Tuesday, October 31, 2006

A new 'pan-European exchange' - Is it what the regulators ordered?

Hot off the presses. A rival pan-European exchange has emerged challenging the dominance of national exchanges in securities trading in a post-MiFID world.

As the November 2007 deadline for MiFID implementation looms, it appears that investment firms are tired of letting the exchanges have it all their own way (in the UK investment firms and alternative trading venues are required to report all trades, including off-exchange trades to the London Stock Exchange, a privilege they pay for handsomely.

Some market players, tired of waiting for European exchanges to put aside their national and political differences, have taken the matter into their own hands by establishing a rival platform that will directly compete with Europe's national exchanges.

“MiFID is intended to promote cost effective pan-European trading, not trading in isolated national exchanges," says Bob Fuller, the newly appointed CEO of Equiduct, which aims to provide investment banks and smaller exchanges with a single point of connectivity for trading equities cross-border. Fuller, as you may know, has been outspoken about the market implications of MiFID as a former director of IT Strategy at Dresdner Kleinwort and former co-chair of the MiFID Joint Working Group IT Sub Group.

It appears Fuller and others are adamant that post-MiFID, trading volumes will not automatically flow to the existing national exchanges. In a clear riposte to the major European exchanges currently mired in ongoing consolidation negotiations, Fuller says Equiduct's objective is to achieve a consolidated Europe by connecting not buying everything.

Equiduct bills itself as a truly "pan-European exchange", the idea being that instead of having to connect to all 28 European exchanges or different exchanges to trade Polish, Czech and French securities, brokers can use Equiduct as a single point of connectivity. Equiduct will initially focus on trading 'liquid' shares as defined by the European Commission.

In the run-up to MiFID, there was talk of the major investment firms, particularly those that intended to be 'systematic internalisers' clubbing together to build alternative trading platforms or execution venues, which is pretty much what has happened in the US market.

There is still a chance this may happen. As Richard Balarkas, co-chair of the Global Steering Committee for the FIX Protocol, and managing director, head of Equity Trading Services, Credit Suisse, points out, MiFID is likely to result in liquidity fragmentation in Europe, similar to what has happened in the US.

However, Equiduct is pinning its hopes on the fact that not all investment firms or multilateral trading venues will want to bear the costs of MiFID compliance themselves and will therefore use its platform to provide services such as pre- and post-trade transparency or best execution. In other words, good old 'white labelling'.

Due to go live in the second quarter next year, subject to regulatory approval and customer prepardness, Equiduct's objective is to not only steal the limelight from Europe's stock exchanges, which let's face it, are fully immersed in national and shareholder politics. According to Equiduct, trading equities post-MiFID is all about low-cost and low-latency (less than 10 millisecond turnaround time for accessing pools of liquidity, to be exact).

Interestingly, the platform Equiduct is using to provide pre- and post-trade transparency and best execution for liquid European equities is an upgraded version of the exchange technology platform that was used by NASDAQ Deutschland and NASDAQ Europe, formerly EASDAQ, the troubled pan-European technology exchange which met its demise. Equiduct no doubt will be hoping that it has better success than EASDAQ or NASDAQ Europe in attracting much needed liquidity.

Tuesday, October 24, 2006

A lot of fuss about nothing?

For all you bankers out there losing sleep at night over whether your anti-money laundering (AML) measures comply with regulatory requirements, according to a noteworthy academic, Dr Jackie Harvey, a principal lecturer in Accounting and Financial Management at Newcastle Business School, Northumbria University in the UK, who has been researching the costs and benefits of AML regulatory compliance since 2001, it appears the threat of AML has been somewhat overstated.

Interestingly, according to the PR blurb accompanying the publication of Dr Harvey's research, as long as compliance officers are personally liable under AML legislation, they "will continue to report everything to cover their backs," which makes it even more difficult to assess the real threat of AML, as opposed to the perceived threat.

According to Harvey, there is "absolutely no evidence" to back up the data on the volume of money being laundered – but it suits the authorities to keep it as high as possible, she suggests. Surely not, the authorities talking up the threat of AML? Is it a classic example of banks being held to ransom by the regulators applying pressure on financial service providers to address a threat, which is non-existent or at best, a relatively low-scale threat?

The over-inflated importance given to AML monitoring software smacks of President George Bush and his fight against terror, which we have all seen takes on strange and varied forms; are the banks essentially doing the work of the CIA and other intelligence agencies in Bush's never ending 'war against terror'?

Well if Bush can get Iraq wrong; as we all know there were no weapons of mass destruction; it is not too much of a stretch of the imagination to suggest that perhaps he and the authors of the Patriot Act, which first thrust AML into the spotlight, may have also got it wrong in terms of overstating the threat of money laundering?

You may laugh, but having spoken with a software vendor recently who specialised in AML, I am convinced that AML monitoring is a lot of work and expense for what? Financial service firms have grappled with the high fail rates of AML monitoring software, which often throws up names that are similar to those on OFAC wanted lists, but are not the actual person wanted.

Dr Harvey more or less says as much by concluding from her research that, regulators unable to quantify the effectiveness of legislation in deterring money laundering, have adopted what she terms a 'second best' approach, with emphasis on the demonstration of compliance with systems and procedures (the 'tick-box' culture).

She goes on to say that the benefits of AML (taken from Government impact assessment reports of legislation) are non quantifiable and generally 'fudged'. Meanwhile the financial services sector is bearing the brunt of the cost of compliance with AML, whilst reaping very little if at all any quantifiable benefit.

Thursday, October 19, 2006

Stalking the stalkers

When you start a blog you get the unusually persistent PR representatives that see it as an opportunity to plug the companies they are working for. As if we are not inundated enough with meaningless press releases about version 5.0 of the latest banking integration application, along comes a PR person (or persons) that have a part-time career in telephone stalking.

