look into the technicalities. Now before I begin, banks have departments and there are all different functions for departments. One of them is the payment department, but others are like lending, mortgages, foreign exchange. Those I'm not going to focus on. I'm only going to focus on the payment department. What's interesting to think about the different departments is that they have a different risk profile. And what I've noticed in the banks where I've been is all the payment departments are very risk averse. They rather make less money and not lose anything than make a lot of money and put a lot of risk. This may be different in different departments. I've not seen them. I've heard a lot of stories, both inside and outside banks. One of the things that is very interesting and very important when you're going to speak with people in banks is to understand the concept of a financial model. And if there is somebody here from a blockchain startup, try to learn those. It will really help you connect with people in banks. So to introduce this concept, I'm going to look at the most simple kind of payment you can do. And it is called a book transfer. And this is happening when in one bank there are two clients and one wants to send funds to another. Now I'm going to use real banks' names, most of them in the Netherlands. But the examples here I have just made up. And in this financial model you will see boxes. And every box is a financial institution. It has a name or a label. So in this case it is AVNMRO, one of the Dutch banks. And then you can have a couple of accounts. You will see there will always be at least two. Otherwise there is very little you can do. And an account looks like a T-shape. On the right side you will see whatever money is taken out of the account. We call it a debit. And on the left side whatever money is put into account. We call it a credit. So what you see here is a transfer of 500 euros. I didn't state that, but let's say euros from Alice to Bob. This is the simple one. Now there are a couple of rules in financial models. And one of them is when you sum up everything on the left side and you sum up everything on the right side within a single box it should be equal. So whenever we take 500 euros from an account we have to put in 500 euros somewhere else. We cannot invent money in this way. Let's make it a little bit more difficult. We have now two financial institutions. Bob is no longer at AVNMRO. He is now moving to ING. And we still want to transfer 500 euros. But we cannot move funds across a box in the easy way. So we need to think of a way to do this. Well one way you could do this is introduce a new account in ING system which is for AVNMRO. So AVN could hold funds at ING. And then when Alice says I want to send Bob 500 euros AVN could pay it out of its ING account to Bob. But we need to make something on the top side too so that would be a flip account where the money from Alice is going to. This is by the way not how it works exactly with AVN and ING but it is to introduce the concepts. These two accounts are now linked together and they should always mirror each other. And therefore we also call them mirror accounts. So let's rename it. On the bottom you see AVNMRO's account at ING and on the top we see a mirror account and set different banks, write it in different ways but one of the notations I've seen is you just prefix M dash. So that's what I'm going to do here. It's important it's a new rule for a financial model that mirror accounts are always mirrored. If they're not there is a discrepancy and this also sometimes happens in reality so people are going to be involved to fix the mistakes but when you're going to do it on a theoretical level whenever you have some product you will have to demonstrate that everything will work out so this rule must be satisfied. In reality as I've already said this is not how it works with AVNM and ING and there's one interesting reason banks are risk averse. So why would AVNM put money in ING? If ING goes bankrupt, AVNM will lose money they don't want to. Still we want to do it in this way and we need to send this 500 euros from Alice somewhere. Now one option you could do is introduce a bank, a different kind of bank one that everybody really trusts. And this is like a central bank for example. Now I'm going to introduce the European Central Bank Target 2 system here and Target 2 is, okay I'm going to show you a little later but it is an ITGS. Here we are moving central bank money and as a customer, as a person or a normal company you cannot hold an account at a central bank only financial institutions can do so. So here AVNM has an account at the central bank, ING has one and now we can make the story work here. We debit 500 euros from Alice's account we credit it on the mirror that AVN has in its books. We send a message to the ECB we're saying okay there is a payment from Alice to Bob and I need to transfer 500 euros from my account to ING so this is what the ECB is going to do and then the message is sent to ING hey you have incoming payment, 500 euros have been credited to your account please make sure that Bob will receive this. Now those green arrows are messages so we need some kind of interbank messaging and this is where Swift plays a role. You may have heard Swift in the news Swift has been established a long time ago in the time that we didn't work the way we work like now but for payments they have two important, very important roles. The first one is they offer a communication network and nowadays part of this is going over the internet but back in the days this wasn't the case of course and it looks a bit like this so AVN wants to send a message to the ECB and first of all you will need some address and for this we have bank identifier codes, BIGS they are eight or eleven digits long and they have a certain structure the first four digits are the bank code so in the case of ABNMRO we see at the left bottom it is ABNA then we have two digits for the country, NL and two digits for the location A2 which is Amsterdam on the right you see that ING is also in Amsterdam on the top you see the ECB, ECBF which is located here in Germany and FF is for Frankfurt now ABNMRO sends a message to Swift Swift stores the message and forwards it to ECB the ECB will acknowledge this so despite or