Friday, December 12, 2008

What credit crisis?

For the last few months we have all been inundated with news stories telling us that the interbank lending market has dried up, along with bank lending in general and that commercial paper markets have virtually ground to a halt.

But there are some dissenting voices emerging from the wilderness to tell us that all is not as it seems; that the figures don't support the US Federal Reserve's and Treasury Secretary's assertions about the dire state of bank lending.

Yesterday, Octavio Marenzi with analyst firm Celent, released a report aptly titled: Flawed Assumptions About the Credit Crisis, which makes no bones about the fact that Ben Bernanke, Federal Reserve chairman and Hank Paulson's comments about the so-called credit crisis are incorrect as they are not backed up by publicly available data, including stats provided by the Federal Reserve Bank itself.

Marenzi does not discount the fact that we are in a deep financial crisis with banks failing and countries teetering close to collapse. However, he says US lending markets are in "good health" and lending by US commercial banks increased 15% during the credit crisis. In fact it says an all-time record high in US commercial bank credit (more than $7.2 trillion) was reached in October 2008.

Marenzi contends that:

  • Interbank lending reached its highest level ever in September 2008, and since the beginning of the credit crisis, it has increased approximately 22%. The cost of interbank lending also remains at low levels, he says.
  • Contrary to the assertion that commercial paper markets had stopped functioning or become prohibitively expensive, Celent says outstanding volumes in the commercial paper market for non-financials are higher now than at any point since early 2004 and that the cost of borrowing in that market has dropped to at least 10-year lows for non-financials.
  • Bank real estate lending also reached a record high in October 2008 and has grown consistently during and before the crisis
Marenzi proffers two possible explanations for the huge discrepancies between what Federal Reserve and government figures are saying and publicly available data. Perhaps Mr Paulson and Bernanke have additional data available to them that supports their assertion that credit markets are in trouble, although Celent is sceptical that such data is available.

The only other explanation, says Marenzi, is "that policymakers are reacting to the situation of a particular set of businesses and financial institutions, and are incorrectly generalising this to
the market as a whole. If this is the case, the policy tools being employed may well be the wrong ones."

Celent was inspired to publish its report following publication of a paper in October 2008, Facts and Myths about the Credit Crisis, which was written by three researchers at the Federal Reserve Bank of Minneapolis. According to Marenzi, the paper claimed that there appeared to
be an abundance of credit flowing in the US market and that the researchers were critical of US policymakers' lack of serious analysis and of "substituting hard data with their own speculation."

Marenzi also looked at commercial lending in Europe and said the data shows no evidence of a credit crisis with consumer lending in France and Italy continuing on the same trajectory since the beginning of 2003, while in Germany, consumer lending has been flat for some years. Commercial lending to non-financials in the three major eurozone economies was also at its highest ever levels at the end of October 2008, having shown steady growth since late 2005.

Based on Bank of England data and its own analysis, Celent also says that lending by UK banks is at its highest levels ever, growing at a rate of 12% annually since 1994. So it appears that the financial crisis has not translated into a general credit crisis, although we are being told differently.

UK Prime Minister Gordon Brown who accidentally remarked that he had saved the world by pumping billions into the UK economy to get credit flowing again, may be eating humble pie alongside various other political leaders.

Thursday, December 11, 2008

Risk management in your Xmas stocking

Go to a Christmas lunch these days and most people will be talking about what they are filling their Christmas stockings with or how they are looking forward to eating turkey yet again for the fourth time in a week.

While the conversation at business intelligence and analytics vendor, SAS's Christmas press lunch today may have been peppered with such conversational tid bits, the subject of the lunch was for SAS to publicise its recent foray into the capital markets space.

Building on its already strong base in the retail banking sector, particularly in the areas of operational risk, credit risk, market risk and financial crime, SAS has put together a team based in the UK that is wholly focused on selling its analytics and risk management solutions to capital markets firms.

2009 is likely to see increased regulatory oversight, particularly when it comes to the overlooked areas of liquidity and counterparty risk; and not one too miss an opportunity, SAS is eager to sell its solutions to a business that is drowning in information, but not quite sure what to do with it or how to make sense of it in order to determine risk, fraud liability etc.

It seems the poor old trader is likely to come under increasing surveillance with intelligent software algorithms monitoring their every move and looking for unusual patterns of behaviour (the ability to match seemingly unrelated events across different parts of the business). The technology is certainly to provide such surveillance, but the cynic in me says most banks are only likely to embrace these technologies as a 'box ticking' exercise in order to comply with regulation, rather than seeing it as good business per se.

