Tuesday, December 04, 2007

Fraud from within

Judging by my last few posts, you are probably beginning to think that FinancialTech Insider has it in for anti-money laundering systems and the banks implementing them. Make no mistake, we do feel that banks have got the raw end of the deal with financial regulators and governments effectively forcing them to police every financial transactions on their watch.

It is no easy task and despite banks throwing millions at the latest and greatest AML solutions, can any bank really say they have got it well and truly 'sussed?' The regulatory burden is only increasing with the Third EU Money Laundering Directive due to be implemented in 2008.

And as recent events have demonstrated, preventing fraud and AML is not just about monitoring transactions and implementing technology. In fact Innovations Softwaretechnologie of Germany says that transaction monitoring should not only cover the threat of fraud being committed by an external perpetrator, but also employee conflicts of interest,insider trading and market abuse.

According to a poll by KPMG of more than 220 banks across more than 50 countries, 33% of banks are not satisfied with the effectiveness of their own transaction monitoring systems, and less than 25% have the capabilities to monitor the transactions and accounts of a single customer across multiple international borders.

Why then is so much of the onus for policing financial transactions on the banks, when banks do not have the adequate systems in place to meet these requirements, and the internal threat from their own employees is not being adequately addressed?

At a time when trust in banks and government departments is being eroded, isn't it time for regulators, governments and banks to engage in a more serious debate about the effectiveness of current approaches to transaction monitoring and money laundering, rather than adding more complexity to an already unworkable solution?

Wednesday, November 28, 2007

Making financial crime a priority

Well it seems the HM Revenue & Customs (HMRC) incident where millions of customers personal and financial details stored on an unencrypted CD went amiss, has opened a veritable can of worms.

My inbox is suddenly being inundated with emails questioning how well customer data is protected not just by government departments, but banks and other companies.

The HMRC incident prompted the British Bankers Association (BBA)to publish these rather terse words for law enforcement officers:

"Looking at the wider context in which this unacceptable lack of sensible data protection took place, it is clear that the Government has not yet accepted properly the case for making fraud and financial crime a priority for law enforcement in its own right," says the BBA.

Not only are government departments it seems letting the side down by not adhering to the strictest data protection principles, but the very same government that requires banks to spend millions on anti-fraud and money laundering measures, is apparently not even bothering to allocate sufficient resources to law enforcement to tackle both money laundering and fraud risks, says the BBA.

“It is quite extraordinary that the industry does so much on anti-money laundering, on fraud prevention and on identifying suspicious transactions, and yet this doesn’t feature among the priorities the police has been given by the Home Office.”

Those of you who read this blog regularly will know that we have been particularly vocal about the cost/benefit of banks investing millions in AML solutions, when there is a very clear lack of transparency as to the success of these systems in accurately identifying suspicious transactions, and the percentage of transactions that lead to successful prosecutions.

Not only are the banks unwilling to talk about how many suspicious transactions they are actually reporting (although we hear the number of Suspicious Activity Reports have increased exponentially as compliance officers are reporting everything to cover their backs), but it appears the due diligence of law enforcement officers does not match the time and money being invested by banks in generating SARs.

Not only that it appears government departments appear to be giving potential fraudsters a hand-up by failing to adequately protect consumers' personal details. Surely the government needs to be made as accountable as the banks?

Tuesday, November 27, 2007

Thwarting fraudsters

I have purposely avoided writing anything about the HM Revenue & Customs'(HMRC) data breach of millions of UK consumers personal and banking details, but I felt compelled to say something when I started seeing information security vendors leaping on the bandwagon.

While it may be true to say that "fraud is already firmly on the banking industry agenda," when information security vendors say that consumers should not lose sleep over the HM Revenue & Customs' debacle because banks have risk management systems in place, it does not really provide me with much comfort.

The fact remains that despite these systems, fraud and identity theft still occur on an ever increasing scale, and it is arguable whether banks' systems are adequate. Even if thieves cannot access a person's bank account directly, they could still use their name and address details to apply for a credit card or other forms of financing.

What is the most alarming thing about the HM Revenue & Customs data leak is that it reflects well entrenched practices within government departments of posting customer data on unencrypted CDs.

It strikes me as rather odd that on the one hand you have a government wanting ISP providers and banks to take more responsibility for protecting consumers' identity and personal details, but yet government departments which hold reams of information on millions of people, are not subject to the same levels of scrutiny or compliance.

According to Jeremy Smith, managing director of Jardine Lloyd Thompson’s Financial & Professional Risks division, the HMRC incident has prompted security experts to renew their request for the current law to be urgently reviewed for, unlike our American counterparts, the Data Protection Act does not currently compel companies to notify those affected by the loss of data.

Smith points to the almost £1 million fine levied by the FSA on the Nationwide Building Society for a laptop theft from an employee’s house. Yet, no such fines will be levied on government departments which do not face the same regulatory scrutiny as banks. Arguably however, as the government steps up its "Big Brother" campaign to collate as much information as possible on individuals, one has to seriously question the lack of government department accountability.

On the technology side, there has been so much focus on authenticating a customer's identity at the point of sale using chip or pin, but very little focus on securing the storage and transmission of customer data between government departments and banks that share this data and training employees to abide by the strictest codes when it comes to managing that data.

At this point, information security experts are going to proffer some kind of comment about the latest and greatest solutions that can help banks identify fraud before it occurs. One such comment in the wake of the HM Revenue & Customs' debacle was:

"By understanding customer behaviour across multiple payment channels in real time, banks will be able to identify irregular account activity that could potentially thwart fraudsters before they have even committed a crime.”

Sounds great in theory, but show me a bank that has the systems and business processes in place that they can accurately monitor and understand customer behaviour across multiple channels and product silos in real time. Even if such a bank exists I don't think they would be game to put their hand up for fear that they will be proven wrong.

The banking industry and government cannot afford to rest its laurels on the fact that banks have implemented a nice piece of software kit with bells and whistles, which is going to make everything alright. With banks, government departments and web sites collating unprecedented levels of personal information on consumers, is it any wonder that identity theft is on the rise. And no amount of banking software is going to change that.

Thursday, November 01, 2007

Don't forget to switch off the lights

"Have a green day," said BT Global Services CEO Francois Barrault as he introduced The Green Bank event at the Tate Modern in London yesterday. His remark is perhaps an indication of how far industry CEOs have come in embracing the environmental sustainability agenda.

After all, Barrault conceded when he first met environmental campaigner Al Gore, who proceeded to show him pictures of Arctic ice caps melting, he thought he was a little "crazy".

John Williams, head of group sustainable development at HSBC, which lays claim to being the world's first "carbon neutral" bank (whatever that means), said he was perceived initially as being somewhat of a "hippy", which is how the corporate world has always liked to portray those that express concern about business' impact on the environment.

One would have hoped that the so-called "Green Debate" had moved on from such redundant stereotypes, but it appears that the corporate world, while on the hand it is waking up to it environmental responsibilities, does not want to be associated too closely with the 'hippies' and 'tree huggers' who do not need a cost/benefit analysis, brand protection or new business opportunities to justify their passion for the environment.

So when a CEO of a major company says, "Have a green day" or HSBC says it is a "carbon-neutral" bank, what does that actually mean? There is no question that HSBC is a major investor in renewables, has project financing guidelines based on environmental principles and has constructed solar-powered buildings.

Yet they have also been accused of being one of the myriad number of banks that leave their office lights on all night at Canary Wharf, and they do not totally rule out providing project financing for environmental "dinosaurs" such as the coal industry.

So does being 'green mean saying one thing and doing another, or being 'green' part of the time and not for the rest of the time. There is no question that the industry has come a long way in terms of its support for "sustainability", but business and banking by its very nature contradicts a lot of sustainable principles.

After all banks are in the business of making money, and if it did not make business sense, win them customers or save them money, then they wouldn't 'green' their IT or use recycled paper, just for the sake of environmental sustainability.

At yesterday's event, HSBC and Morgan Stanley spoke about the dilemma of what to do about executives that need to travel. Both are looking at telepresence and the latest videoconferencing technologies as a way of reducing executive air travel, but I am dubious when banks say that for those carbon emissions they cannot reduce easily, they can merely offset it by buying carbon credits.

In that sense the "carbon-neutral" title is somewhat misleading as it appears to suggest that the bank has a zero carbon footprint, which is not entirely true.

A lot of yesterday's debate at the Tate Modern was spent showing graphs and theoretical proofs of concept around what is sustainability and what does it mean, when the reality of why banks and industry should be doing this was more succinctly put by the CIO of Morgan Stanley who said that if oil and commodity prices continue to rise, reducing energy consumption and their data centre footprint, was pretty much a 'no-brainer'.

A guy sitting next to me from Barclays Capital said he was a bit disappointed by yesterday's presentation. He wanted to hear what other banks were doing when it came to "greening" their IT and data centres, and thought the industry debate had moved on to more concrete tangibles rather than debating the vagaries of what sustainability means.