unless how it is on the internet where we have a best effort model for messages here we actually do acknowledge everything and when a message doesn't arrive it will retransmit etc Swift will also archive the message so whenever in the future there is a dispute Swift can say ok here are all the messages that have been sent those times it has been acknowledged etc so we can reconstruct what has happened and what would then legally be the thing that should be and the second role of Swift is now we have this network and we can send messages is what do those messages look like so they create standards the message definitions and nowadays we have two types commonly used in some places MT and MX and MT is the old style which stands for message types and there are a lot of them they all have an identifier of three digits so we have for example MT103 which is a customer payment MT202 is a payment from an institution to another institution and not specifically for a client MT910 to inform another bank that his account has been debited there are a lot more then MX because we are going forward in time so we need XML is a new standard also an ISO standard actually and people who may communicate with banks may know for example PN1 and those kinds of but those are also used between banks so let's see some example MT103 is a credit transfer for a single credit transfer for customers so we are actually clients of banks are involved here is an example we have five blocks the most interesting block is block 4 it contains all the information and it is kind of like a tag value pair so for example we have the tag 32A and it states that the first six digits are the date so on 26th of May in the year 2000 we have sent US dollars with the amount of 1,101.50 this is the amount that is actually moving between banks 33B is the amount that was ordered the difference of 20 US dollars that is the charge on the bottom you see 71F there are some charges let's not go too deep into this but this states we are sending funds from here to there and this is all banks needs to figure things out then there is block 5 and it contains a message authentication code so it is not easy to change those so we can detect transmission errors and we need new names of course and we need a smaller font but for the rest this is an example so here again there is an envelope at the top for those who can read it stating this is going from this institution to this institution and there is a content which says there is one transfer in this XML file and it has some details so this is the example we were looking at but there is something about this I told before the target 2 system is called an RTGS which stands for Real Time Gross Settlement System and here we are transferring some people in banks are actually calling real money I don't know what they call the money that I deposited in my account then but this is central bank money yeah, Venus but a transaction in target 2 is quite expensive and banks normally do transactions up to hundreds or sometimes thousands of transactions per second target 2 cannot handle this if all of Europe will be transferred in this way and at the bottom you actually see the pricing options for target 2 transactions the cheapest single transaction can be transferred for 12.5 cents and I know for sure that I can send someone a euro without paying 12.5 cents so there is something else going on here what's actually happening for low value payments isn't we are going to net batches so the example I showed just before if a company sends 10 million to another company we call it a high value payment, we do it in that way what I'm going to show is low value payments it works like this, at the bottom are the four largest retail banks in the Netherlands ABNMRO, Rabobank, SNESbank and ING and during the day people are sending in payment orders so with an app or with 3 internet you're saying I want to transfer money now let's say again Alice says at ABNMRO ABN sends to a clearing house a message saying okay there is a payment and one of the clearing houses we have in Europe is EBA step 2, another one mostly in the Netherlands is Equence, they collect all those payments and they just put them on a heap and then periodically a process starts and this is the settlement cycle so now we have from all banks a list of payments they want to do, what we can now do is we can net it all together, so let's say we have payments from ABNMRO going to the other banks and they all sum up to an amount of say 800,000 euros and incoming are payments for the amount of 1 million euros now the net result is that ABN should receive 200,000 euros so there will be one transaction in target 2 just redistributing things according to all the individual payments we have seen in this cycle so EBA in this case prepares all this, sends information back to all the banks saying these are your incoming payments so now at ING knows Bob is going to be paid but ING is not yet going to pay Bob at this point in time EBA sends a message to target 2 saying this is how I want to redistribute the funds and target 2 sends to all the banks hey you have an incoming payment or you have an outgoing payment so there is a credit or a debit on your account and now ING sees I have done those transactions I have those incoming transactions and this is what happened on target 2 it will compute the same sum and see that the net amount is equal to what happens at target 2 and then they say ok, I am now very certain I have received the money, central bank money, so now I am going to pay out Bob so it looks a bit like this the slides are going to be on the website by the way so if you want to study it more in depth then you can take your time but there is one more thing I introduce in here in ABN you see a suspense account some banks know I call it a wash account or control account but I like the term suspense so banks use different names for the same thing very interesting so when Alice sends saying I want to send this 500 euros to Bob the money is taken out of her account so it's debited there and we need to put it somewhere is one of those rules so let's put it in this suspense account at this point in time Alice has no longer a claim on ABN Ambrough for this 500 euros but also ABN Ambrough knows I cannot just use those 500 euros for anything because it is in the suspense