Risk management is suddenly the business to be in, but one has to wonder where was all this wonderful bells and whistles technology when things started going wrong in capital markets? And at the end of the day technology can only do so much.

If the people in charge still view "betting on the bank" as a necessary part of making money, or don't want to listen to those 'little voices' in their risk department warning them that something bad is about to happen; then no amount of technology can account for the fact that the culture within firms has to fundamentally change if risk management is to be viewed as a strategic asset and not something that is ferreted away in a back office somewhere filing reports to regulators that no one really concerns themselves with.

Interestingly, while we only get to hear about the multi-billion dollar losses racked up by rogue traders like Jerome Kerviel, there are plenty of other million dollar losses within banks, which occur on an almost daily basis (be they the result of human error or internal fraud) that we don't get to hear about.

Mark Hudson, industry consultant, Capital Markets, SAS, believes if firms can start minimising those million dollar losses we don't get to hear about via market or trader surveillance technologies then perhaps the industry will have achieved something.

Surely saving the bank a few 'mill' from combating accidental or internal fraud is going to make a CFO's ears prick up in this challenging business climate? And even if it doesn't, then Hudson believes the banks' customers and may be even their shareholders (which lets face it is the government these days) may insist on more risk management oversight.

Friday, November 21, 2008

Desperately seeking an "enterprise-wide" view of risk

One of the consequences of the current economic crisis is that banks' risk management practices - or lack of them - have been exposed. Like peeling back the various layers of an onion only to find that the inner layer is rotting, the more so-called risk experts have delved into the risk management practices of banks, they have not liked what they have seen.

Something is rotten in the state of financial risk management, and there should be no surprises that banks' siloed view of risk based on asset class or geography has played a rather significant hand in the dire predicament they now find themselves in. Not only do banks not have an enterprise-wide view of risk across asset classes and geographies, they apparently also find it difficult to stop or prioritise payment flows. Few banks it seems had the ability to stop payments going to ailing investment bank Lehman's Brother as it collapsed.

"How many banks have the ability to say I don't have enough cash in nostro A , but there is plenty in nostro B, so I can re-route payments?", asked an executive from complex event processing vendor, Aleri, during a recent webinar it hosted on liquidity risk management.

Not only are banks' risk management systems siloed, the experts say, they also do not speak to liquidity management and collateral management systems. Liquidity management was traditionally seen as the preserve of a bank's treasury department, but Bob McDowall, a research director with TowerGroup in Europe, says that has to change.

McDowall said forthcoming regulation in the wake of the current crisis meant that banks would need to develop the capability to measure and manage liquidity risk on an enterprise-wide basis. Aleri says complex event processing is one technology that can help pull together disparate sources of information together without having to connect to the different silos within banks.

"At any time, banks need to be able to take a view as to what their risks and liabilities are up-to-the minute, not at the end of the day or periodically throughout the day," said McDowall.
He anticipates that banks will need to move from real-time to "predictive" risk management based on analysis of prices and behavioural patterns.

The national financial regulators are also going to have to pull their socks up it seems, as McDowall says that in order to monitor how well banks are managing liquidity risk, they will need to take a more "forensic" approach to risk management and build systems that enable them to share information with one another.

According to Tony White, managing director, product and R&D, Wall Street Systems, "next generation" liquidity management systems will need to provide a quick overview of everything and be tied to front office systems. They cannot be product agnostic as they will need to understand the product if banks want to combine collateral and cash. Liquidity management policies will also need to be reflected in these systems and stress testing of different scenarios will need to be done in minutes not months.

Sounds like banks are going to have their hands full over the next few months, but one wonders how many banks will actually achieve a truly enterprise-wide view of their risk, given that risk management projects have tended not to receive that much support from senior banking executives.

Citi shareholders need reality check

As speculation continues to mount around the future of Citi's various business units, Bob McDowall, a research director with TowerGroup in Europe, remarked that investors needed to understand that banks were a long-term stock pick.

In the last two days, Citi's share price has slumped more than 20% forcing the hand of the bank's board members who are meeting today to discuss options for restoring investors' confidence. Despite talk of an increased injection of capital by Citi's main investor, Prince Alwaleed Bin Talal, Citi's shares continued to fall.

There is speculation that Citi may sell of one or more of its businesses to help shore up capital and investor confidence. Business lines it is likely to consider selling include its investment banking business and special investment vehicles. McDowall said that Citi's global transaction banking, wealth management and international branch network remained relatively good value, so it is unlikely to dispose of those.