Particularly since I invested in caller ID I have managed to identify a regular group of PR stalkers that often ring six times a day at 15 to 30 minute intervals and leave no message.

When pressed as to why they exhibit such stalking tendencies, one PR person said to me that they don't leave messages because journalists never return calls (well they cannot return a call if you don't leave a message, and if they don't return the call, wouldn't that suggest to any sane person that the journalist is not interested)?

Some have also suggested that a number of PR companies encourage their employees to exhibit stalking behaviour until it gets a result; not quite sure what they class as a result though as stalking more often than not is likely to result in a rebuff. Particularly around conference time, the stalking behaviour of PR executives reaches fever pitch.

So for all you banks and IT companies out there trying to get your message across, can I suggest that employing PR executives that moonlight as stalkers is not the way forward. Not only does it have a whiff of desperation about it, but more often than not, it is likely to incur the wrath of said journalist, who instead of listening to your corporate message across is more likely to say f... off!

Tuesday, October 17, 2006

Euroclear ups the ante over Target2 for Securities

Last week at the Sibos conference in Sydney, Australia, Jean-Michel Godeffroy, director general, payment systems, the European Central Bank (ECB) was seen loitering nervously near the exhibition stand of international central securities depositary, Euroclear.

Apparently a member of the Euroclear staff asked him if he was OK, to which Mr Godeffroy replied, 'I have an appointment with Pierre Francotte,' Euroclear's CEO.

And the relevance of this you may ask, well, I am sure ECB staff do not make a habit of loitering near the exhibition stands of financial service providers unless they have something serious to discuss.

Godeffroy was later ushered into a meeting room where, without the benefit of being a fly on the wall, the conversation perhaps went something like this (although it would have been in French and Belgian and perhaps peppered with more expletives);

Francotte: Bonjour Jean-Michel

Godeffroy: Bonjour Pierre

Polite conservation ensues for a few minutes

Francotte (in a polite but raised voice) to Godeffroy: What is the ECB trying to achieve with its Target2 for Securities Jean-Michel. Surely, this can only lead to further market fragmentation within Europe.

Euroclear is less than pleased with the ECB's plans to use Target2, the ECB's payment system for high value payments in euro, as the predominant system for DVP settlement in euro in central bank money for equities, corporate and government fixed income transactions.

Currently CSDs use national payment systems to settle the payment leg of securities transactions or in the case of Euroclear, Euroclear Bank performs that function. However, according to Euroclear, the ECB's Target2 for Securities or T2S proposal means that national CSDs would no longer be able to settle in central bank money; that would be "outsourced" to T2S; they would be required to settle in commercial bank money only.

T2S is a classic example of how regulators and central bankers tend to work. Come up with an idea, which in theory may sound great (after all Europe's clearing and settlement infrastructure is fragmented, why not try to force consolidation by using Target2), but do not consult the market first before you put it out there.

Consolidation of Europe's fragmented clearing and settlement infrastructure is already a political 'hot potato' and securities depositories like Euroclear obviously has its own nest to feather in terms of its plans to consolidate five settlement platforms into its Single Settlement Engine. Euroclear's argument is that they and the market in general are already making significant inroads by standardising securities settlement platforms and market rules governing corporate actions. Then along comes the ECB with plans of its own. Is it a recipe for disaster in terms of creating more market fragmentation?

T2S, Euroclear argues, could damage the work that is already being done by market participants to harmonise Europe's clearing and settlement infrastructure. "There is a risk that commitment to [harmonisation] and commitment to invest in change will fall away if the markets see a risk of double migration in the T2S proposal," Euroclear states.

Whilst the ECB may be trying to encourage further harmonisation of Europe's disparate clearing and settlement infrastructure, the question is to what extent is it willing to go to achieve this? Will T2S transform the ECB into "a full CSD" which would replace eurozone CSDs altogether?

Euroclear has called for further clarification of the ECB's T2S proposal, particularly in terms of whether it would generate additional cost, complexity and inefficiency and whether migration to T2S would be mandatory or voluntary; the latter it says raises doubts as to whether T2S would gain the critical mass required to warrant investment by the CSDs.

Thursday, October 12, 2006

Train wreck ahead

One of the things analysts are good for is the colourful language they use to get us all excited about a subject. Believe you me, sometimes they are stretching it. I find it difficult to get excited about derivatives at the best of times, but at today's closing session of the Sibos conference in Sydney, Karen Cone, CEO of TowerGroup certainly aroused my fast waning interest in a video appearance where she compared derivatives to a "train wreck waiting to happen."

It wasn't that long ago that derivatives were the poor cousins of the securities world. Everybody else was so focused on equities and fixed income. Today credit derivatives volumes are growing faster than the economies of China and India combined, with business in credit default swaps growing by 52% in the first six months of this year to $26 trillion, according to ISDA.

But with "speculative fiascoes" such as those embodied by Enron and LTCM still fresh in the minds of regulators and those ever-cautious bankers that equate some aspects of the derivatives business with gambling, it seems the SWIFT banking community are getting a tad nervous.

In addition to "train wreck" other colourful adjectives that were used to pepper the debate about derivatives in the closing plenary included "a big mess," which was Jacques-Philippe Marson, president and CEO, BNP Paribas Securities Service's reference to certain aspects of the credit derivatives markets, which he said were largely dominated by hedge funds that were less concerned about the middle and back office (in other words automation and settlement risk).

SWIFT has established an Alternative Investment Advisory Group to look at risk and automation issues in areas such as derivatives.

The Depository Trust and Clearing Corporation in the US has announced plans to create a central information warehouse and support infrastructure for automating over-the-counter derivatives.

So are derivatives a train wreck waiting to happen or is the level of risk being over hyped by analysts? Post a comment by clicking on the link below.