After all there are things firms can do now that will cut costs and save energy; turning office lights off, printing on both sides of the paper, using teleconferencing, virtualising servers, grid computing; without having to debate what sustainability means. That is just good business sense.

Yet while there certainly is an impetus amongst banks to sign up to being "green" for whatever reason, once they ascribe that label to themselves, it is not merely something that you can throw money or technology at and say you have done your bit.

"Being green" is an ongoing responsibility, after all if you are reducing the carbon footprint of your data centre, but then continuing to issue paper bank statements and faxes every day, forgetting to switch your office lights off or project financing major oil and coal projects, doesn't that mean companies are only being 'green' when it suits them?

Tuesday, October 30, 2007

Clients likely to challenge 'best execution'

As the 1 November MiFID deadline is almost upon us, my inbox is being inundated with vendors' last minute words of wisdom regarding the much talked about Markets in Financial Instruments Directive.

One has to marvel at the PR strategies of some companies - bombard journalists with as many emails as possible, even if it is the same information that they were propagating about MiFID a few months back. Let's repackage it and hope no one notices, a bit like some of the so-called 'MiFID ready' solutions out there.

What surprises me though is that for a regulation that is lacking in "prescriptive" detail, vendors seem to know more about what firms need to comply with MiFID than firms do themselves. Is there a danger of firms installing all this whiz bang technology, only to find they did not need half of it?

Having said that Atos Origin's survey of the market suggests that firms have actually spent 20% to 25% less on MiFID than they initially intended and have not implemented smart order routing technologies, as suggested, because they are still unsure that liquidity will be as fragmented as some have suggested.

Vendors are eager to dispel the perception that they are flooding the market with technology which is simply a repackaging of existing solutions with a MiFID label slapped on it.

Some of them are even forming alliances (The Open MiFID Alliance comprising Allen Systems Group and vendors like Sun Microsystems, SAS and Gissing)where they purport to have put aside their "single-vendor" approaches and opted for a more "synergistic" approach.

I have to say though I am sceptical of some vendors trying to cash in on MiFID and the confusion that still reigns in the marketplace. But it appears no amount of "best-of-breed" technology is going to prevent firms from being fined for non-compliance with MiFID.

Well at least that is the expectation of firms surveyed by Thomson IFR which indicated that all firms expect fines for non-compliance as early as Q1 of next year, and 90% expect more fines every following quarter.

Despite all the rhetoric about "best execution" and what it means and solutions for addressing it, almost 70% of firms surveyed expect the first client to challenge their “best execution” in the first quarter of next year. Firms are not even confident about their own MiFID implementations, let alone the technology underpinning it.

Despite all the consultant-speak about MiFID being an opportunity to differentiate, it appears a number of firms are throwing technology at the problem and hoping it satisfies the regulators, without carefully considering what their strategy should be in a post-MiFID environment.

Friday, October 26, 2007

SEPA - a case of industry mismanagement

Although they don't necessarily court publicity or boast about the innovative ways in which they are using technology, Nordic banks tend to have grasped the fundamentals of technology long before many other banks and do not approach it with the same level of fear or risk aversion.

That is why perhaps the Nordic payments infrastructure is considered to be 'light years' ahead of many other European states. It boasts a relatively efficient credit transfer system and the concept of "real time", which most other banks only pay lip service to, is enshrined in consumer internet payments which are credited same day. Float has also been reportedly done away with in domestic Norwegian transfers and internet banking uptake generally is much higher.

Some of these aspects are only now being considered on a European-wide scale as part of the Single Euro Payments Area, which in effect means European banks and their customers now have the opportunity to catch up with their Nordic counterparts, which have enjoyed these efficiencies for some time.

No surprises then that a lot of Nordic banks see SEPA as a step backwards for them. They already offer a relatively efficient cost-effective electronic payments infrastructure, which is linked in with value-added services such as e-invoicing.

I was having a discussion about SEPA via email with Bo Harald, ex e-banking guru for Nordea and now head of executive advisors at financial software provider, TietoEnator, which has helped Nordic banks build innovative e-invoicing solutions.

In his initial email he had this to say:

"The thing is we need to be rather forthright together with the ECB and the EU to get the banking community to move to new services. Having met people in London yesterday it did strike me how many still cling to the past(it has NEVER been a good business strategy) and try
to find reasons to delay starting reforms - only to have to do them later in gigantic panicky efforts without being properly prepared

My remark to him was that the industry's tendency to want to preserve the 'status quo' meant that the only form of innovation at times was that forced by regulation, and that SEPA was a good example of that.

His reply was that "SEPA had in fact been an issue of industry mismanagement - by resisting the credit/debit part instead of steering it and promoting e-invoicing instead, the banking industry and thus its customers will have to invest and pay close to €10 billion and revenues will go down. Instead he says they could have invested very little and saved €200 billion plus the cost for EU enterprises and corresponding earnings."

It appears that "fostering creativity in payment services" through the introduction of SEPA-wide payment related services such as e-invoicing, is going to be the difficult part for banks.

SEPA Direct Debits and Credit Transfers is a start, but as we have been hearing from corporates, they have yet to be convinced of the business case for implementing these new instruments and where are the additional optional or value-added services that everyone is saying banks need to provide in order to make up for revenues lost through SEPA's implementation?

Thursday, October 25, 2007

Project Turquoise gets its act together, or does it?

Well it seems after much speculation that it would not get off the ground, Project Turquoise, the multi-lateral trading facility announced by seven leading investment banks, has appointed a CEO and technology provider.

There were rumours that Project Turquoise may buy PLUS Markets, a London-based quote-driven electronic trading platform based on OMX technology in a reverse takeover. But after that deal fell through, it selected Cinnober Financial Technology, a Swedish company which also provides the technology for BOAT, the pre- and post-trade market data consortium, as its technology provider.

It has also finally appointed a CEO, Morgan Stanley managing director Eli Lederman. But in an interview with Reuters, Lederman said Project Turquoise's launch would be pushed back from November this year to next summer, giving NYSE Euronext, BNP Paribas and HSBC time to launch its SmartPool for trading so-called "dark" liquidity pools anonymously.*

The delayed launch of Project Turquoise also continues to stoke the rumour mill that it may still not manage to get off the ground.

A shorter time to market would have been preferable if Project Turquoise was to finally silence its critics and start competing with the likes of Chi-X, which is already capturing significant market share in trading of some major blue chip European stocks.

But with other MTFs gradually coming on line, it is unclear how long Chi-X will enjoy first mover advantage and what trading models or technologies are likely to gain the upper hand in the battle for liquidity.

It is reminiscent of the battle between American ECNs at the onset of the millennium, but look what happened to them. They consolidated and eventually got bought by the exchanges they competed with.

Are Chi-X, Project Turquoise and SmartPool destined for the same fate?

*PS For any of you who have ever wondered why liquidity pools are often referred to as being 'dark'. Well apparently, according to one knowledgeable insider, they are 'dark' because when you switch the lights on, there is nobody inside of them.

Tuesday, October 23, 2007

'Home-grown' software difficult to manage

A common tale one hears from financial software vendors is that banks are riddled with legacy systems, some dating back to the 70s, and that the code for those systems or applications has been lost forever because the person who developed it is no longer with the company or has filed it away in a drawer somewhere where no-one can find it.

With banks running so many IT systems as part of their daily operations, including the ones they have inherited from acquisitions, is it any wonder that they may not have a real grip on their IT environment? It is a bit like corporate treasurers saying they are not quite sure how many bank accounts they have globally - which in effect means cash could be sitting somewhere idle without being invested for maximum return or used more wisely.

With IT, the implications can be resounding. Not knowing how many IT systems, servers and applications a bank has running and their interdependencies with one another, particularly when new applications are installed, could have 'alarming' consequences in terms of rogue IT attacks and system downtime and failure.

This scenario has obviously played into the hands of vendors touting application dependency mapping and IT configuration tools, which essentially seek to provide a map or 'blueprint' of a firm's IT environment and its interdependencies so it can be more effectively managed.

Yet, according to one such provider, Managed Objects, a lot of application dependency mapping tools do not work well with "home-grown" or customised applications which banks have developed in-house.

Based on research commissioned by Managed Objects and conducted by Vanson Bourne, more than half of 100 UK IT managers and senior leaders in the retail banking, investment banking and insurance sectors, indicated that they run home-grown software, with 56% needing over six people and 38% needing more than 15 people to operate it.

What is concerning is that 57% estimated that software outages cost more than $10,000 per hour. And outages happen with regular frequency with almost 80% experiencing outages impacting the business in the past year. More than 20% had more than six outages in the same time frame.

Thirty-nine percent of banks surveyed by Vanson Bourne attributed 25% of outages to application changes, which let's face it, occur somewhat frequently in a banking software environment where the need to upgrade applications to support rising transaction volumes and to stay ahead of the competition, is an ongoing battle.