But given that now is not a good time to be selling, given low valuations, McDowall said Citi's options were limited. He said governments could not continue to be seen to be pumping money into ailing banks as that would further erode customer and shareholders' confidence in the US financial system.

But McDowall takes a dim view of the pressure shareholders are putting on Citi to deliver more value in the current depressed economic environment. "Shareholders have to understand that banks are a long-term stock peg," he said. "Having had a good feast on banking dividends for the last five years, now it is time for a little bit of famine."

McDowall believes that the much maligned sovereign wealth funds, which have invested in banks like Citi, have a much better attitude towards investing in banking stocks; they tend to take a longer-term view and see the current share price of Citi as an opportunity to buy not sell.

According to a Reuters report, Citi's CEO Vikram Pandit has indicated he wants to hold onto the banks' Smith Barney brokerage business, and said that employees should not focus on Citi's falling share price as it is well capitalised.

A single bank seems likely to take on a merger with a bank of Citi's size - that would be too much to digest, although that may be an option if the government is forced to step in. One also has to wonder whether the US authorities will relax investment restrictions for foreign investors in US banks, given that Middle Eastern investors have demonstrated that they are only too willing to hold stocks like Citi.

Wednesday, November 12, 2008

Data management projects still a hard sell

Front office trading applications and risk management have garnered a lot of media attention during the recent credit crunch. But one ingredient that feeds both front office trading applications and risk management, data, which is the "lifeblood" of most companies, is still getting short shrift when it comes to funding.

Data governance and quality should be right up there on the list of things that financial service providers need to work on because if they are taking in poor quality data then they are going to be spitting out poor trading and risk management decisions based on erroneous data.

But it seems data management in general is not at the top of most banking CEO and CFO's agenda, at least that is the impression I got sitting in on a panel discussion on the funding process for data management in a turbulent financial market at FIMA Europe 2008 in Olympia, London.

While most companies recognize that data is a "strategic asset", getting funding for data management projects appears to be as difficult as pulling teeth, according to the esteemed panel of EDM, client and customer accounts operations heads from Citi, HSBC and Dresdner Kleinwort.

And while the credit crunch has shone a light onto the once mysterious backwater of reference data management - regulators are likely to start enforcing standards around data quality and management - data specialists do not expect funding for major reference data projects to get easier any time soon.

"It is difficult to get management buy-in [when it comes to data management]," said Sally Hinds, global head of EDM, HSBC investment bank. One trick, said Hind was to ask for the same budget as 2007 so it didn't look like reference data management was gobbling up even more of increasingly scarce budget resources.

Hinds stressed that the EDM department within HSBC was relatively new and that the recent global market turmoil highlighted that data still resided in many different, often siloed locations, and that sometimes there were mismatches between front and back office views of data.

"Citi is incredibly siloed," said Julia Sutton, global head, customer accounts operations for Citi. "We are trying to break down these silos, but it is difficult." Sutton said as her function was placed within the capital markets division of the bank it was viewed with mistrust by other business lines. And whilst her business has senior management buy-in, she said there has been a major influx of new management recently. "They haven't been there long enough to know how important it[customer data] is to them," she said.

Sutton said her department had to try various methods in order to get funded. In the end instead of getting funding from the individual business lines, they obtained funding centrally as the customer data it manages crosses various business lines including global banking, investment banking and treasury.

Instead of managing data in silos, enterprise data management or EDM, encourages firms to move to an enterprise-wide data management fabric. But it appears that the reality on the ground for most firms is still very much silo-based. "We have a long history of acquisition, but a short history of integration," said Sutton. Hinds of HSBC said it is working on a project called, "one HSBC", which aims to reduce [data] duplication across asset management, investment and private banking.

Sadly it seems, the only thing that seems to truly motivate most banks to embark on major reference data management projects is the threat of regulatory oversight. Most of the panelists agreed that regulations such as Basel II and MiFID had provided them with opportunities to get projects funded.

Tuesday, November 11, 2008

Summit told Citi may not be profitable for several years

The transition for Wall Street Banks, Goldman Sachs and Morgan Stanley to bank holding companies, will be "painful", Oppenheimer & Co analyst Meredith Whitney told Reuters Global Finance Summit held in New York, London and Hong Kong recently.

Whitney also said that Citi, which was one of the casualties of the subprime crisis, was unlikely to be profitable for several years and needed to reinvent itself, either by buying another US retail bank or losing some of its businesses.