account and it's not in their own account then when the settlement cycle happened step B money is moved in the ECB target 2 system and all the banks in their turn will receive notifications and can perform the final transfers and they can either go out of a suspense account or out of the mirror account so I'm already going to the final part here but this is also a more difficult part it will take a bit of time how do things look in an international cross-currency system so let's make it very interesting first of all the world is huge and there are a lot of banks so we need a routing system a routing table back in 1987 this was the routing table and every year a new Elmenec came out where you can show these are the banks this bank has a relationship with this bank the relationships I'm going to show you I've just invented them yesterday so those are probably not the ones that are in real life but for example here it could say ABN has a dollar relationship a US dollar relationship with Citibank or with JP Morgan this bank in Brazil has this kind of relationship with this American bank and then the sending bank and at this time it was like flipping pages finding a route how you could make sure the funds ends up in the last bank beneficiary bank so let's look at an example here and what we're going to do I've now moved Bob out of Europe moved him all the way to Brazil and he's now no longer transacting in euros but he has an account in Brazilian Real Alice is still at ABN Amro and has an account in euros now Alice wants to send Bob a payment and for a payment we need a currency and for this payment let's pick US dollars and we want to send 600 US dollars so the first thing that happens is ABN Amro has to somehow decide an amount of euros to take out of Alice's account so we have an exchange rate and ABN Amro is going to choose another option could have been ABN Amro doesn't do US dollars so it's first doing a euro payment to a different bank maybe a larger bank who can then do it for an exchange and then ABN Amro upfront doesn't even know how much to debit Alice's account so this is a complex thing starting to here but let's now dive into that thing so 500 euros are taken out of Alice's account and needs to be credited to some other account now what happens in this case is ABN Amro is going to actually increase their position in euros so the euros are now going to belong are actually owned by ABN Amro and in return is going to take out decrease their US dollar position so Alice is actually selling euros to ABN Amro to buy back US dollars but those euros and US dollars need to be somewhere so you don't see here where the euros are but probably in the target 2 system it's a different account but we don't even need to touch it because in target 2 we don't need to move euros we're selling them to ABN Amro but US dollars ABN Amro cannot have an account at the Federal Reserve, the central bank in the US because they don't have a banking license in the US so they need to store it somewhere else well in this case they're going to store it in a commercial bank in the US, let's say JP Morgan as I said I just invented this relationship yesterday so JP Morgan has an USD denominated account in the name of ABN Amro and we need to make the thing match again so we need to mirror it and if you do it in that way it will all line up pretty easily taking out, so debiting the position of ABN Amro in USD, crediting the mirror account of JP Morgan and the other side the mirror must be flipped so ABN Amro is debited BankoJSefra is crediting the bankoJSefra and the other side the mirror must be flipped ABN Amro is debited, BankoJSefra is credited in US dollars, message is sent to Brazil they are debiting their mirror it's a mirror, crediting something well in this case they're at USD position so now what's going to happen here is USD is sold to BankoJSefra and both are at Brazilian Rials and this happens by Bob actually all hidden in the process so 2000 Brazilian Rials are debited from the position in the BRL position and credited to Bob and now Bob has received the funds this may seem pretty difficult so again the slides are online if you want to walk through the process to really understand it but there are a couple of things that are interesting here in ABN Amro and actually everywhere in Europe we have now iBans and they're all standardized and automated and there is a checksum in there so a lot of mistakes can be prevented upfront in the US and in Brazil we have different systems so well there is some manual thing in here and if the beneficiary account number is wrong money may be moved from in JP Morgan from ABN to BankoJSefra and in the end they see i don't know where to put this money so a message goes back which is also an empty message saying okay i don't know what to do with this money now it goes back to ABN Amro and a manual process is started manual process takes time and investigation takes time and it costs a lot for banks or one of the reasons why international payments are expensive a lot of problem errors go on in there those must be corrected and a bank can choose to either charge those customers that make the mistakes but not always you can really identify them so another thing is well we know the amount of mistakes we make we have a team it costs us this much let's spread it out over all the international payments and getting money from Europe to Brazil is like 15 euros and then it kind of works out and that's what most banks are then doing and another thing here is ABN Amro is in a Euro time zone Europe's time zone, JP Morgan is in a different time zone BankoJSefra is in a different time zone more aligned with JP Morgan but sometimes it therefore when a message is sent to another bank and their central bank is not open or they themselves are not open it just sits there waiting for the sun going in their direction so this is one of the reasons why it takes time other things is for example now there is a US bank in the middle of a payment from a Europe client to a Brazilian client and the US banks have very stringent controls here they must not be in the path of any terrorist money for example so JP Morgan may decide for some reason to delay this this transaction so they can figure out whether Bob is actually a good customer so there are a lot of things that are adding