Banks are not going to retire some of this 'home-grown' software - too many applications rely on them and if it ain't broke why fix it. But it seems the challenge is integrating newer applications with these supposedly "complex" customised and home-grown applications.

Have software and integration vendors oversimplified the challenge of working with in-house software, and is encouraging firms to buy rather than build applications likely to have any impact, particularly as some banks will always see 'off-the-shelf' solutions as a leveler that stifles any so-called competitive advantage?

Wednesday, October 17, 2007

A PLUS for Project Turquoise

A week or two couldn't go by without some more news surrounding MiFID. And it seems that the latest is a revival in Project Turquoise's flagging fortunes. You know Project Turquoise, the multi-lateral trading facility announced by seven leading investment banks that has yet to get off the ground?

Well according to a report in Financial News, Project Turquoise looks like it may finally have 'lift off' with the announcement that it had moved to buy PLUS Markets, a London-based quote-driven electronic trading platform which trades more than 1,000 shares of largely small and mid cap stocks.

The deal has yet to be confirmed by either side but it would certainly give Project Turquoise the hand-up it needs as it still has not settled on a technology platform and has had well publicised difficulties finding a CEO.

Interestingly, PLUS Markets is installing a new trading platform, supplied by the Nordic Exchange Group, OMX, who Project Turquoise were also looking to purchase technology from. PLUS Markets new trading platform will support its "enlarged trading services offering under MiFID" and extend its share coverage to UK and EU liquid shares and some 7,500 securities.

Hacker 2.0

PR companies and consultants will go to any lengths it seems to raise the interest of us tired and cynical hacks. As I opened my email inbox this morning, two headlines leaped out at me (which I must say is pretty unusual as I generally find it hard to get excited about any press release that graces my inbox); "Hacking the Stock Market with Comsec," read the first one, and the second one was "The Hackers arms race 2.0," which sounds more like something that belongs on the front page of a tabloid newspaper.

The first pertained to an invitation from Comsec Consulting to come and see them "hack" into the world of online stock trading at the upcoming RSA Conference.

The Comsec presentation said that it would "review advanced analysis and hacking capabilities within the world of online stock trading – one of the most vulnerable sectors of online business, as well as demonstrating common weak security practices used by developers from an attacker's perspective, and an in-depth look into commonly used protocols and their vulnerabilities."

The other presentation at the same conference pertains to websites designed using good old "Web 2.0" technologies which are meant to provide a richer, more interactive internet experience, but allegedly at the expense of security says VeriSign who adds that the "complexity" of Web 2.0 websites means "traditional" security measures can no longer keep pace, leaving gaps for hackers to get in.

I am beginning to wonder if the IT security companies, hackers and PR companies are all in cahoots with one another?

Banks in hot water over AML

Still on my AML rant, it appears that Lloyds TSB is the latest bank to find itself in hot water under US legislation.

According to a report on Bob's Guide, Lloyds is alleged to have "knowingly assisted" Lycourgos Kyprianou, founder and former chairman of AremisSoft, in laundering approximately $500 million through his bank accounts. The Bank of Cyprus is also implicated in the allegations.

A Lloyds spokesperson stated there was no basis for the action by the US. But it does remind me of the debate we have been having on this blog over a period of months about the effectiveness of anti money-laundering measures and whether banks really know their customers or whether the solutions they are putting in place are merely to satisfy the regulators.

Well it seems US regulators are a rather difficult bunch to satisfy. Lloyds is not the first UK or European bank that has found itself in hot water. NatWest and Credit Lyonnais are the subject of lawsuits in the US that allege the banks channeled funds to organisations that raise money for Hamas, which is designated a terrorist organisation by the US, but not necessarily by other countries.

The lawsuits against the latter two banks were filed under the US's Anti-Terrorism Act, which says it is unlawful for any person or entity to provide "material support" to foreign terrorist organisations. The banks need to prove they did not knowingly channel funds and that the provision of "routine banking services" does not amount to "material support".

With reputational risk very much at the forefront and the heavy hand of regulators so eager to clamp down on any potential threat of money laundering (after all haven't some UK banks been fined under AML measures not for actually laundering money but for not having adequate measures to combat it in place?), the real question is not whether banks are "knowingly" participating in money laundering, but whether all the millions they have invested in combating AML is money well spent?

Even if there is a stray employee within a bank facilitating money laundering, what measures does the bank have in place to try and prevent that from occurring? It comes back to that age-old question, are banks spending so much time on 'ticking boxes' for regulators that they actually know relatively little about their customers?

Furthermore should the onus for 'policing' fraud and terrorist financing activities lie with the banks given that their raison d'être is to make money?

Monday, October 15, 2007

"Unusual" account activity?

I have been quite vocal about anti-money laundering (AML) measures put in place by banks to help combat fraud. Industry insiders, including those working for AML solution providers maintain that while banks are forced to put measures in place in order to avoid regulatory fines, no one can say with any certainty whether the millions being spent on AML and anti-fraud measures is actually working.

I alongside others have argued for a review of AML measures and legislation, which has not been forthcoming. All parties concerned appear to want to be seen to be doing something, even if it is not effective.

Recently, I experienced first hand the anti-fraud measures some banks have put in place. While travelling abroad to the US I found that I was unable to use my Maestro/Switch debit card facility to top up my pay-as-you-go telephone, although i was able to withdraw money from ATMs.

Upon my return to the UK still finding I had problems using the Maestro facility, I rung my bank upon which they informed me that they had identified some "unusual" activity on my bank account and had barred the Maestro facility.

The "unusual" activity turned out to be cash withdrawals I had made from ATMs in the US and a switch payment to my UK internet provider. According to the bank's anti-fraud department its "automated" anti-fraud system, which had just been updated, flagged the transactions based on the logic of how can someone be withdrawing money in the US while a Maestro payment on their card is being made in the UK?

Well the Maestro ISP payment comes out of my account every month and if they had bothered to check they would have seen a record of that, but as the anti-fraud officer I spoke to told me, automated anti-fraud solutions do not provide that level of detail, they merely flag things, which to them look unusual.

While I appreciate my bank's efforts in trying to combat card fraud, I do question the reliability of automated systems that flag everything without some form of manual verification of my transaction history and spending behaviour.

If my bank really knew their customer then they would have realised that I do make regular overseas trips and that the Maestro payment to my ISP is a regular payment made from my account.

Thursday, October 04, 2007

Banks enter uncharted territory

Well it is the end of yet another Sibos - an eventful or uneventful one depending on how you look at it. There has been the usual SWIFT speak - advancing critical dialogue, price reductions, rebates and a SWIFT that wants to get closer to its customers.

But as some of the journalists I spoke to this week have said, 'There has been very little meat' in terms of major announcements. OK the leading European banks have signed up to delivering SEPA- they are now "legally committed" as one person put it.

But take-up and migration to SEPA, particularly SEPA Direct Debits, still presents significant challenges, and there is a feeling that the regulators will need to do more to give SEPA a "nudge" to ensure it gets through these final yet all-important stages.

This Sibos will perhaps be best remembered for turning the tide when it comes to attendance - more corporates now attend SWIFT's annual user conference than investment managers, although those in attendance from the securities industry believe the debates around derivatives, the European clearing and settlement landscape and the future of the industry, were enlightening.

Yet, it is questionable whether the SWIFT community can truthfully say they 'gained momentum'? With the challenges around SEPA, automating securities and derivatives, the general confusion and uncertainty around whether banks can really play an enlarged role in the financial and the physical supply chain and provide value-added services customers want, it appears the industry is faltering somewhat.

The same applies to SWIFT in a way. Can it be everything to everybody - it is now even contemplating entering the insurance market - or has it bitten off more than it can chew, particularly given that it is talking about extending SWIFT connectivity to mid-tier corporates.

That was not in the original game plan, at least not that based on former SWIFT CEO Leonard Schrank's vision, which only saw SWIFT corporate connectivity as an option for the Fortune 100 companies.

His incumbent Lazaro Campos appears to have a slightly different agenda, which is likely to see SWIFT enter uncharted territory, just as the banks are finding themselves moving into traditionally non-bank areas (AP automation, e-invoicing, logistics). And like the banks, SWIFT is likely to enjoy mixed success.

Target2 Securities is not going to go away

Having opined at length about corporates and payments at this year's Sibos conference in Boston, I thought it was time to focus on some of the securities issues being raised at this year's event.

Despite there being negligible representation at the conference from investment managers, some of the vendors on the exhibition floor that sell in the securities services space, feel that the securities sessions, particularly those on derivatives processing and the future of the industry have encouraged a high level of debate.

Well all you investment managers that did not come to Boston, you have apparently missed out on a scintillating debate. One debate that continues to rage at this year's Sibos is Target2 for Securities (T2S) which saw Jean-Michel Godeffroy, director-general, payment systems and market infrastructure, European Central Bank, nervously hovering around Euroclear's stand last year at Sibos in Sydney.