While Citi's Global Transaction Banking business continues to be profitable, Whitney said that opportunities for cross-selling to clients across Citi's myriad financial services businesses, was not happening because the bank had not invested enough in "integrating different units' computer and risk management systems".

She also stated that losses in the bank's consumer loans business in emerging markets such as Mexico and India were rising and that an accounting rule change would bring credit card loans packaged into bonds back onto Citigroup's balance sheet forcing the bank to set aside an additional $7 billion to $10 billion to cover loan losses, Reuters Global Finance Summit reported.

Citi lost its bid for Wachovia Bank, the US's fourth-largest bank by market value, to Wells Fargo in early October. The deal would have helped to increase its deposit base, which is considered crucial in these credit challenged times. Reuters Global Finance Summit reported that Citigroup relied more on borrowing in the bond market than competitors, particularly in the US, which increased its funding costs.

"If they want to grow their US business, they're going to have to fund it differently," Whitney told the Finance Summit.

Having lost the Wachovia deal, Citi is believed to be seeking other acquisitions.

Tuesday, October 28, 2008

Who is holding SEPA back?

Given current economic conditions and the precarious financial situation some banks have found themselves in, is now really the best time to be forcing banks to invest in SEPA?

Well it seems the European Central Bank is keen to press ahead with SEPA regardless of external conditions. In a newspaper interview last Sunday, Gertrude Tumpel-Gugerell, ECB Executive Board Member, said that an end date for SEPA to be the only bank payments system in Europe needed to be set.

Many banks and corporates will welcome that statement as SEPA Credit Transfers, which make up less than 1% of total credit transfers, have not been the success some hoped for, with The European Associations of Corporate Treasurers (EACT) blaming that on the lack of an end date for SEPA implementation, which makes it difficult for corporate treasurers to convince their CFOs they need to budget for SEPA.

Tumpel-Gugerell was quoted as saying that, "When SEPA is the only system working, bank commissions will fall further, which will be an advantage for all clients." I am not quite so sure that the banks will look on it so favourably as innovation or disruptive innovation, is not something banks in general are very good at, particularly in a recession.

During the third edition of the International Payments Summit “Do You SEPA?”,held in Milan on Monday, Renzo Vanetti, SIA-SSB’s CEO said that the adoption of new technology solutions and the creation of new services and business models under SEPA and the Payment Services Directive (PSD), represented an opportunity to contribute to a "rapid solution" of the current system crisis. But that it needed to be an integrated and complete vision for change with the authorities acting as the catalyst.

In other words somebody needs to pull it all together. The banks are not going to do it on their own. But is heavy handed regulatory pressure or intervention the way to do it, as some banks clearly do not see the business case for full SEPA migration, particularly when it is likely to erode their existing payments revenues?

Going forward if SEPA is to work, the Do You SEPA payments event in Milan heard that there needed to be a high degree of harmonisation in terms of how member states implemented the PSD, which provides the legal framework for SEPA.

Carlo Tresoldi, SIA-SSB chairman, also pointed the finger at the public sector saying they needed to adopt the new SEPA payment instruments. "At European level these public authority bodies alone account for 20% of all payments in euros and 40% of GDP," he said. "In addition, public authorities represent 15% of market share in the area of credit transfers and collections”.

But are public authorities the real problem? Sure it would be good if governments used SEPA instruments, just as it would be good if corporates did. But when you have a number of banks still not fully implementing SEPA or adapting their payment systems fully to handle SEPA payment instruments, one has to ask who is really holding SEPA back; the public authorities or the banks?

Wednesday, October 22, 2008

DTCC and LCH.Clearnet to merge

We've had transatlantic exchange mergers, now it seems that securities clearing houses are tying the knot with the DTCC and LCH.Clearnet announcing their intentions to merge.

The merger has been a long time coming, given the fragmentation within securities clearing in Europe and the lack of "interoperability" in the clearing layer, which is one of the conditions set down by the European Code of Conduct for Clearing and Settlement.

Interestingly, the DTCC revived the old Nasdaq Europe platform, EuroCCP, in an effort to give firms a choice of where they clear and to break away from the model of clearing being a "proprietary function of vertical exchanges".

Following resolution of certain key commercial, legal, tax and regulatory issues, it is intended that DTCC’s existing European subsidiary, EuroCCP, will join with the new LCH.Clearnet HoldCo to form a single European clearing business.