Should you care about BICs and IBANs?

Okay it is the end of the day here in Australia and I am really flagging, so I am going to keep it short and sweet. In another demonstration of the banking industry's predilection for presuming that everybody knows it is talking about, the message about including BICs (Bank Identifier Codes) and IBANs(International Bank Account Numbers) on cross-border payments does not appear to have sunk in.

According to Jonathan Williams of Eiger Systems, which provides software for managing BICs and IBANs, the banks presumed that everybody knew about BICs and IBANs when they were first mentioned as a means of reducing the cost of cross-border payments in euro as part of the European Commission's 2001 Cross-border Payments Directive.

From 1 January this year, BICs and IBANs were made mandatory for European cross-border euro credit transfers, but according to one payments vendor, there are few payments within Europe that carry the requisite details, and therefore are not processed as cheaply as a domestic payment.

The upshot of all this however is that since 2003 when the Cross-Border Payments Directive took effect, banks have been charging extra to process payments that do not contain the correct BIC and IBAN details. "There are examples of companies being penalised £20 per transaction," says Williams.

However, he gives the Royal Bank of Scotland a pat on the back for being explicit about the charges it will levy on customers that don't include BICs and IBANs. Meanwhile, in the US it seems that companies there and banks doing business with Europe, do not give a monkeys about BICs and IBANs. "There is a lot of misunderstanding in the US about IBANs," says Williams. Quite frankly neither do corporates it would seem with one French corporate stating it had yet to be convinced of the business case and cost of implementing them.

Given the pressure on banks' revenue streams from competition and regulation, it would appear that not informing their customers adequately about BICs and IBANs is one sure way of making up dwindling revenues, until the banks can think of something better, like adding value.

The missing piece in SunGard's cash management puzzle

I didn't see this one coming, but then I am not psychic and the pace of consolidation occurring amongst software vendors these days is so frantic, that it is resulting in some interesting bedfellows.

The latest one is the SunGard and Trax merger. SunGard announced today that it had acquired Belgium-based financial messaging and payment processing software provider,Trax. Trax helps banks and corporates optimise their payment flows by facilitating connectivity between banks and corporates and transformation capabilities when it comes to financial messaging.

Last year, SunGard made a serious foray into the cash management space with its acquisition of GetPaid, which covers the order-to-cash cycle. The Trax acquisition, which will be incorporated within SunGard's AvantGard treasury management business, is the icing on the cake for the vendor in terms of being able to provide cash management workflow tools throughout the enterprise and higher levels of connectivity. "[Trax] gives us greater flexibility and the connectivity, which goes beyond what we could have done with our payment hub," says an AvantGard spokesman.

The two vendors had worked together on a number of cash management projects and the spokesman said the acquisition felt like a "natural fit", unlike those other kind of acquisitions which are more of a defensive play.

The banana of financial services

By now you are probably thinking I have totally lost my mind. First it was the hamburger and spring roll analogy earlier in the week to explain the concept of relationship based pricing, the spring roll representing a more integrated view of the customer's total value to the business and the hamburger of course, constituting a less integrated approach. (Please note all food analogies are not my own creation but that of vendors and analysts who spend a lot of time thinking about these things.)

Now it seems the banana's turn (which may be quite apt as Australia is currently facing a banana shortage thanks to last year's floods). According to Ralph Silva, research director, TowerGroup, most consumers of financial services (80%) would like to receive all of their financial services from one company, but only 12% believe that is currently possible.

It's this "financial supermarket" concept, which draws inevitable comparisons with Tesco's supermarket franchise in the UK. Silva believes that customers want the same level of consistency in their financial services as they have in their supermarket experience; "If you pick up a banana you know it is a Tesco banana," he says. Apparently, consumers want the same thing from their banks; consistency that is, not bananas.

Not as easy as it sounds though, after all haven't banks invested millions in CRM or something masquerading as CRM only to find it doesn't work. Silva says this is because banks are not very good at capturing the relevant customer information within their financial data.

We all know that banks have a lot of information on us, but they haven't really been able to leverage it successful to the extent say that an Amazon.com has by relaying our buying history to us every time we log on.

TowerGroup's CEO Karen Cone believes that SOA will make a difference here in terms of allowing banks to leverage their data silos.This perhaps explains why a number of software vendors including the likes of Fundtech, Misys, i-flex,Oracle and IBM are are SOA enabling their applications.

According to Cone, it is not just about knowing your customer's needs. In fact she goes as far to say that while banks need to listen more to their customers, they shouldn't listen too much. "Most customers don't necessarily know what they want," she says. "It is about being one step ahead of your customers and knowing what they want before they do."

Time to get serious about SEPA

The title of this post may sound like an oxymoron. After all, I have heard nothing but SEPA all this week at the Sibos conference in Sydney and I am suffering from SEPA fatigue. Is there anything left to say about SEPA?

Well it appears there is, or at least I have managed to interview somebody that has something else to say about SEPA that I thought you should all know. My judgement, however, may be clouded by now.

Anyways, as much as there is a strong whiff of SEPA in the air at Sibos, a number of observers believe that banks need a proverbial ... up their ... "The banks have got to get more serious about SEPA, otherwise the regulators are going to step in," says Karen Cone of TowerGroup.

A number of the larger global cash management banks (along with the vendors that all have SEPA solutions proudly on display promising a hassle free migration to SEPA - it is a bit like taking a headache tablet that makes the pain go away); appear to be rubbing their hands together with glee at the prospect of SEPA as the prediction is that it will be all about who has the greatest volume.

A number of these banks are also fairly well advanced in terms of consolidating their multitude of payment systems onto a single platform, which people like Joe Mazzetti of Fundtech believes is key to managing SEPA. "Our mantra is the convergence of payment systems to do one thing," says Mazzetti. The thinking is that low value and high value payments will merge so banks will only need a single platform for all payments.