The debate around T2S this year does not appear to have really moved on, with the ICSDs Euroclear and Clearstream still asking for further clarification around the ECB's proposal for settling securities in central bank money using its existing Target 2 system.

Euroclear was obviously hoping that its Single Settlement Engine encompassing five markets would be enough to appease the regulators, and everyone else including agent banks and national CSDs were probably hoping that T2S would just go away.

Well, that doesn't look likely it seems and national CSDs and local agent banks are contemplating what the future holds for them if T2S goes ahead.

If T2S is implemented, there will be clear winners and losers," said Pierre Slechten, CEO, Euroclear France. "The implementation of T2S will lead to further consolidation of CSDs in Europe and cause us to readdress our strategy in terms of moving up the value chain in custody."

As T2s proposes to replace the settlement engines of existing CSDs with a joint settlement engine, there was some suggestion that local CSDs and agent banks could team up to deliver new business services. "T2S relies on CSDs so CSDs will not disappear," said one speaker.

Katja Rosenkranz, member of the executive board, business strategy, Clearstream, said that those CSDs and agent banks that did not change their business models were likely to end up out of business.

Despite calls for the Eurosystem to join forces with other market harmonization initiatives such as Euroclear's SSE, Rozenkranz said T2S was the only solution that allowed for integrated settlement in central bank money. However, Slechten of Euroclear suggested there was likely to be some overlap with Euroclear's Settlement of Euronext-zone Securities initiative.

"I would be surprised if the T2S model does not end up looking like the model that we have developed for ESES. It is not sharing a platform, but it is sharing a view in terms of harmonisation."

The payments 'World Cup'

Guest blogger, Colin Kerr, research area director, payments practice, TowerGroup says regulation in Europe is unleashing a wealth of innovation around payments.

Well, what a week! Strategic changes announced by SWIFT on Monday, to the Red Sox winning their first game of the series last night. As I pondered the sports obsessions of Boston it struck me that Sibos is like the FIFA World Cup: the global soccer tournament that has until recently been neglected by the US.

This week the rest of the world has descended upon Boston to discuss the issues of global payments and, as with sports; the US is on its own track. This week over 50% of delegates arrived from Europe to dominate a conference held 4,000 miles from home.

Payments are 'Gaining Momentum' all right, as evidenced by the 44% of attendees who indicated 'payments' as their key interest area. No wonder that the payment sessions were overflowing with not a seat to be found. I almost felt a pang of sorrow for my colleagues in securities who suffered a dearth of attendees.

But the truth is that on a global basis, payments is the most diverse business in SWIFT’s domain today, and Sibos is the only true global payments conference. It is a forum to debate and share ideas, a showcase of global payments technology, but just as important it is a place to learn from each other.

Sibos is no longer a "SWIFT-only" conference for international messaging standards, but many US domestic payments industry participants have yet to recognize this.

Legislation is driving innovation ever faster in Europe. The Payments Services Directive (PSD) rather than free market forces is forcing the implementation of new payments instruments, but in the midst of upheaval this legislation is also fostering more innovation than may otherwise have existed.

There is collaboration on infrastructure and standards such as ISO 20022, but competition will result in product delivery and client service as banks seek to differentiate themselves.

Looking at the United Kingdom in particular, we can also see that legislation will soon result in low value, real-time, yet low cost payments through the Faster Payments initiative: a concept those of us who bank in the US can only dream of.

So what’s my point? The domino effect is that technology vendors are pushed to innovate rather then rest on the laurels of past successes. This year over 200 exhibitors showcased their technology and services to address the re-engineering efforts of banks.

Payments convergence is coming right now as evidenced by the interoperability pact announced this week among European processors, Equens, Iberpay, Seceti Stet and VocaLink. As the US drags itself away from cheques, its institutions and processors can learn and share at Sibos.

Meet at the world stage, engage, and play the game. Isn’t the concept of real time, person-to-person payments something worth pursuing, or is the banking industry content to let Paypal eat its lunch?

Next year the "Payments World Cup" is in Vienna. See you there.

Wednesday, October 03, 2007

Corporate access - banks have only taken 'baby steps'

By now you have probably gathered that Sibos has become a forum for corporates to tell banks what solutions they would like to see from them and for the banks to sit there, scratch their heads and do the exact opposite of what corporates have asked.

Guest blogger, Susan Feinberg of TowerGroup reminded us earlier about how diversified the SWIFT community has become particularly since Sibos was last held in Boston in the mid-1990s. Corporates now outweigh investment managers at Sibos and the likes of Shell and Microsoft are using their corporate 'muscle' to force banks to address their connectivity needs.

In a session this afternoon Shell, logistics company Safmarine and aeronautics provider EADS, told SWIFT and the banks what additional services (investment automation, trade document dematerialisation and automation of the bank account management process) beyond treasury and cash management they would like to see on SWIFTNet.

Now that they have had a taste, corporates are wanting to bite off a bigger chunk of SWIFT, but all of this presupposes that the banks who make up SWIFT want to move in the same direction as the corporates asking for these services and the SWIFT Board who appear eager to be everything to everybody.

When it comes to providing a cheaper and 'lighter' way to connect to SWIFT, the banking cooperative's new CEO Lazaro Campos is certainly thinking 'outside the box', finding inspiration in Steve Jobs of Apple and and his revolutionary iPod. (After all Campos did say in the opening plenary that SWIFT should be just another button on the fax machine, referring to investment managers' predilection for fax machines rather than SWIFT connectivity).

But one wonders if Campos' employers, the banks that make up the SWIFT community, are moving in the same direction as their enthusiastic new CEO. After all, despite all the rhetoric about doing more for corporates on SWIFT, corporates attending Sibos keep having to reassure the banks that they are not trying to 'disintermediate' them by wanting to connect to SWIFT.

"[Our single bank gateway] is not borne out of any vision to disintermediate our banking partners by commoditising payment transactions," Alex Harris, group treasurer, Virgin Atlantic told the banks.

As much as the banks like to think they have come a long way in terms of facilitating corporate access to the network, Harris reminded them that they had only taken 'baby steps'.

"SCORE may have simplified the enrollment process and reduced the cost and time to market [of SWIFT connectivity], but only for PLCs, which means medium-sized corporates that are not PLCs, must continue with the more cumbersome and time consuming MA-CUG model. SWIFT is only viable for large corporates with deep pockets and the rest have no real choice in how they connect.".

Making history in Boston

Guest blogger Susan Feinberg, research director, wholesale banking, TowerGroup, applauds the growing diversification of the SWIFT community since banks last met in Boston back in 1994.

At the opening of the first ever Sibos Corporate Forum, Marilyn Spearing of Deutsche Bank pleaded with the delegates to make their voices heard and help SWIFT and its member banks better understand how to maximize the SWIFTNet Corporate Access value proposition.

With over 100 corporate delegates representing 65 different companies, the Corporate Forum is evidence that this is a very different Sibos community than the one that last met in Boston in 1994.

I was a banker back then, representing one of the venerable Boston institutions that have since gone the way of M&A. What I remember distinctly about my first Sibos was the lack of diversity - lots of men, mostly middle aged, wearing black or grey suits and except for a few technology sales reps., they were pretty much all bankers like me. Well, not that much like me, come to think of it. I also remember being shocked at seeing bottles of wine on the table at lunch time. Our Puritan forefathers would not have approved.

I think it's appropriate that Boston - with its rich historical legacy at the center of the American Revolution - is the location for another kind of revolution. The creation of a new community within SWIFT in which the corporates are encouraged to have a dialogue with their banks, with SWIFT and with the technology community to make SWIFTNet a viable solution for more corporates.

Make no mistake, those delegates are already heeding Marilyn's call and have spent two days expressing their views on everything from endorsing the "SWIFT button" concept that we heard about in the opening plenary, to the need for bank participation in the supply chain, to the need for true global standards.

This might sound like no big deal to some, but to me it is an indication of the diversification that has occurred within the SWIFT community since the last visit to Beantown.

The highlight of Sibos for me so far was a conversation with one of the corporate delegates from a Fortune 100 company when she shared her process for identifying those banks that will support SWIFTNet connectivity for the company starting next year. She said, "We asked our representative from each bank whether they could support us on SWIFT only once. If we didn't get the right answer the first time, we moved on.We don't have time to educate our bankers about SWIFTNet."

Ultimately for this industrial giant, it will be SWIFTNet connectivity or nothing. Wake up call to the banks: your client facing representatives better be equipped to provide the answer the client is looking for or you'll find yourself with at least one less major corporate client.

Oh, and one more thing, please join me in wishing the hometown team g
ood luck in the playoffs starting tonight at Fenway Park. GO RED SOX.

Banks try to force ACH consolidation

Banks have been banging on for some time about ACH consolidation in light of SEPA, and this week at Sibos in Boston we have seen a number of banks including JPMorgan Chase and Nordea announce that they would use the EBA's STEP 2 as their single channel for all SEPA payments, at both domestic and cross-border level.