It kind of makes you wonder why the DTCC bothered setting up EuroCCP in the first place as merger discussions with LCH.Clearnet have been ongoing for some time, and perhaps in this current economic environment where risk management and cost savings are uppermost in people's minds, LCH.Clearnet finally caved.

It is unclear which technology platform will predominate, but it is anticipated that the proposed merger will result in efficiency gains, largely derived from technology savings, as well as economies of scale as both the US and Europe would be supported by a common infrastructure. As such "further reductions in the costs of LCH.Clearnet’s and DTCC’s services", most notably for equities in both Europe and America, are anticipated. Other markets will also be covered including, fixed income instruments, exchange-traded derivatives and commodities, mutual funds, annuities and OTC products such as interest rate swaps and credit default swaps.

The formal announcement from the DTCC said that LCH.Clearnet would move to an at-cost based structure comparable to DTCC’s within three years. It is believed Euroclear, which has a 15.8% holding in LCH.Clearnet supports the transaction in principle and will remain a shareholder.

A "binding" agreement between the DTCC and LCH.Clearnet is subject to a number of conditions including; consultation with the Works Council in the French subsidiary of LCH.Clearnet, the approval of shareholders, and the relevant regulators and tax authorities.

SWIFT misses open standards opportunity

SWIFT's relationship with its member banks is entering an interesting phase, particularly as the Brussels-based banking co-operative courts corporates as customers.

At Sibos some of SWIFT's member banks expressed their discomfort at the announcement of Alliance Lite, SWIFT's new low cost means of connecting to SWIFTNet, which "is as easy as logging onto a web site".

Alliance Lite was developed as a lower cost alternative for corporates, banks and investment managers that don't have the volumes of traffic to justify managing their own SWIFT infrastructure and want to get up an running on SWIFTNet in days rather than months.

However, within the Alliance Lite web browser corporates for example are able to initiate payments, which mirrors the functionality banks provide in their own online proprietary banking applications. So needless to say the banks were not happy with SWIFT treading on their toes. We also hear on the grapevine that the banks have told SWIFT they want to leverage their existing investment in IdenTrust for authentication and do not want SWIFT to reinvent the wheel with some other form of PKI.

But it raises an interesting challenge for SWIFT and its member banks as SWIFT moves into the solutions space and becomes focused on the agenda it wants to push, which is not necessarily that of the banks or corporates.

In a recent research note, analyst firm Financial Insights points out that while SWIFT was busy "selling itself through rebates and fee cuts for users, as well as a few new initiatives like a workers' remittance program and Alliance Lite," it missed an opportunity to promote the ISO 20022 standard and how banks could "leverage open standards to create new business opportunities".

SWIFT is the Registration Authority for ISO 20022 or the UNIFI standard as it is otherwise known, and although usage of the XML-based standard is not widespread, it does form the messaging foundation for the new SEPA payment instruments.

Financial Insights believes that ISO 20022 is the "leading candidate for standardization of corporate-to-bank messaging" but that only a handful of banks (notably Citi and JPMorgan Chase) had thrown their weight behind it, while other banks saw problems in meeting demands for "open messaging standards" unless the large volumes of new business are already there.

It is the old chicken and egg syndrome; banks don't want to develop new solutions based on open messaging standards unless their is significant customer demand and corporates believe that banks should want to fund new developments in order to keep their business.

At Sibos in Vienna, SWIFT had an opportunity to really sell ISO 20022 to the banks, but they were too busy it seems selling themselves. "SWIFT had the attention of the world's bankers at Sibos and failed to take advantage of it to promote a standard that could change the structure of the banking industry," said Financial Insights analysts.

But then of course would banks have had the appetite for such an initiative? After all, as Financial Insights points out, open standards would enable corporates to switch banks more easily. "For ISO 20022 to succeed, SWIFT and other industry players, including leading banks and technology vendors, have to coalesce around a set of new business opportunities like financial supply chain management and quantify the opportunities. Only then will banks be able to justify moving to open standards," Financial Insights concludes.

Monday, October 20, 2008

PSD implementation likely to be pushed back

In the midst of a global credit crunch, the continued roll-out of SEPA (Single Euro Payments Area) and compliance with the European Commission's Payment Services Directive (PSD) are probably the last things on banks' minds.

A Capgemini survey of more than 60 banks at this year's Sibos conference found that 80% had established specific initiatives to address the upcoming PSD which banks must comply with by November, 2009. (One has to question though what will happen to these initiatives given the nationalization of some banks and/or the reassessment of funding priorities in the wake of the credit crunch).