Some believe, however, there is too much focus on the complexity and 'pain' of SEPA - just one of the hundreds of regulations that banks have to comply with - and not the opportunities it presents. "There should be more of a focus on how banks can take advantage of SEPA to differentiate their services," says Mazzetti.

Easier said than done though when SEPA to most banks constitutes further commoditisation of payments, declining revenues and a strategic re-engineering of their payments business.

Despite the many 'pain points' around SEPA, Ralph Silva, research director, TowerGroup, believes that banks have a "social responsibility" to make SEPA work.

TowerGroup CEO Karen Cone believes it is more about a fundamental cultural shift that needs to occur within banks. Although analyst outfits like TowerGroup hardly paint a rosy picture for the future of the payments business - by 2016 it predicts that 80% of the world's payments processing will be concentrated in the hands of 25 banks - it is not just about the big banks hoovering up the small fry.

Cone says it is much more about banks really coming to grips with the concept of white labelling to the extent that outsourcing their payments business to their competitor or another bank is a 'no brainer'. Banks can still compete but on the front-end customer channel, not the back end. It has been said before, but banks don't seem to have got their heads around this. It is time for some of them to eat humble pie.

How much should corporates buy into SWIFT?

SWIFT is looking pretty pleased with itself these days when it comes to the number of corporates it now has on its network. There are approximately 168 corporates connected to the SWIFT network, with major multinationals such as GE, Microsoft and IBM signing up for the SWIFT experience.

GE for example has replaced its 40 EDI connections with multiple closed user groups (CUGs) in an effort to standardise its connectivity with its global banks. But not everyone believes that GE's complete buy-in to SWIFT is the way forward. "GE's infrastructure buy-in to SWIFT is nuts," says Joe Mazzetti, executive vice president, Fundtech, adding that he doesn't see other companies rushing to do the same as they don't really want to know the ins and outs of SWIFT to the same extent that GE does.

Yet, whilst SWIFT may be satisfied with 168 corporates (or the Top 200 corporates which SWIFT CEO Leonard Schrank has alluded to), it is really a drop in the ocean when you consider how many corporates are out there. Also, what about smaller to mid-sized corporates that see Closed User Groups as too expensive and are precluded from participating in the 'exclusive' corporate participant category?

"SWIFT still has to get more corporates signed on," says Karen Cone, CEO of TowerGroup. "They should be more aggressive in the corporate space. The percentage of corporates signed on is still tiny."

The unspoken thing that nobody seems to be talking about - only in hushed whispers in corridors - is granting corporates direct connectivity with one another via SWIFT, without the need for an intermediary bank.

Wednesday, October 11, 2006

No panacea for corporates

Its 4pm Wednesday afternoon and it seems that the debate about corporates on SWIFT is losing some of its lustre (did it ever have any?) at least for the less than 60 banks that bothered to show up for a session on corporates on SWIFT.

Suffering myself from a spate of afternoon malaise, I listened as HSBC bank, which proudly boasted that it was in the Top 3 globally in terms of banks connecting corporates via SWIFT, make joining SWIFT sound as easy as signing up for a gym membership.

The market feedback I have heard suggests the exact opposite: time consuming, expensive and a steep learning curve particularly for those corporates lumbered with banks that are not that experienced in connecting corporates to SWIFT. HSBC's Marcus Treacher said that moving on to SWIFT was not "IT intensive", which seems to conflict with corporate perceptions.

Treacher made a big deal about the fact that a survey it had conducted demonstrated that 39% of 200 corporates planned on implementing an MA-CUG in the next 12 months, compared to 31% in the same study the previous year, as if to suggest that SWIFT had significant corporate buy-in. Is 39% significant?

According to Christopher Ben, Standard Chartered Bank, corporates like GE and Arcelor had achieved ROI's of 406% and 605% respectively from standardising connectivity with their banks on SWIFT. Great, whilst no corporate or any sane person could dispute the cost savings of standardising connectivity (according to Ben, proprietary banking connections cost corporates EUR 100,000 a year to maintain), corporates need to read the fine print.

Beneath all the hype is that fact that standardised connectivity does not mean standardised formats. This mirrors a conversation I had with a senior European bank the other day, which said corporates using SWIFT had discovered it was not the panacea they thought it would be. Ben more or less conceded as much saying that he expected this would come as ISO 20022 standards were rolled out.

Let's be honest, though. How can SWIFT say it has made connecting to SWIFT easier for corporates when its new corporate participant category is only open to corporates that are members of stock exchanges in FATF countries? "FATF represents some challenges for banks like Standard Chartered that have a global footprint," conceded Ben.

A waiting game

In typical SWIFT fashion, the banking co-op has seized on reference data like it has most things; SEPA, derivatives processing, corporate actions; saying that it can bring the collaborative problem solving capabilities that are needed to resolve the reference data conundrum. A good example of its expertise in this area, it says is its experience in managing the BIC directory service, which also incorporates national clearing codes.

But is SWIFT really the answer to the problem of reference data, or is it part of the problem? The reason I say that is that companies like Asset Control have been in discussions about providing a joint reference data solution with SWIFT for the last two years. Reference data is one of the underlying themes of SWIFT's 2010 strategy, and Ger Rosenkamp, CEO of Asset Control, believes that his company of 16 years is the unequivocal choice in terms of who the banking co-operative should partner with in the area of reference data management.

Leveraging its centralised data management model, which encourages firms to dispense with multiple data silos, Asset Control joined forces with Accenture to develops its ACDEX outsourced data management solution for handling pricing, reference, counterparty and other data.