Is this tantamount to the banks saying they are no longer going to invest in the existing national ACH's as well as those with pan-European ambitions such as VocaLink and Equens?

Well yes and no it seems. In terms of the national ACHs, the banks have made it clear they do not want to invest in multiple ACH's and with respect to Equens and VocaLink some suggest that in five years they will eventually have to address their funding models, but that there will still be a place for them particularly as national payment instruments will continue to co-exist alongside SEPA instruments for some time.

The EBA is obviously feeling pretty pleased with the banks' announcements that they will use STEP 2 for their SEPA payments. Their ambition is to capture at least 30% of SEPA volumes and they predict the remainder will be bilaterally cleared between banks.

An announcement to that effect was made yesterday by Deutsche Bank, Deutsche Postbank and ING, major payment processors in Europe who in addition to leveraging EBA STEP 2, have agreed to exploit the efficiencies of direct file exchange between themselves for SEPA Credit Transfers and SEPA Direct Debits.

The three banks announced that as soon as SEPA clearing volumes ramp up, for high volume mass payments they will establish direct bilateral file exchange based on Pan-European ACH (PE-ACH) standards.

The EBA believes that similar announcements are likely to be made by 20 to 25 banks that are processors of mass volumes of payments, and that over time ultimately this will mean that the banks will "re-consider" their investment in national ACHs.

Another hot topic in the ACH landscape, but one that is not being talked about at Sibos, is direct corporate access, something that VocaLink is looking to offer via its Euro CSM platform.

The word on the street however is that direct corporate access to ACHs is a political 'hot potato' and something that the banking industry is not quite ready for. This suggests that VocaLink and any other ACH owned by the banks may face an uphill battle when it comes to rolling out direct corporate access.

So as much as banks attending Sibos pay lip service to the issue of corporate connectivity and enhanced corporate access, they are still stuck in a legacy mindset fuelled by the fear that corporates are trying to disintermediate them.

Do banks really understand supply chains?

I have typically avoided writing much about SEPA during Sibos in Boston as I have already aired concerns about a lack of corporate appetite for the new SEPA payment instruments and how migration to SEPA will be handled.

While vendors such as TietoEnator appear to have signed up a number of banks for SEPA payments processing, it would be foolhardy to think that this suggests banks are well prepared for SEPA.

A vendor exhibiting at Sibos told me that while his own company's treasurer saw SEPA as a great opportunity to rationalise bank accounts and to reduce the complexity of managing excess liquidity in euros, when they asked a leading cash management bank when this vision of SEPA would be realised, they said it could take years.

European banks like Deutsche and ABN AMRO have announced that they will provide format conversion capabilities from old legacy formats to the new SEPA XML formats to help ease corporates' transition to SEPA.

According to Eric Sepkes, director, cash strategy EMEA, Global Transaction Services, Citi, although some banks are offering format conversions, "there’s little economic reason for corporates to migrate to the SEPA instruments.” Some form of incentive in the way of value-added services is needed, he says.

Some banks appear to believe that by inserting themselves further into companies' supply chains, they will be able to make up some of the revenues lost through SEPA. The spate of announcements in the last 12 months around banks launching supply chain financing solutions confirms this.

It is difficult to gauge if all of these supply chain financing solutions will succeed and one of the leaders in this space is convinced that they have the upper hand because they bought a logistics company.

Yet, one thing the banks forget is that not all companies want banks to play an enlarged role in their supply chain. Banks are launching supply chain solutions left right and centre, but in their scramble to say they have an offering, corporates believe banks are not taking the time to fully understand what they are really looking for.

A number of the exhibitors at Sibos will tell you they have a supply chain solution or that they are about to launch one, but as banks historically have tended to sell to treasurers, one wonders how they are going to embed themselves deeper in the corporate supply chain without establishing a dialogue with people in procurement or those that make the purchasing decisions.

Jan Van Dooren, e-commerce executive for Danish shipping container company Safmarine, is an example of the new breed of corporates banks say they want to work with in order to embed themselves deeper into companies' supply chains. Yet he reminded SWIFT and the banks that they need to start talking his language if they want to have a fruitful dialogue.

"If you want to move in the corporate space beyond treasury, banks need to start talking our language," said Van Dooren referring to the myriad of acronyms that are bandied about at Sibos."Banks also need to take our operational processes more seriously."

Van Dooren is the first corporate I have heard publicly praise SWIFT'S Trade Services Utility (TSU) initiative. Given the needs of logistic companies like Safmarine to automate trade documentation such as purchase orders, invoices and bills of lading, Van Dooren says the TSU is "moving in the right direction."

The TSU was established by SWIFT to provide a centralised matching hub for the exchange of information between banks for matching purchase orders and invoices electronically. But while it addresses a gap in the supply chain - if banks can capture and automate this information they can use it to provide additional services and financing solutions - once again it is a largely bank-driven initiative which has no immediate and direct benefits for corporates.

Tuesday, October 02, 2007

Where are the investment managers?

Boston is not only host to Sibos. It is also the investment management capital of North America. Where are the investment management firms, asks guest blogger Rob Hegarty, managing director, securities & investments, TowerGroup.

One would think that by holding Sibos in Boston, the representation from investment firms would be significant…hardly. A paltry 2.8% of the attendees here are from fund companies. Given the location – Boston is arguably the investment management capital of North America – one would expect a better turnout from the fund business.

For that matter, the entire securities industry is under-represented here at Sibos. While SWIFT derives more than half of its revenue from the securities industry, only 28% of the 7,500 attendees are from the securities industry. Let’s go, securities industry! Make yourself heard in a place where you matter!

But enough of my rant. On a more positive note, the sessions on the securities industry were thought provoking and informative. We heard about the need to get more fund companies buying into SWIFT as a solution, and how simplifying the usage of SWIFT is the key to this adoption – even though we all know the fund companies will buy in when someone else picks up the tab!

The prices changes covered by my colleague, Ted Iacobuzio, on this blog earlier today also demonstrate a commitment to value for service. We also heard the new CEO, Lazaro Campos, say that “Securities remains the engine of growth” for SWIFT, and that it applies to all client types, enforcing SWIFT’s commitment to the industry even as they reorganise on regions instead of products.

And the session on the Securities Landscape 2013 provided an interesting view into the future of the industry, post global expansion and consolidation. Finally, there is a clear message coming from SWIFT: We know we’re not the only game in town. There is an overarching theme of competition for SWIFT, with frequent references to their 'competitors' and the 'competitive landscape.'

Maybe the hyper-active competition in the global evolution of financial markets is putting SWIFT on a new fast track? Only time will tell, but the prospects certainly look promising.

SWIFT - eat as much as you like

Guest blogger, Ted Iacobuzio, managing director and practice leader, payments, TowerGroup, shares his views on SWIFT's "eat as much as you like" opening plenary speech.

Well, another SIBOS, another opening plenary. On the surface, the same old, same old - rebates, price cuts, we really work hard for you, etc., etc. Not scintillating, but a good old-fashioned crowd pleaser--a typical "new broom" speech.

But scratch the surface, and it was actually far more interesting. The actual reductions in price were indeed old news. But the changes in pricing structure--three-year agreements for large banks, for example--and, just as important, the change in SWIFT's own attitude to pricing, and, hence to its customers, indicate that the consortium has perceived threats to its business. For the first time, SWIFT seems to be acknowledging the fact that the world has evolved and that it needs to address this as well. It has finally realised that it has competition.

This can only be a good thing for the industry. There is nothing like a competitor breathing down your neck to focus your mind. The expected price cuts for the big banks were there and in reality only a small proportion of SWIFT users--the very largest--will even consider this new flat-rate deal, even though these largest users account for 80% of SWIFT transactions, and the majority of growth, as SWIFT's head of pricing Andre Boico has pointed out.

But there was a significant shift in creating a "eat as much as you like" deal at a flat-rate. This could work effectively to drive volumes and more important, tie users into SWIFT. And addressing the issue of "total cost of ownership" for the rest of the community will address the George Orwell issue: some members of the community are more equal than others. The cost of just being connected has long been an issue, and so the industry will be watching with interest.

The other interesting thing to note was the devolution to a regional structure. The slide said it all--Sibos is taking place in the heart of the US mutual fund business, yet over half of the attendees, are European. The US banking session spent a considerable time trying to discuss SEPA. SWIFT is betting on regionalisation to get more traction, and needs it, er, swiftly.

Corporates vs fund managers on SWIFT

When it comes to corporate treasurers and investment managers connecting to the SWIFT network, SWIFT has got itself into a rather tricky situation. Having actively pursued multinational corporations in order to drive more volumes onto SWIFTNet, there are now approximately 200 corporates on SWIFT, and corporates make up 33% of SWIFTNet FileAct traffic.