Not surprisingly, almost half of the banks surveyed believe that the scheduled PSD implementation target of November 2009 will be pushed back and given the lack of take-up for SEPA Credit Transfers and uncertainties surrounding SEPA Direct Debits, scheduled for implementation in 2009, almost 70% of banks said they believe a “hard” SEPA end date is required in order to make SEPA a success.

According to Capgemini's survey, more than half of the banks surveyed cited harmonized implementation of the PSD across the EU as the biggest challenge. The PSD is estimated to have a €1 billion impact on banks' business as a whole with lost profit from value dating cited as the main concern.

In an effort to eliminate "float" the PSD prohibits value dating.While banks expect the PSD to lead to new payment services such as direct debit mandate management, this is hardly the level or kinds of innovation that the PSD is really seeking.

Having earned money off the status quo for some time, banks are finding it hard to come to terms with the new world of payments that the PSD beckons in. And the credit crunch is only likely to widen the gap between customers' expectations and banks' ability to deliver new payment services and products.

Thursday, September 18, 2008

What are the technology vendors to do?

When I agreed again to write this blog, I thought about the previous year’s challenge of identifying appropriate stories to reflect upon. So many announcements come out at Sibos and so much networking goes on that it’s hard to see patterns until the dust has settled. Little did I expect that stories outside the exhibition hall would dominate. Indeed, in my first blog of the week, written just hours before Sibos started, the anger that seems almost understated.

So what does this all mean? A theme that has begun to emerge over the week is the need to change the business model. The traditional “You buy, I sell” will become even more difficult as the banks start to say, actually, “We have no money to buy” or even “Bye-bye” (sorry, a terrible pun). How do technology suppliers ensure they can maintain their share of the banks’ IT investment budgets in an increasingly competitive marketplace?

If we look at other industries, we see that much innovation has occurred in the business models under which they operate. Consider the product-bundling innovations of operators in the telco market. (Note that the telco market was commoditised long before the payments market, and yet operators grow and prosper.) The internet has created all sorts of more radical models, from “reverse auctions” to the “freemium” model, whereby users get the basic service for free but pay small incremental charges for additional services.

So what can vendors do? In reality, we’re seeing some innovations. For example, delivering a service by ASP or SaaS necessarily shifts the model. And the fixed-fee model of SWIFT itself is a form of price bundling. That model has definite appeal with its lower-up front costs and “pay-as-you-go” mentality.

But that isn’t enough. Or rather, some vendors have an opportunity to move from the role of trusted supplier to trusted partner. Cost is a key element, but not the only one. Risk is a key element. Structuring the deal in such a way that the technology supplier has “skin in the game” shares the risk but also the reward.

A supplier’s showing faith and conviction in its own ability to deliver the vision and solution changes the banks’ perception of the supplier. We’re seeing this effect in some companies already but it is a well-kept secret. Those companies are now aiming for the next step — moving from trusted partner to trusted advisor.

The next generation of bankers

Given what has gone on in the banking industry this week, it appears that SWIFT had to "re-write" its closing plenary session at the last minute.

Instead of looking to the current generation of bankers (nodding off in the back after a week of heavy networking and deal-making) who got it horribly wrong, Don Tapscott, author of Wikinomics, suggests the bankers of tomorrow are likely to be today's tech-savvy teenagers who can multi-task on multiple digital devices and are not afraid of collaboration.

Given the financial meltdown that has occurred this week, something certainly needs to change in the world of banking, and it is not more regulation. It is what Tapscott refers to as a "generational change".

"A new [financial services] model is necessary," said Tapscott. I don't think anybody would disagree with him, but I am not quite sure if the world of banking as we know it is quite ready for "Generation Y" teenagers or "system administrators" that can operate multiple digital devices (i-pod, television, web-based collaboration) while doing their homework or "toasters that initiate a financial transaction on the web."

There has been a lot of talk of Web 2.0 at this year's Sibos as SWIFT tries to tap into "Generation Y", but somehow it does not look so cool when you have a bunch of last generation's bankers sitting there scratching their heads because they did not pip technology providers like PayPal to the post when it came to devising new and innovative ways of making payments.

May be banks and trading departments in 20 years time will be run by a bunch of Xbox gamers and Facebook social networkers who are not afraid to collaborate or admit that they don't know everything about risk management, and will instead insource or outsource that capability to a community of non-specialists on a social networking site.

