21 October 2019

The Warehouse Metaphor: Continuing Education and Financial Market Infrastructures

Whether you are a seasoned professional or straight out of university, continued education is critically important for growth and success in any industry, and none more so than in financial services. This is a complex business that is forever evolving. A solid understanding of how financial markets operate is beneficial not only to those working in the industry, but also to their employers, bank customers and society as a whole.

One person who understands this is Prof. Dr. Ron Berndsen, Professor of Financial Market Infrastructure and Systemic Risk at Tilburg University. With experience in both industry and academia, Berndsen has a strong belief in the benefits of continued education. He was formally Head of the Oversight Department of De Nederlandsche Bank, and currently teaches a course on the multidisciplinary field of financial market infrastructures and payments at Tilburg.

In his course Berndsen starts with the classical notion of the three functions of money:

  • as a unit of account
  • as a store of value
  • as a medium of exchange

Often, this third function – money as a medium of exchange – is simply ignored. This can be forgiven as the exchange is largely carried out behind the scenes embodied in the underlying infrastructure that facilitates the financial world. This is the focus of Berndsen’s course, and a new textbook he has written to accompany the course – FINANCIAL MARKET INFRASTRUCTURES and PAYMENTS: Warehouse Metaphor Textbook.

These are important topics, yet few Economics or Finance students encounter them during their studies. Greater knowledge of financial infrastructure is also of use to those already working in the industry. The financial services sector employs millions of people globally (just in the UK and US there are an estimated 1.1 million and 6.3 million respectively as of 2018). As the industry continues to evolve so too does its workforce and they need continued education.

Berndsen’s Warehouse is a metaphor for the network that settles all kinds of non-barter transactions in an economy: paying for groceries in a shop (with cash or card) or the monthly rent, but also payments in bulk such as the monthly salaries paid by a major corporation to its employees. It also applies to the settlement of securities transactions done at the stock exchange, money market transactions or the settlement of derivative contracts.

The Warehouse helps to define financial infrastructure in three elements: 1) The system of rules, governance and technical infrastructure that 2) is necessary for the accurate and timely settlement of financial transactions 3) entered into throughout the economy.

The Warehouse is divided into three floors. The lower floor focuses on retail payments. Those that everyone in the economy come into contact with on a daily basis including direct debits, credit transfers, card payments (debit or credit cards), prepaid cards, and internet payments. The middle floor of the Warehouse contains large value payment systems, which includes correspondent banking. The upper floor moves out of the world of non-cash money and into the world of securities.

The Warehouse

It is a simple yet ingenious way of explaining the complex infrastructure behind money and securities movements around the world. Berndsen presented the Warehouse during a Lunch & Learn session at the recent Sibos event in London. The session was so well received that we decided to invite him to give a more in-depth lesson on the Warehouse to the new graduates who have joined SWIFT over the past year.

Staying ahead of the curve in this fast-moving business means continually developing new skills, knowledge and ideas. As in many firms, our graduate programme is an important element of our investment in people. A core part of this programme is gaining a solid understanding of how the financial services industry operates. Through the SWIFT Institute we provide training to our graduates (and more seasoned colleagues) by bringing in experts from the academic world. These unique views equip our team with the knowledge to better serve and lead our industry today, and in the future.

by Ron Berndsen