Arguably 200 corporates is not a lot in the overall scheme of things, but with a number of vendors such as Sterling Commerce, Broadridge and SunGard announcing service bureau or expanded Member/Concentrator offerings to facilitate connectivity with SWIFT, thereby reducing the upfront investment for corporates that do not want to connect to SWIFT directly or invest in SWIFT domain expertise, it should provide some inducement for more corporates to connect to SWIFT.

After corporates complained that they could not directly connect to SWIFTNet via their ERP systems, SAP also announced at Sibos this week an integration package to facilitate direct connectivity between SAP ERP systems and SWIFTNet. Great news for corporates, some of whom have had to use their own middleware (Microsoft) in order to connect SWIFT with internal applications.

At Sibos in Sydney last year, former SWIFT CEO Leonard Schrank suggested that 250 corporates on SWIFT may be enough. But it caused some to ask, what about the small to mid-tier corporates? Couldn't they benefit from SWIFT connectivity also? Well today BNP Paribas announced that it would actively pursue mid-market companies with earnings of $100 million or less.

"We have to generalise SWIFTNet," said Pierre Fersztand, head of cash management, BNP Paribas, announcing that it would try to make SWIFT corporate connectivity more attractive to 100 mid-market companies in Europe by working with integration and ERP vendors to simplify connectivity to SWIFT and by partnering with a SWIFT service bureau.

Banks appear to be bending over backwards to get more corporates to join SWIFT. And whilst one can see volume as the driver - the more volume on SWIFT the less it will cost banks, corporates and all SWIFTNet users - one has to ask why aren't banks providing the same level of support in terms of making it easier for fund managers to connect to SWIFT?

SWIFT had targeted investment managers long before they permitted multinational corporations to join SWIFTNet? Yet with attendance of less than 3% from asset managers this year, compared to 100 representatives from more than 60 multinational corporates, SWIFT has failed to mobilise the investment management community as successfully as it has corporates.

SWIFT's new CEO Lazaro Campos admitted in yesterday's opening plenary that SWIFT had failed to convince fund managers that they should connect to SWIFT to facilitate STP. Whether price reductions will be enough to encourage investment managers to join SWIFT is debatable. For investment managers who are more concerned with 'alpha' and portfolio performance, the STP and standardisation benefits of SWIFT do not provide the same allure as it does for multinational corporates.

The main reason why multi-banked corporates are joining SWIFT is because they want a single and standardised interface to communicate with all their banks, instead of having to pay out EUR 50,000 each time they want to connect to a proprietary banking interface.No such incentive exists for fund managers.

Interestingly, although corporate interest in SWIFT is increasing, there are still a number of banks that see corporate connectivity on SWIFT as a direct competitive threat and are reluctant to actively promote it. Of SWIFT's 8000 member banks only 220 banks offer SWIFT corporate connectivity and a much smaller number are promoting the service.

If banks in general are reluctant to support corporates joining SWIFT for fear of 'disintermediation', should we be really surprised then that they have failed miserably when it comes to selling SWIFT to investment managers?

Will there be a SEPA pricing war?

As we all know the Single Euro Payments Area (SEPA) is forcing major re-engineering in the European payments landscape. This week at Sibos in Boston a number of major vendors (HP, Bottomline, Microsoft, Sun Microsystems) are touting the latest versions of their payment processing systems.

But what is more interesting perhaps is the announcements being made by banks. At Eurofinance in Vienna in late September, Deutsche Bank stirred things up by announcing that it would apply the same pricing to all payment transfers within the eurozone regardless of payment size to try and entice corporates to start using the new SEPA Credit Transfers from 28 January, 2007.

Having invested heavily in its SEPA platform, Deutsche along with other banks that see themselves as major contenders in the post-SEPA payments processing landscape, are eager to see corporates and the public sector move to the new SEPA instruments as soon as possible so they don't have to bear the cost of running legacy and SEPA systems in parallel for too long.

Deutsche said it would also accept payment transfers in a host of legacy formats to try and reduce the pain for corporates of converting their own internal systems to SEPA XML formats.

Today, ABN AMRO, will announce that its systems are "SEPA ready" and that it will provide "fuss-free" conversion of legacy payments to SEPA XML to minimise the impact of the change.

It did not announce anything on the SEPA pricing front, but surely with Deutsche Bank stepping up to the plate and announcing a flat fee for euro payment transfers, it is only a matter of time before there is a 'pricing war' by major European banking providers to try and incentivize corporates to migrate to SEPA as soon as possible.

Meanwhile, banks like Deutsche have made it clear that they will centralise their payments processing of low value euro payment transfers on the EBA's STEP 2 platform, which it considers to the only PE-ACH. Banks like Deutsche are keen to see consolidation amongst Europe's myriad ACHs and payment processors and see this as a way of forcing the issue by making the bank's stance public.

The question is what does this mean for VocaLink, Equens et al which also see an enlarged role for themselves in a post-SEPA landscape?

Monday, October 01, 2007

SWIFT on the "offensive" in Boston

A common 'behind-the-scenes' gripe of banks at Sibos is that SWIFT is too expensive to connect too. Even large volume users of SWIFT say it is too expensive, yet they have to connect to it because their customers demand it. Well, for the first time in my more than 10 years of attending Sibos, (not something I like to divulge), SWIFT has tried to knock this kind of 'backroom' talk on the head.

I did get an awful sense of 'deja vu' when SWIFT chairman, Yawar Shah, announced in the opening plenary at Sibos in Boston yet another rebate - 15% on top of the 10% SWIFT had already delivered, bringing the total rebate for 2007 to 25%, with another 5% rebate earmarked for January 2008. 'Whoopee do' is often the retort of most banks to SWIFT's rebate announcements.

It seems SWIFT has finally woken up to the fact that yet another rebate, no matter how significant, is not necessarily enough to evoke excited chattering amongst the masses. So SWIFT went on the "offensive" as it were, which may sound somewhat contradictory given that the standard joke is that SWIFT does not mean moving swiftly. However, Shah seemed eager to knock that one on the head saying that SWIFT realised it needed to work harder and more aggressively.

"I want to see SWIFT on the offensive through a combination of governance and more aggressive leadership,"
said Shah acknowledging publicly the competitive threat SWIFT faces from other network providers (BT Radianz, SAVVIS et al) and that internet bandwidth continues to come down in price, increasing the challenge for SWIFT to remain relevant from a pricing point to its users.

Eager to try and put its data privacy issues behind it, Shah banged on about the new distributed architecture SWIFT was deploying, which means intra-European data will be kept within Europe. And with 100 representatives from 65 corporate entities attending SWIFT's "biggest ever Sibos" in Boston (there are actually more corporates attending Sibos now than fund managers, which make up less than 3% of total attendance), Shah was keen to re-iterate that it did not intend to come between banks and their corporate customers.

Well that is a relief, but the message does not appear to be getting across to those smaller regional banks, who according to large corporate customers of SWIFT's like Microsoft, are still not actively supporting SWIFT corporate connectivity for fear that they will be 'disintermediated'.

Shah even spoke about whether SWIFT should extend its tentacles to insurance, which raises the question is SWIFT extending itself a little too far in its efforts to be everything to everybody?

A good example of the 'contradiction' that SWIFT has become however, is its desire to be more competitive, much like any commercial entity. But hang on a minute isn't SWIFT meant to be a co-operative? Yet, when SWIFT's new CEO Lazaro Campos took to the stage, he sounded more like the CEO of a commercial company than a banking co-op.

Walking amongst the audience (the first time I have seen a SWIFT CEO do that), rather than talking at banks from a lectern on the stage, Campos announced a new "lite" SWIFT interface for those banks that have often bemoaned the high cost of connecting to SWIFT, despite all those rebates.

Eager to debunk the perception that higher volume users of SWIFT pay more, Campos also announced that the SWIFT Board had approved a "fixed fee" for a three year period for high volume users of SWIFT, which meant they could increase their volume on the network without paying extra.

Taking a leaf out of HSBC's book which emphasizes that despite being global it is still a 'local' bank, Campos said SWIFT would establish regional operational centres in the US, Europe and Asia, so it could be closer to its customers.

Last year the big theme in terms of future SWIFT growth was the BRIC countries. This year however, Campos said there was still significant potential for growth of SWIFT traffic in the US and Japan.

Whilst "governance on the offensive" was mentioned, I am not sure if this will satisfy those banks that still believe SWIFT needs to address its governance so it more accurately reflects who is accessing SWIFT, which let's face it is more corporates these days than fund managers. It remains to be seen even with SWIFT "lite" and price reductions whether SWIFT can engage fund managers as successfully as they have corporates.

Beyond the world of SWIFT, Bank of America CEO, Kenneth Lewis, highlighted the recent credit crunch and how it was not really a surprise to those that heeded the warning signs. He went on to talk about how integral a robust and secure payments messaging infrastructure was to successful economic markets.