We live in difficult times, which requires some radical re-thinking of how financial services are managed and delivered, but I am not quite sure the banking world is ready for Banking 2.0.

"Computer companies don't make computers any more," said Tapscott. Well banks have stopped providing credit to one another and they are slowly coming to the realisation that they do not need to build or own everything themselves - they can insource it from somewhere else, or outsource it to a third party. But somehow, I don't think this is the kind of radical change or transformation Tapscott is talking about.

Let's see if the next generation of bankers have something better to offer.

SEPA disappointment

It is the last day of Sibos and as the crisis in the global banking sector continues to unravel, banks are also having to acknowledge their failure in another area - SEPA.

While it may be a little too harsh to attribute the lack of uptake of SEPA Credit Transfers (SCTs) wholly to the banks, it does demonstrate the drawbacks of trying to fend off further regulation by devising new payment instruments that nobody wants to use.

With SCTs making up less than 1% of total credit transfers, it is difficult to call SEPA anything other than a failure at this point, although 78% of Sibos delegates surveyed by ACI Worldwide preferred to say that the migration to SEPA instruments had been "disappointing".

SEPA Direct Debits, which are more challenging to implement, are unlikely to enjoy any greater success when they go live next year. "SEPA Direct Debits are a 20th century solution for the 21st century," says Eric Sepkes, chairman of Gresham Computing, but perhaps better known in his former role as a payments industry specialist at Citi. "A three day clearing cycle for [SDDs}, that in itself is criminal," he said.

Sepkes appears to be enjoying his new-found role sitting on the other side of the fence selling technology to the banks he used to work for. It also gives him an opportunity to cast a more critical eye over SEPA than what he would have been able to do if he was still sitting behind his desk at Citi.

Sepkes says the industry has got it the wrong way round and that they should have "eletronified" the supply chain first and then built a solution for direct debits that fits within that world.

It is tempting to say that Sepkes has conviently changed his tune about the banks' response to SEPA as he is now trying to flog supply chain financing solutions in his new role at Gresham. But Sepkes says these are views he has held for some time, even before he took up the role at Gresham.

"Why spend money on something [SEPA] that may not be needed for another five years," he said. Given that banks and corporates are going through one of the worst economic slowdowns since the Great Depression, Sepkes says forcing banks and corporates to invest in SEPA is not the answer.

But looking for a solution to the current SEPA 'impasse' by going back to the very same people that helped architect it, is not the answer either. Forty-six percent of Sibos delegates surveyed by ACI Worldwide said there was nothing more that the banking industry’s self regulation of SEPA can deliver, although I am not quite sure that I agree with them when they say that the time is right for SWIFT to play a role in reversing the present situation.

Let's not forget that SWIFT is owned by the very banks that formulated the industry's response to the European Commission's SEPA vision. And while opening up the SWIFT network to corporates may facilitate higher levels of bank-to-corporate connectivity and the adoption of "end-to-end standards", SWIFT does not have all the answers. Neither do the banks it seems.

It is back to the drawing board for SEPA it seems, but in the current economic climate, the European Commission and the ECB, and those banks that have invested heavily in their SEPA payments infrastructure, may have to wait a lot longer than expected for market traction.

Wednesday, September 17, 2008

Back to the back office

With banks' front offices copping most of the flak from the credit crunch (the trading room was always considered to the money-making machine while the back office was the expense centre), back office operations and processing is at the top of the agenda again.

Reconcilitiations, matching, confirmations, exceptions processing and settlement may not be sexy, but it appears banks are slowly waking up to the fact that if they had invested as much in their back office processing as they had in front office trading applications, then perhaps they wouldn't be in the mess they are in now.

The benefit of hindsight is a powerful thing, but nevertheless the back office operations guys, which are Sibos' bread and butter, are chomping at the bit to get their hands on some of the money that has historically gone to the front office.

"There was so much IT spend on the front office, that now needs to be rebalanced with more investment in controls, risk management, the effectiveness of the back office and improving support systems, because they are just out of control," says Ken Archer, CEO of SmartStream.

SmartStream is looking to extend its Transaction Lifecycle Management solutions for trade processing into the OTC derivatives space. With a lot of information pertaining to complex derivatives being stored on spreadsheets and new instruments being devised more quickly than the back office is able to process them, the challenges in the OTC post-trade space are not insignificant.

SmartStream says it will initially focus on bringing efficiencies to "vanilla" derivatives, and in the current climate where the unravelling of complex CDO deals got a considerable number of banks into hot water, Archer believes that there is likely to be a market backlash against more "esoteric" instruments.