in delays and in costs in the way we do banking right now and this is my most complex example if you want to see more complex examples just come by afterwards I don't have them here but maybe we can send them later on sometimes it's fun to look at but think again banks are risk-averse when it goes to the payment departments thank you very much thank you Mark thank you for the world without blockchain I hope we're moving fast are there questions here in this audience yes here sir you're the first one take your chance thank you for your talk my question is why does AB&MRO do the okay why does AB&MRO do this hook via an American bank I think AB&MRO is not that small of a bank and Brazil is not that small of a country so why doesn't AB&MRO does open account in a Brazilian commercial bank and do with them what they did with Morgan but avoiding the dollars it's a very good question and the real answer here is I invented those relationships but to go into a little bit more subtlety and for a bank to keep this relationship open it costs them money so it depends a lot on how much transactions they're going to be with Brazil for example it costs them money for a couple of reasons and one of them is in fact they don't like keeping money in another commercial bank so during the year they do continuous checks on how is your liquidity position how is your solvency position and maybe we want to lower the amount of money we keep in your bank or maybe we accept a higher amount so there's a lot of work going on in there in the past and you saw that there were a lot more relationships and what you see now in banks especially since in Europe we are now one single region you see banks like to decrease the amount of relationships they have and as a result concentrate money in a couple of large banks thank you I was wondering if you looked at how it works for example to move other kinds of assets like stocks is it a similar process or is it completely different because that's also a very popular application of blockchains the answer is no I haven't and the reason is the most things I'm involved with involved in with banks right now is with payments so for the others I do know a bit what is going on but not really in depth we have a question there from Out of Space how does this all work with people or credit cards the payments there are usually instant it is a very good question and actually the payment is not instant what is instant is the promise that you will be paid and this now I have I know one thing they call it cards and it's a separate department and it works completely different but around a bit what I have understood about credit cards there is some point in time there are still obligations so one of the questions I haven't yet an answer for myself for example if I have a credit card at ING and I want to pay someone in the US what happens when ING goes bankrupt before the money actually goes out that's one of the questions I hoped I could have answered today but not yet maybe next year okay I have a question here this gentleman why don't they just use the Central Bank like the European Central Bank is having a connection with the American Central Bank so they use those for exchange that's also a good question in general the European Central Bank has a couple of roles in society one of them is like two and another one is having oversight over the euro area but they have nothing to do with US dollars and whenever you touch that you are actually importing new risks that you don't like and the central banks we want to trust them and they should therefore be a little trustworthy actually and not do anything that may be a risk okay this gentleman here concerning the security with SWIFT transfers there have been recently some kind of virtual haste for example I think in Bangladesh a couple of months ago could you elaborate a bit on how they how it works actually and how they try to fix it security only a little bit he has NDAs to sign you know he's working in the financial sector bunches of NDAs but another thing a lot of people don't know everything actually nobody knows everything in this sector so you have to network your way to the knowledge you want to know and if you need the knowledge for your work you have a reason to do so and otherwise you do it in your spare time or whatever anyway what happened with Bangladesh and whatever I'm not sure about security in general the messages or some messages are signed I found on the message type and I found they have a really interesting choice why some messages are signed I still don't know the reason for example the MT103 is signed which I believe is a good thing but some banks for example choose to only credit the beneficiary account when they receive the MT103 and an MT910 saying we have received funds in another commercial bank for example so they wait for two messages one of them that can be faked and I was like then why wait for this message they don't know the answer the people I could ask don't know the answer it's a misty mystical financial world filled up with trust a bit but yeah I don't know if I trust this guy I wouldn't by the way why can't the international money transfer system be better automated to make the costs less well actually that's one of the reasons why banks are looking for blockchain they also see this as expensive and error prone and blockchain is this magical thing right so yes they are investigating and that's all I can say today okay this gentleman here is queuing since a long time so you said for transfer between two banks in different time zones take time because sometimes waiting for an acknowledgement till the sun come up or something why is this process not automated so sending message hacking back and that's it it actually depends on the banks that are involved so for example he wants to be a 24-7 bank but they depend on other banks so for example there are also banks that haven't automated a lot so if one of those is in the path by definition it takes time but there are also other delay factors than only time zone or opening hours of banks gentlemen there in the back please a question about your personal experience why do banks always say hey we want blockchains when it seems like they actually only want more international standardization or do you think they want to subword the central authorities with