Yet, somehow I don't think the resiliency of SWIFT and payments messaging traffic is going to mean that much to those sub-prime mortgage borrowers impacted by recent events, nor has it prevented one of Bank of America's largest competitors and one of SWIFT's largest volume users, Citi issuing a Q3 profits warning ahead of its official results announcement.

Regulation as an opportunity?

Guest blogger, Gareth Lodge, analyst, European payments, TowerGroup, gives us his thoughts on some of the 'juicy' and not so 'juicy' announcements he expects to see at Sibos this week in Boston.

I'm writing this mid-afternoon on day one of Sibos, just as I'm about to dash to the opening plenary. This has increasingly set the tone for the event, so all eyes will be on Ken Lewis in a few moments.

One of the reasons I think why the keynote is so pivotal is that Sibos has grown to be so important to the industry and that everyone uses it as a platform for announcements. I sat in my hotel room late last night just trying to keep up with the embargoed releases that have been shared with TowerGroup, and they are just the tip of the iceberg. As a result, it's often not until a week or two after the event when the dust has settled that some of the more significant releases become apparent.

I think that's one of the reasons why we've seen some releases before Sibos as pre-emptive strikes, with the news of Equens and Seceti merging, Deutsche Bank "shielding" corporates from SEPA, and an expected statement from the EBA that JPMorgan and Deutsche Bank will be using the EBAs' STEP2 platform as their single channel for all SEPA payments, at national and cross-border level alike.

So what am I really expecting? I'm not sure that we'll see the big announcements that the industry is hoping for. That said the Microsoft announcement that it is rationalising the payments platform for Santander though is very significant. I'm a stronger believer that if one large bank radically changes how it processes payments, then it will set off a chain reaction.

But whilst there are plenty of conversations, there seems to be less appetite for taking what is perceived a potential risk - if it ain't broke.... This announcement will cause a number of banks to re-visit this area. I've coined a phrase SEPA 2.0 to address this and it has two aspects. Firstly to cover the Web2.0 like aspects of the innovations that will result from SEPA schemes - mobile and internet payments will become easier.

But the second point is that SEPA is first and foremost part of a bigger political vision which won't be allowed to slip. Just as MiFID is a second attempt, a second iteration of SEPA is becoming increasingly more likely.

TowerGroup is seeing that banks are beginning to look at SEPA in a more strategic, longer term way. SEPA Direct Debit is such a radical change for many, both in scheme and potential impact, that it is forcing them to move from a tactical point fix, to a bigger strategic response, such as systems replacement or outsourcing.

As a result we might find that there are only a handful of significant announcements over the course of the few days. Yet as an analyst, I'm torn between wanting lots of big, juicy announcements now and not wanting any yet, as it would indicate that banks are actually starting seeing regulation as an opportunity, rather than fighting it. We live in interesting times

The buzz on the exhibition floor

At Sibos it is always interesting to try and sound out the unofficial news that does not make it to the press release stage for obvious reasons. Wandering around the exhibition floor, one picks up a lot of unofficial 'noise and one of the comments an industry source made to me concerns ABN AMRO, the top tier financial services provider, which has two high profile suitors, Barclays and Royal Bank of Scotland (RBS).

I was at a financial services event in London the other day where an employee of ABN AMRO piped up saying that,'If there is anyone in the room from RBS, you are looking very attractive."

That would seem to suggest that RBS is the favoured suitor for the Dutch bank. But the buzz on the exhibition floor is what does that mean for ABN AMRO, its customers and the product offerings the Dutch bank is promoting at Sibos, which include its SEPA offering and enhancements to its MaxTrad platform, including the implementation of Adobe's LiveCycle solution for creating "MaxTrad Express" geared at smaller-to-medium-sized customers that would not normally be able to leverage the bank's MaxTrad capabilities?

But with the whiff of consolidation in the air, the question on some observer's lips was, 'Will those same solutions and products be available in a few months time if ABN AMRO is acquired, and what does this all mean for end customers?

Judging by the ample size of its exhibition stand at Sibos, ABN AMRO appears to be taking it all in its stride, adopting a 'business as usual' stance until details of any potential acquisition are finalised.

Reuters steals the EDM spotlight

Having just told you about HP's data warehousing capabilities, Gary Barr, head of enterprise data management (EDM), Reuters comes along and knocks all those assumptions on its head by claiming that "data warehousing" delivers relatively little value in the EDM space.

A late entrant to the EDM space, which has been dominated by vendors such as GoldenSource, SunGard and Cicada, Reuters used the opening of Sibos in Boston today to try and steal some of the thunder from the founding members of the EDM Council. According to Barr, the EDM Council in its earlier incarnation was not "totally representative" of the industry, and that now a major market data provider such as Reuters had joined, he anticipates that it will give the EDM market, which has suffered from a lack of real-world implementations, a much-needed boost.

Reuters differentiates itself from existing vendors in the EDM space, which Barr says are very much focused on pricier implementations ($5 million plus) geared towards top tier firms.

Reuters on the other hand, says Barr, are focusing on extending EDM to mid and lower tier firms at what it terms a more attractive pricing proposition including the provision of professional services, which it has partnered with Detica to provide, as well as offering a subscription pricing model that is attractive to tier 3 and 4 firms. "Hosting and outsourcing is going to be a big business over the next few years," says Barr, differentiating Reuters' offering in this space from managed reference data services which have enjoyed mixed success.

So what can Reuters bring to the EDM space that other vendors haven't? Well Barr highlights Reuters unique position as a market data provider, that also has a reference data platform and integration capabilities. According to Barr, integration, not data quality and governance is the key ingredient for making EDM implementations work.

Reuters also has 1200 existing customers via its RMDS footprint, which it hopes to migrate to its Enterprise Platform. One customer is already live on the new Reuters Enterprise Platform, which incorporates its real-time market data platform RMDS, its reference data system and what it calls its "Enterprise Integration Engine (REIE)", which Barr describes as the "intelligent glue" that allows firms to orchestrate the distribution of data to applications and their customers.

Reuters' Integration Engine contains both complex event processing and "bi-directional" business intelligence, and is based on technology it has licensed from a company called M35. Reuters also has native connectivity to three of the largest middleware providers - IBM, Tibco and BEA.

Irrespective of the application the client is using - Bloomberg, Reuters, Thomson - Barr says Reuters Enterprise Platform supports the distribution of data from point A to point B without the costs and inefficiencies of point-to-point integration.

Reuters enterprise platform embodies its vision that real-time market data and reference data will converge. "The platform provides the prospect of integrating the two (market and reference data)on the same platform," says Barr. So just as the market has demanded real-time streaming market data, Reuters believes reference and corporate actions data will move in the same direction.

I would like some 'intelligence' with my data

We all know that generally speaking, banks have done a pretty poor job of gleaning anything ‘intelligent’ from the vast reams of data they collate and store about their customers. There are various reasons for this. Despite the promise of customer relationship management technologies, they have fallen far short of user’s expectations, which has not been helped by the fact that in most major financial service firms, data resides in silos which are not well integrated.

But with certain parts of their business becoming commoditised, increased regulatory reporting requirements and banks looking to leverage information in a more meaningful ways in order to gain a competitive advantage, “business intelligence” has not only become the industry’s biggest bug bear, but also its most significant opportunity to deliver value added services that make it stand out from the crowd.

Recognising this opportunity, the data hardware vendors have tried to up their game and deliver that little something extra. Some like Sybase have bolted on complex event processing technologies on the front-end to support real-time analysis of trade, risk and reference data. Yet, while these solutions show significant promise, they are lacking in “real-life” implementations to ensure they do what they say on the tin.

HP is the latest data management vendor to make bold claims in the business intelligence and risk management space. Following its acquisition of Knightsbridge Solution Partners, a Chicago-based data management and large scale data warehousing solutions provider, Hewlett-Packard has beefed up its business intelligence division and developed a “data enablement” platform overlaid with a business intelligence application layer.

HP’s new data provisioning platform, Neoview provides a hardware and information management application layer to facilitate optimisation of business intelligence in “real-time” environments. Neoview is designed to be highly scalable (it is geared towards large data sets in the hundreds of terabytes) and to handle mixed workloads .

According to Geoffrey Burkholder, director, business intelligence solutions, HP Financial Services, its data provisioning creates a new approach to how data is sourced. Instead of sourcing data independently from the same place, it sources the data once and all the relevant pieces of data reside in the Neoview platform, to ensure that everyone is using the same data so that they can ensure high levels of data quality and governance, particularly for regulatory reporting.

These solutions are not for the faint hearted or light of pocket though. In a deal valued at $4.3 million HP announced today at Sibos in Boston that Dutch bank, Rabobank had selected HP Neoview to service its business intelligent needs

HP also announced the release of its new Enterprise Risk Management solution, which leverages the data provisioning capabilities of its Neoview platform. Its ERM solution is designed to addresses all three pillars of Basel II and compliance with regulations such as Sarbanes-Oxley, International Accounting Standards, anti-money laundering and Know Your Customer.