Asset Control provides the technology platform for ACDEX and Accenture provides the outsourcing service on top of that capturing Asset Control data which it then manually cleanses. Currently two customers have signed up for ACDEX, a third is expected to be announced soon. "The logical idea would be for SWIFT to provide the network that connects all the financial institutions," says Rosenkamp. But when has SWIFT and logical ever been synonymous?

In typical procrastination fashion (it is the usual joke about how swift is SWIFT), SWIFT is biding its time. "SWIFT needs to make a clear decision about what they want," said Rosenkamp. "What SWIFT wants is very ambitious," he says referring to its ambitions to manage a specific set of reference data around BICs. Yet, Rosenkamp says SWIFT's requirements do not go beyond those of its customers, which are largely Tier 1 firms.

Although banks are still getting to grips with the outsourced data management model, Rosenkamp believes that in five years, ACDEX will be the dominant player and says it has already proved it can increase the efficiency of reference data by 30%.

For Rosenkamp, the choice of who SWIFT should partner with in the reference data space is obvious. But as usual the market must wait for SWIFT to decide what direction it is going to take.

Alternatives to SWIFT

While SWIFT has the habit, like a number of so-called global banks, of beating its own drum and portraying itself as a truly global network, it is easy to overlook the fact that not every bank is on SWIFT and not every bank or corporate necessarily wants to use or join SWIFT.

The Sibos conference has been dominated by the usual PR fluff with IBM announcing that it would join the SWIFT network under the new corporate participant category. SWIFT CEO Leonard Schrank made it clear on the opening day of the conference that it has no ambitions beyond getting the top 200 corporates on the SWIFT network, so what about those other corporates, and the banks that find SWIFT an expensive option for their connectivity needs?

"We have to live with SWIFT," says Jerry Luckett, director, product & strategy, core banking, Misys Banking Systems, commenting that the migration to SWIFTNet was expensive for a number of its members. But Luckett believes it is important for customers to have alternatives to SWIFT.

The alternative to SWIFT brigade seems to be gaining momentum and Luckett believes it could be fuelled by banks rebuilding their payments infrastructure.

Following on from Schrank's comments on day one of the Sibos conference that SWIFT would deliver a further 50% reduction in costs to its members within five years, some say banks could have that 50% cost reduction now if they used alternative IP networks like BT Radianz (this is not a plug for BT Radianz by the way).

In what some see as a potential move to position itself as an alternative payments network provider, UK clearing house Voca will announce today (Wednesday)the opening of a SWIFTNet channel for banks to connect to its Payments Platform for bulk and real-time payments. Voca will establish a market infrastructure Closed User Group using SWIFTNet as a "multi-purpose channel" for its SWIFTNet Transmission Service, which supports its SEPA offering and its new real-time payment service scheduled to go live in November 2007.

Putting on a brave face

When your chairman is quoted as saying that your software is not as good as that of your competitors, it is difficult to hold your head high and carry on as if nothing has happened.

Mired in negative publicity over the last few months with respect to mismanagement of the company and failed takeover bids, the future of Misys Software is anything but certain.

At Sibos in Sydney where Misys has a rather imposing stand decorated in purple and white, its corporate colours, Jerry Luckett, director, product & strategy, core banking, Misys Banking Systems, was putting on a brave face. Luckett says chairman Dominic Cadbury's comments were taken out of context, but conceded that it was a topic that customers at the Sibos conference continued to raise. "We are getting on with doing business," he says. "That is what is important to our customers."

On the core banking systems front, recognising some shortfalls in its Equation and Midas applications, Luckett says Misys is "refreshing" its technology by breaking them down into components, which can be leveraged within an SOA environment.

Misys' competitors in the core banking systems market, more notably i-flex Solutions and Temenos, claim to have been winning business from Misys. Luckett maintains Misys is still winning business in branch banking applications. "The technology refresh recognises that people want open platforms and architectures," he says.

Misys Treasury Plus, the FX confirmations solution it provides to approximately 800 corporates, banks and fund managers, will also have new components added to it including cash management applications - the first piece being multibank and multicurrency reporting - that are not in development yet.

However, it is difficult to be certain about Misys' future direction let alone its foray into the cash management application space until Dominic Cadbury finds Misys a new CEO, following Kevin Lomax standing down as chairman and CEO of the company.

Tuesday, October 10, 2006

PDFs that talk

The ubiquitous PDF, we all use it, we all receive it for free when we buy a PC. With the purchasing of Macromedia, Adobe Systems, creators of the PDF format, have been able to embed more "intelligence" and multi-media capabilities into the once static PDF format.

Leveraging Macromedia technology, PDFs can now speak in the form of live video and audio incorporated within the document. Static diagrams embedded in PDFs can also be made more dynamic.

Adobe is also beginning to make its mark in financial services with its Adobe LiveCycle platform, which generates "intelligent" documents. As Anthony Giagnacovo, financial services, director, Adobe, explains, leveraging its ubiquitous PDF format, LiveCycle generates documents that contain a presentation layer (people to people), a business logic layer (people to machine)and an XML layer, which enables information contained in the PDF to be exported to ERP and CRM systems.

Adobe LiveCycle also includes bar coded forms, which means that even if people want to fax or print off information from a PDF, it can be easily re-entered into the system without manual re-keying by scanning the bar code.

Leveraging these capabilities Adobe is making forays into the trade finance space, which is arguably long overdue. Banks have been banging on about the lack of standards in terms of automating the purchase order and invoice in the trading process, and all along a solution has been staring them in the face; the PDF, which is on most people's desktop even a supplier in the outer reaches of China, for example.

In conjunction with e-document platform provider Tradocs, Adobe Systems has developed a Trade Services Utility Connector Suite which leverages all the intelligent document capabilities enshrined in LiveCycle. The Tradocs Connector Suite can convert any document to the "de-facto PDF standard" and then the information from the purchase order can be sent to SWIFT's Trade Services Utility (TSU) for matching and confirmation.