some peer-to-peer technology okay I cannot talk for all banks why they want something but what I have seen is they're interested in the technology there is a lot of talk and hype about it in the media and in conferences and everywhere so they're like okay this is something important also one which I find very interesting a lot of billions of dollars have been invested in blockchain startups so it must be important so let's also invest some more follow the money was the message isn't it but okay besides that reasoning most banks I'm involved with are actually trying to understand the technology and a lot of ideas have already been scraped they say okay blockchain is not a fit in here so they're actually doing a real job in understanding this thing this you have a question how can a bank like Revolut let their customers get money all over the world in every currency for free sorry how can there's a new bank called Revolut and you can have a credit card from them I can get money all over the world in every currency for free so how is that possible quite probably you get it for free but the bank is paying for it or their investors yeah that's true so for example I in the Netherlands you have a payment system called Ideal and you pay for a transaction and it's mostly used for internet payments but lately banks are building apps so you can send an ideal link to someone else as a consumer and they don't charge for it but banks still have to pay the other banks they're paying for it because they want the publicity or they want a certain image or whatever I also think about you can get money out of an ATM for free but those very secure devices which has a lot of manpower involved they cost money so you as a customer are just a cost center not a profit center for a bank most things customers retail customers do at banks don't make them real money or profits at least banks are a little bit providing umbrellas when the sun is shining of course moment first raindrop falls there goes your umbrella that's my experience please sir so you said that a lot of costs happen when transaction fails right when this error message is sent back and it's manually cleared and I'm wondering I mean these could be solved with modern communication protocols and our banks working on a system to anticipate the result of sending this old and send an empty message when they know that it will fail yeah a little bit yes but one of the things here is also standardization as long as everybody talks in the same for example format of account numbers and the things are easier and that's one of the things that has happening is happening in Europe standardized everything before SEPA and IBAN the Netherlands had a different system than Belgium and the different one than in Luxembourg and all the countries had their own thing so that's actually why SEPA is there to standardize what's going on in this region now one of the parts of SEPA is for example IBAN and other countries are now looking into can we also incorporate IBAN just to lower the amount of errors that we have because of this region and of course there are more reasons but standardization is a very important thing before you can actually automate it Sir here at the right side you have a question or you were just waiting for the bus okay the international transfers is there a protocol, a standardized protocol which each bank must follow and who develops it and can I open a bank and say oh no I have my own protocol or a region of China maybe says no we think we can do it better would be very interesting to try but the standards are as long the most important thing is that two banks that have a relationship also have a standard now one of the most nice things is that you can buy standard software for banks if you want to start your own bank so some protocols have been implemented like the MT defined by Swift so that becomes a standard in that way so it's not a standard because of law but it's a standard because it makes things easier to do things the same way you had that experience who told me about considering to start a bank then, wasn't it? so yes if you want to talk more about this to the after this show we have some other questions you've been talking about irregularities in this let's call it money routing system I guess then and you've been saying that manual work is being involved in resolving these issues do you know anything about the social relationships between bank personal around the globe or how are these things being resolved are there people involved who know each other how do they know each other I actually have no idea I have seen an example of a message where one bank sends to another bank and it doesn't say names of people it's just like regarding empty message with this identifier if this is going on so you could automate it you could say but then the banks have to trust each other vice versa about the claims that are being made right maybe not on this level maybe not on this level but yes when there is a relationship you need to trust each other specifically in one direction because one bank has money in the other the other way around to trust could be a little less but whenever you're sending a message saying this is going wrong that message is most normally signed and then whatever is in the message is therefore legally binding there is also by the way a non-signed chat message and this is not used for this functionality so whenever something goes wrong there then you first have to set up a relationship and that's also difficult so therefore sometimes you see the message flowing back in the same route but a different direction okay I've personally I have one last question for you there can we talk about the revolving door principle as well in the banking slash bit corning industry certain levels like government in America is happening currently for instance to the revolving door where people first start working at financial sector and then in the governmental sector in this case bit corning and banking it's a good question and I know a lot of people who works in banks or worked in banks and are getting interested in bitcoin or blockchain I know very little amount of people that go in the other right and I even don't know one who is really doing a revolving door kind of action okay so this is the first one voila thank you thank you