Given the transparency required by regulations such as SOX and IAS, Burkholder says HP’s ERM solution enables firms to ‘drill down’ into each piece of data so firms can more easily demonstrate to regulators what process the data went through to derive regulatory reports. For banks struggling with KYC requirements, which let’s face it is most firms, Burkholder says the data provisioning within Neoview means it is able to provide a “much better view of all data related to the customer.”

Well he would say that, but Burkholder is particularly confident about the capabilities enshrined within its new ERM solution as it draws not only on its own in-house expertise, including the Knightsbridge acquisition, but also includes input from a number of software collaborators including Quadrant’s data modelling capabilities, Informatica’s data integration tools and Microstrategy’s business intelligence and advanced dash board capabilities. Will be interesting to see if this makes HP a more serious contender in the business intelligence space

Saturday, September 29, 2007

Innovation comes from within

Our first guest blogger for Sibos in Boston is Tim Lind, who during his time at TowerGroup did a 'Heidi Miller' on the securities industry with his aptly titled, "A Eulogy for STP and the Asset Manager," which blamed poor STP on custodians' inability to understand what fund managers really cared about, alpha.

Lind is now managing director, strategic planning, for post-trade pre-settlement solutions provider Omgeo, and ahead of his "intellectual battle" on Tuesday in the Sibos Fund & Investment Management Forum debate, Lind calls on the industry not to rely on regulation for innovation.

On Tuesday, I will be speaking on a SIBOS panel, against the need for more prescriptive regulation. Whilst I am sure it will be entertaining for the purposes of the debate to be on the side of good versus evil, we all know that it isn’t that clear cut. Whilst no one wants to be burdened by onerous rules and regulations, guidance from regulators plays an important role in shaping behaviour in the securities industry.

But it’s not just the role of the regulators to initiate transformation. The institutions that drive our industry must show leadership in putting the interests of the investor first and foremost. Just as doctors are bound by a ‘Hippocratic Oath’ to do no harm to their patients, shouldn’t we expect the leadership of our industry to uphold the interests of the investor with the same zealousness?

Current discussions around the pros and cons of principles- versus rules-based regulation are turning attention away from the industry‘s responsibilities. It may appear easy to criticise the SEC for implementing a regulatory overload, or to praise the FSA for its apparently more enlightened approach, but the responsibility for identifying pockets of risk and initiating ‘palatable’ change lies with securities firms and industry bodies as well as regulators.

In a 2004 speech addressing the mutual fund scandals in the US, William Donaldson, then chairman of the SEC, summarised the point beautifully. “Opportunity may only knock once, but temptation leans on the doorbell. As much as we may wish to, we will never be able to set and enforce rules that govern every situation in which an investment adviser’s employees might be tempted…”

The SEC has made it clear they expect the industry to follow the highest level of ethics, not because they should fear enforcement (which of course they should) but because it’s their responsibility as a fiduciary.

That said, threats of regulation, rather than regulation itself, have proved effective in the past. Rather than issue an edict, the Federal Reserve threatened to intervene unless the world’s biggest banks reduced their credit derivative processing backlog by 30%. The banks responded to the threat, achieving this goal and even outlining their own new target of cutting the backlog of unconfirmed credit derivative trades by 70% in a letter to the Fed.

The European Commission took a similar approach when it decided against issuing regulation to increase transparency in European Clearing and Settlement. Instead it issued a Code of Conduct which seems to be working.

I admit that it doesn’t always happen this way. The Canadian regulator, the CCMA, having seen no evidence of self-transformation, decided to tackle one of the most risk-laden spaces in the trade life cycle. The regulation, known as National Instrument 24-101, mandates that institutional trade matching, or same day affirmation (SDA), be adopted by investment managers in the Canadian financial market by the summer of 2008, via STP. However, by having the option of a phased approach over a few years, firms have at least been given time to get their back-offices in order.

As a community, the securities industry is evolving at a faster rate than ever before. Technology is empowering the rate of innovation, and it is clear that the entire industry must constantly review ways to ensure that this change can continue safely, preventing systemic and market risk. It’s not just a question of rules vs. principles, it’s a question of responsibility.

A different perspective on Sibos

The last time SWIFT's annual user conference was in the US in Atlanta, Heidi Miller, executive vice president and head of JPMorgan Chase Treasury & Securities Services, lambasted the banking community for "being a long way from STP" and the "glacial pace" at which banks moved, weighed down by legacy investments, regulation and compliance.

Are banks at the epicentre of the transaction services industry as secure as banks think, Miller posed? Well it is three years since Miller made that speech and those that saw it have been dining out on it for some time. It struck a chord - bankers were surprised at someone in their own camp being so forthright about banks and SWIFT needing to raise their own game, when normally Sibos is as an opportunity for bankers to pat themselves on the back.

Will there be a lot of back patting at Sibos 2007 in Boston? Well this year the opening plenary features a new SWIFT CEO Lazaro Campos and Ken Lewis, chairman and CEO of Bank of America. Those of us that have attended more opening plenaries at Sibos than we care to remember would like to think that the industry has heeded Miller's message got their act together and moved swiftly to up their game.

But with an industry still overburdened by legacy systems, the unfulfilled promise of service-oriented architecture, dwindling payment volumes and even more regulation, as well as the global fallout from the recent credit crunch, is innovation and banking an oxymoron or has the industry really 'gained momentum,' to borrow SWIFT's theme?

In the coming week we will be covering of on the major themes of Sibos 2007 in Boston - corporate access on SWIFT, and the ongoing automation and regulatory challenges faced by the investment and fund landscape. A different guest blogger from TowerGroup will be joining us each day to share their thoughts on some of the main issues raised throughout the day's events. And I as usual will be wading through the mines of nonsensical press releases to try and provide you with a different perspective on Sibos.

Wednesday, September 26, 2007

Berlin's stock exchange looks to Equiduct

While Project Turquoise may still be looking for a CEO (well they were the last time we checked), the "pan-European exchange," Equiduct is looking to shore up market share by getting into bed with Börse Berlin.

Börse Berlin announced this week that it had taken a majority stake in Easdaq, which trades as Equiduct. Equiduct revived the old Easdaq trading platform in response to the removal of the 'concentration rule' under the Markets in Financial Instruments Directive (MiFID), which effectively means trading of equities on the Continent is no longer confined to national exchanges.

Under MiFID, exchanges like Börse Berlin are tipped to be part of a dying breed as supposedly faster and cheaper multilateral trading facilities, ECNs and alternative trading venues emerge post-MiFID to try and steal market share from 'dinosaur' exchanges. However, as we reported in the latest issue of Financial-i, few contenders other than Equiduct, Chi-X and Project Turquoise (which has yet to find a CEO) have thrown their hat into the ring.

According to the PR blurb the deal between Börse Berlin and Equiduct will provide their customers with "unrivalled access to trading in a broad category of European financial instruments." As to what this precisely means has yet to be revealed but Equiduct believes it has the "state-of-the-art" trading system and Börse Berlin has the "broadest range of securities" and experience in secondary exchange trading.

Thursday, September 20, 2007

ME exchanges battle for dominance

The long suffering Nasdaq which was unsuccessful in its bid to court the London Stock Exchange (LSE) and looked like suffering a similar setback in its pursuit of OMX Group in the Nordic countries, appears to have reached an interesting comprise.

Bourse Dubai, the other suitor for OMX, has agreed to let Nasdaq have OMX, while the Dubai exchange has agreed to take on Nasdaq's stake in the LSE, as well as a 20% stake in Nasdaq itself. It is all starting to sound rather incestuous in the world of exchanges - everybody is hopping into bed with one another in their bid to go global.

As part of the deal Bourse Dubai has agreed to give Nasdaq a share in the fledgling Dubai International Financial Exchange, which will now carry the Nasdaq name and use both Nasdaq and OMX market technology. Is it a 'win-win' for all parties? Well the LSE and Middle Eastern sceptics in Washington may not be cracking open the champagne bottles just yet.

As some pundits suggest, a government-owned UAE exchange owning a stake in a US brand name like Nasdaq may rise the ire of those that are not in favour of any Middle Eastern company owning anything American. One only has to recall Dubai Ports World's decision to sell off its US operations to an American owner following pressure from Congress. Is the US Congress likely to have similar feelings of discomfort about Bourse Dubai owning a stake in Nasdaq?

Similarly those that nurse nationalistic sentiments about the LSE may be equally miffed by the deal. This was borne out by the LSE's response to Qatar making an offer for Nasdaq's 31% stake in the LSE. According to a report in The Times, the LSE welcomed the Qatari investment as a "long-term" play. No such sentiments were ascribed to Dubai's stake in the LSE.

Now it appears the battle lines have been drawn between Dubai and Qatar with the latter making an overnight raid to acquire an almost 10% stake in OMX. Few could have predicted that the fate of the LSE and Nasdaq would lie in the hands of Middle Eastern exchanges.