HSBC Bank has successfully piloted the Tradocs Connector Suite as part of its preparations for the going live of SWIFT's TSU, which is still in pilot phase. According to Adobe, the Tradocs Connector Suite, will enable banks to re-integrate themselves back into the corporate supply chain and open account trading between buyers and suppliers, by more readily capturing information from the purchase order and invoice, which are transmitted in PDF format and managed using LiveCycle, which is implemented on the bank's back-end.

A veritable smorgasbord

As I sat down to a finger buffet politely laid out for a team of journalists, some of whom were apparently no-shows according to the irate PR person that organised the press briefing, I found the smorgasbord analogy being taken to new extremes.

It was a press briefing with SunTec, the Indian based transaction billing company that has brought the concept of relationship-based pricing, something which dot.coms and telephone utilities know quite well, to the realm of financial services.

SunTec's CEO Nanda Kumar started by drawing comparisons between relationship-based pricing and a burger or a spring roll. The point he was trying to make, from what I could grasp without being overwhelmed by the food analogies, was that a spring roll resembled the ultimate in terms of pricing based on a more integrated view across multiple product lines.

In other words if a particular customer does business with the FX and investment banking side of the business, SunTec's technology enables banks to achieve an integrated view of that customer and assign a price that more accurately reflects the value of that relationship.

You would think that banks would do that really, but according to SunTec and Gartner analyst Susan Handry, banks' have historically taken a product approach to pricing, typically because the information about that customer has resided in multiple product silos that are not integrated.

So even though a customer may choose a bank based on price, that price does not accurately reflect the true value or relationship that customer has with a particular bank. In fact, says Handry, because of this siloed information, banks are losing revenues or failing to collect the appropriate fees, particularly in the area of corporate cash management.

A few years back at another techie conference at Disney World, there was talk of intelligent software that enables companies to gather information on customers (a bit like what Amazon does when you revisit its site) so that products can be customised to suit the individual needs and buying habits of that particular individual. Is this where pricing is heading?

Yes, says Kumar, but the banks are not quite ready for dynamic pricing customised to the nth degree. The reason why is not just inertia or conservatism on the part of the banks. Well, it is that, otherwise PayPal and Tesco Financial Services would not have stolen a significant chunk of their business.

But it appears that there is a legitimate reason for banks inertia on the relationship-based pricing front.

Good old legacy. "There are technology bottlenecks [in banks]," says Handry, "and the most obvious is to do with legacy systems." Kumar does not expect customers, which include banks like ING, Lloyds TSB and HSBC to scrap their legacy. Instead it connects the relevant product platforms and then overlays its relationship-based pricing solution on top of the bank's infrastructure, a process which can take anywhere from four to 14 months.

It also announced at Sibos that its centralised billing and relationship-based pricing solution TBMS-F, can now be deployed globally across multiple countries and currencies. In other words, banks can now have an integrated view of a corporate customer, and how much business that customer does with the bank on a global basis.

Surely, once the value of that relationship becomes more transparent to both the customer and the bank, customers are going to put pressure on banks to reduce their prices even more? The counter to that, says Kumar is that relationship-based pricing across multiple product lines allows banks to increase their revenues by reducing "spillage" as well as increasing the potential to earn more business from that customer.

I hate to break it to you guys, but SEPA is not a huge priority for corporates

Ok here's how it goes. The banks, the European Commission and the European Central Bank have been banging on about this thing called SEPA (the Single Euro Payments Area. I think I am suffering from SEPA fatigue.

Anyway, at the second day of the Sibos conference, Natexis Banque Populaire and Unicredit outlined how they were preparing for SEPA in terms of developing a single operating platform, the need for testing and for banks to decide whether they want to be on the manufacturing side of the business or outsource their payments business to someone else.

Then Vincent Herlicq from the French corporate treasury association AFTE took to the stage and proceeded to tell the banks, well actually we may support the concept of SEPA, but it is not a major priority for most corporates. Oh and by the way, we are not going to be ready by 2008, the start of the transition period to SEPA. In fact, it could take corporates six years to migrate to SEPA which means instead of the 2008-2010 transition period most banks had planned on, they may have to run legacy and SEPA instruments in parallel for a few years longer.

"There is no widespread coverage of SEPA within the general population," said Herlicq. "SEPA is still not a real concern. I don't know any corporate that will have a high volume of SEPA instruments in 2008. We are not ready for that."

While the banks may still be deciding how SEPA impacts their business, the corporates it seems have not even got that far. The challenge for treasurers says Herlicq is to convince the CFO to invest in the SEPA project at all and until they can do that the move to BIC (Bank Identifier Code) and IBANs (International Bank Account Numbers) is not going to carry the same sense of urgency as the banks would like, at least not for those corporates whose business is still largely domestic.

It seems the banks, in particular the European Payments Council (EPC) have done a great job at educating corporates as to why they should move to SEPA or the new payment instruments that the EPC developed rulebooks for. "The EPC rule books are too complex," said Herlicq. "We would like a more simplified version," which was met with a rather bemused grin by Gerard Hartsink, the chairman of the EPC, who earlier had reeled off an excerpt from a press release by the European Association of Corporate Treasurers as if to say, SEPA, as the banks have defined it, has corporates' blessing.

According to Herlicq, corporates also need to be convinced that the SEPA instruments are a significant improvement on the domestic payment instruments companies are currently using. Talk about project mismanagement.

Corporates could possibly be incentivised to take SEPA more seriously if the banks were more forthcoming on pricing, but the banks are being cagey on that front. Bernard Gouraud of Natexis Banque Populaire gave some explanation as to why. "How can we talk about price when banks will have to run legacy systems in parallel with SEPA instruments."

Monday, October 09, 2006

Turf wars

With the theme tune of Peter Allen's 'I still call Australia home' bursting out of the loudspeakers in the plenary hall, replete with a live performance by the Sydney Girl's Choir, I thought I had walked into the wrong room at the opening plenary of the Sibos conference in Sydney.

I expected the Solid Gold dancers to materialise at any minute, but they didn't. It reminded me of an opening session at an NCR conference many moons ago in Disney World Florida, where delegates clapped and sang along to some 80s nostalgic hit complete with svelte dancers.

But that was NCR, a commercial organisation and this is SWIFT, a not for profit co-operative. The sense of deja vu continued throughout the plenary as I heard the key speaker, David Morgan, CEO of Westpac Bank in Australia, take banks to task for not doing enough to stifle competition from non-bank providers in the payments space.

"Non-traditional payment providers are ahead of the curve and are on our turf," Morgan asserted. "Tesco Financial Services and General Electric Consumer Finance are making money we should be making, which does not fill me with sensations of peace." He went on to say that he had the same less than charitable feelings towards online payment providers such as PayPal.

In order to compete with the more nimble non-bank payment providers, Morgan said banks needed to not only be more competitive but co-operate through industry utilities and competitive pricing. I had heard it all before. Isn't this what banks tell themselves at every Sibos? At Sibos in Atlanta, Heidi Miller of JPMorgan Chase took the industry to task for not being the first to develop online payment solutions like those pioneered by PayPal. When are banks going to stop talking and debating and start acting? I am sure they will be beating themselves up about how much payments revenue they have lost to alternative providers at the next Sibos.

As SWIFT's new chairman Yawar Shah took to the stage, some delegates left the auditorium. They were probably thinking like I was that they had heard all the rhetoric before, or maybe they were just eager to get to the welcome cocktails. Shah spoke about challenges the industry faced over the next 10 years and the standard rhetoric about price reductions for SWIFT members and SWIFT's 2010 growth strategy.

Taking up the 2010 growth strategy theme, SWIFT CEO Leonard Schrank said it was the most "profound" of SWIFT's visions (SWIFT has had many visions including its 2006 one about making SWIFT the lowest cost and lowest risk chief global financial messaging provider). But given the challenges SWIFT still faces around the cost of using its network and privacy issues, has it even delivered on its 2006 vision before it sets its sights on 2010?

Once again its 2010 vision is about SWIFT being all things to all people; not only will they solve the reference data issue, but hey guess what, they will also solve the complexities around automating derivatives and the corporate supply chain. That's it everything's solved, we can all go home.

Piggy in the middle

On the opening day of the Sibos conference in Sydney, SWIFT CEO Leonard Schrank joked that he never thought he would see SWIFT make the front pages of international newspapers following recent disclosures that it had allowed US intelligence agencies to monitor financial transactions on its network.

Privacy organisations have taken SWIFT to task for its decision to allow intelligence agencies access to transactions on its network, and privacy investigations are underway in at least three countries include Belgium where SWIFT is headquartered.

When asked if he would have done things differently if he had the time over again, Schrank said that SWIFT was caught in the middle. "It was not SWIFT's fault," he said, adding that it had no other choice but to comply with the monitoring, which was "compulsory".

Schrank said there is a global framework for disease control but not one for privacy issues. "[Privacy] is a global issue and SWIFT is a global company." He joined European Central Bank President Jean Claude-Trichet in calling for a global privacy framework governing financial data.

The question remains though before granting the intelligence agencies access to transactions on its network, should SWIFT have informed its member banks, which total 8000, or at least the Top 100 banks on its network?

FinancialTech Insider would like to hear your comments so click on the comment link to post a comment.

Is SWIFT too expensive?

On the opening day of the Sibos conference in Sydney Australia there was the usual blurb about rebates and price reductions for members of the SWIFT network. SWIFT CEO Lenny Schrank announced an 8.2% price reduction which amounts to EUR 15 million in 2006 as well as a rebate of 5% (EUR 20 million)to SWIFT members. Overall messaging prices he says have been reduced by 50% for the period 2002-2006. "In total we are giving back EUR 60 million to our members," said Schrank. SWIFT also plans to reduce messaging prices by a further 15% over the next five years.

So what you may say. Whilst SWIFT may make a big deal of these price reductions at every Sibos, they need to be considered in the context of how does SWIFT compare with other global IP networks in terms of cost? I am thinking of the BT Radianz's and Savvis's of the world who maintain that they are more cost competitive than SWIFT.

As a senior European banker reminded me over dinner the other night, the price reductions and rebates meant nothing to him as SWIFT is a monopoly. So whilst it may offer rebates (something which not all banks view favourably given that they have to budget for them), it is still expensive. When asked about alternative IP networks such as BT Radianz, the banker said whilst they boasted a competitive network, he was forced to use SWIFT as its major customers were also on SWIFT.

This whole issue of how cost competitive SWIFT is was further compounded by Schrank reporting record financials for SWIFT in terms of pre-tax profitability. He made the joking aside that SWIFT Board members start to worry when he announces that SWIFT is making too much money, and although it may return some of this to member banks through rebates, how much is too much money? After all isn't SWIFT meant to be a not for profit co-operative?

SWIFT's ambition is to grow its messaging traffic. One way of doing that has been to seek new network users such as corporates. Schrank and Shah spoke about how SWIFT had changed its tune towards allowing corporates onto its network. An initial vote to allow corporates to join SWIFT was flatly rejected by the SWIFT board, but recently the Board unanimously (98.7%)voted to allow corporates to join SWIFT.

Having spoken to some bankers about the Closed User Groups (CUGs) and the new Corporate Participant Category SWIFT had developed to faciliate bank to corporate connectivity, one banker remarked that some companies had established CUGs hoping it would solve the complexity of having to deal with multiple banks and multiple standards, only to find it was just as complex.

When asked if SWIFT planned to offer any other carrots to corporates, Schrank said they were only looking five years ahead. When asked why SWIFT had limited its new corporate participant category to companies from qualifying countries, Schrank said SWIFT had to start somewhere. "We have the top 200 corporates which is plenty," he remarked.

What about other corporates? I thought SWIFT wanted to be everything to everybody. The conclusion seems to be that the MA-CUG and new corporate participant category are not the panacea some thought it would be in terms of helping solve corporate to bank connectivity issues.

Big banks will not have it all their own way

With a rather expensive yacht moored in Darling Harbour, Logica CMG is certainly making its presence felt at the Sibos 2006 conference in Sydney Australia.

Before boarding the boat I was asked to remove my shoes and found myself in a rather unique situation; interviewing Jerry Norton, the director, strategy, global financial services, Logica CMG, in my bare feet whilst he sat there with his socks on. It was one of those situations where you think to yourself I am glad I painted my toenails, or in Mr Norton's case wore socks without holes in them.

Naked feet aside, the luxurious yacht certainly signifies Logica CMG's new found confidence fresh from its announcement of its acquisition of WM-data, which will enable it to expand its geographical footprint in the Nordic and Baltic markets. Once the deal is finalised, the combined companies will have a turnover of £3.1 billion, and according to Norton it will also make Logica one of the Top 20 companies of its type globally.

With regulators calling for greater harmonisation and convergence of payments in Europe, Norton believes Logica is well placed to provide end-to-end capabilities for all payments (interbank, retail and corporate). Of course the question on everyone's lips is what impact will the Single Euro Payment Area (SEPA) have on their payments business?

Norton like most believes that the payments business (much like its equivalent in the securities world, custody) will consolidate into the hands of fewer providers. The need to run SEPA and non-SEPA payments infrastructure in parallel during the SEPA transition period from 2008 to 2010, is likely to be "the straw that breaks the camel's back," says Norton in terms of smaller banks deciding whether they want to remain in the payments business or outsource it to a scale provider.

Nothing new there, however, Norton believes that the global cash management banks will not have it all their own way. "In terms of how banks speak to their customers, the banks that recognise and respect local customisation, that is where the opportunity is for the regional players." In this respect, Norton believes that cultural issues gives European banks a competitive advantage over US banks who see SEPA as an opportunity to make their "stamp" on Europe.

But before SEPA comes to fruition, there are a number of things banks need to consider, not least of which, says Norton is the 'testing issue'. "There needs to be end-to-end testing in the market to ensure that SEPA standards are not implemented differently in different countries," he says. "And the testing has got to be done now."

Banks also need to do a better job at selling SEPA to corporates, says Norton."The dialogue is starting but there is a long way to go." In terms of adoption of SEPA instruments, Norton believes that government organisations and the European Commission should lead the way. "Banks are looking for some sort of assistance," and if the EC says it is going to use pan-European credit transfers, Norton believes other customers will follow.

Under the terms of the Payment Services Directive, which provides the legal framework for SEPA, Norton is adamant that non-bank payment providers such as First Data Corp. are likely to emerge. The question is, will these non-bank providers be subject to the same regulation as banking providers?

Global remittances sorted?

At a time when European ACHs are having to justify their business strategies and compete in what is largely a volume business, Voca CEO Marion King was positively beaming as she announced the UK clearing house's partnership with Citigroup in providing a "low cost" global remittance solution for UK banks.

According to World Bank figures, the global remittance business (foreign nationals sending money back to their home countries)generates somewhere in the region of £49 billion a year. Yet, the banks have been relatively unsuccessful in capturing the lion's share of the global remittance business, which is dominated by money transfer agencies such as Western Union. Lack of competitive pricing from the banks is cited as one of the common causes of the remittance business falling out of the hands of the banks.

In a rhetorical barb directed at the transfer agencies that have been cashing in on remittances, Marion King, Voca's CEO, said the joint rremittanceservice it developed with Citigroup would allow banks to offer lower cost remittances than Western Union, for example. "For many banks to set up such a solution the infrastructure costs would be too prohibitive," King said.

King is hoping that Citi's global payments expertise and franchise and Voca's already established payments processing capabilities will make the solution a "win-win" for all parties concerned.The service offered by Citi and Voca will enable customers to make remittances from their current accounts using the internet.

The global cash management banks seem unusually humbled by the remittances debate. Normally they like to boast they have the capabilities inhouse to offer payments globally, but obviously remittances was one area where they realised it would be more difficult to do something on their own.

Interestingly, Eric Sepkes of Citigroup, who recently challenged the European Commission as to how many ACHs Europe could sustain post the introduction of the Single Euro Payments Area (SEPA,) was in the audience at the announcement of the deal with Voca on the opening day of the Sibos conference in Sydney, Australia.

With this announcement, which is obviously geared at ramping up Voca's payments volumes, does this mean that Voca and its CEO can breathe a sigh of relief? European ACHs are not only under pressure from banks to consolidate, but also some banks have made it clear they are not happy about clearing houses like Voca having pan-European ambitions; offering pan-European as well as domestic payment instruments when SEPA comes into force from 2008.

Friday, October 06, 2006

When you're down and troubled ...

Of course Sibos in Sydney is not just about sitting in an airconditioned room mulling over the future of the payments business post-SEPA or what the rise of China means for world trade.

When you've had all you can take of SWIFT posturing, you could always do what the locals do, head for the beach to clear your head. As the saying goes, 'When in Rome ....'

Get your seats now

Some conference delegates have already barred a front row seat at the opening plenary.

Thursday, October 05, 2006

A conference with a view

Will Sibos 2006 conference delegates really be hankering to hear about SWIFT CEO Leonard Schrank's 2010 vision, when they have this on their doorstep?

Subtle branding at Sibos

Getting dressed for Sibos