Meanwhile, at a Sibos panel session entitled, Breaking the FX bottleneck, most of the panellists agreed that the operatinal capabilities and capacities of sell-side banks and the cost per ticket were creating bottlenecks in the FX market.

While FX trading volumes continue to rise on the back of the emergence of the FX prime brokerage market, retail and algo trading and increased trading of emerging market currencies, banks' back offices are struggling to keep up with the pace of change and the number of trading tickets.

Phil Brittan, global business manager for FX and Economics at Bloomberg summed the current market situation up by saying that unless the bottlenecks were addressed it could result in increased systemic risk. Sound familiar?

Rob Close, CEO of CLS Bank, was the only panel member that did not want to concede that a bottleneck already existed in the FX market. However, he added, "that if we don't do something as an industry, there could be restrictions on how the market grows."

One can only hope that in this current climate, CFOs and CEOs are not tempted to postpone some much-needed back office tinkering.

Alternatives to SWIFT

With the credit crunch continuing to bite, a recurring theme at Sibos this year is reducing the cost of ownership of SWIFT. SWIFT has responded with its "SWIFT on a stick" solution.

Alliance Lite is SWIFT's "low cost" solution for smaller banks, corporates and investment managers that want to use a simple internet connection to connect to SWIFT, without having to manage and install a dedicated SWIFT infrastructure.

But if SWIFT thinks it is going to be that easy, it is wrong. Telcos and other network providers say they can connect banks and corporates to a larger user community for considerably less cost than SWIFT - it kind of makes you wonder why SWIFT is even bothering to try and compete in the network space.

Another challenger to SWIFT that is emerging is Italian-based payments, capital markets and network services provider, SIA-SSB. At Sibos this week, it launched its B-Gate solution, a network connectivity solution for bank to corporate communication.

In order to keep costs at the level of a standard internet connection and to leverage the faster speeds of the internet, B-Gate leverages ADSL and purports to offer the same level of security in the bank-to-corporate space as what already exists in national interbank networks.

Giacomo Buico of SIA-SSB says that B-Gate was developed in response to demand from banks in Europe wanting a lower cost alternative to SWIFT in the corporate-to-bank space. This was before SWIFT changed its tune about offering a connectivity solution for mid-sized corporates.

While SWIFT says its network has 100% availability and reliability and has never been hacked into, Buico says there is a need for a "back-up" network in Europe. "There are too many limitations [with SWIFT's network]," said Buico. "They need to stop it for maintenance. We run a card processing business and we cannot stop our network for maintenance."

"If a virus gets on the network, SWIFT is stopped. No one is immune from this problem," Buico continues. SIA-SSB will roll outs it B-Gate solution initially to banks, starting with its home market of Italy.

Its vision is to grow the number of users on the network across Europe, and to increase the number of service providers that can be accessed by partnering with other companies.

Buico is under no illusions that B-Gate will compete directly with SWIFTNet, which has a loyal customer base, albeit one that on a global or European scale is still relatively small in terms of the total number of end users it connects.

Buico claims its B-Gate network is key for the future development of SEPA, as it has the bandwith to carry not only payments messages, but also data pertaining to the exchange of electronic invoices, direct debit and reporting orders, but without the hassle and cost of having to manage network protocols "in a fully secure automated way".

Reshaping banks for the future

In the current credit climate where banking CEOs may be having difficulties sleeping well at night, guest blogger, Guillermo Kopp of TowerGroup, says commonsense needs to prevail if banks are to reshape themselves for a brighter future.

Amid the turmoil in financial markets, one might think that a sense of fear or conscience would keep CEOs on edge around the clock. At a Sibos panel moderated by Juan Senor, several CEO-level executives shared their formula for a good night's sleep. They favoured the following approaches:

- Spreading the liquidity and credit risk, broadening the sources of funding with retail deposits, and protecting from the short-term shock

- Balancing defensive strategies with proactive innovation in business models and integrated processes

- Partnering with an ecosystem of industry providers that deliver optimal value to the end clients

- Revisiting the approach to risk management with the right people, skills and tools to balance risks versus rewards

- Rebuilding confidence and trust through more transparent valuations and asset pricing.

TowerGroup believes that common sense should prevail and that CEOs must focus on steering through the present turmoil with their view set on reshaping an interdependent industry for a brighter future.

Who is piloting the SEPA plane?

I walked into this morning's payments session at Sibos on SEPA expecting the European Payments Council and the banks to pat themselves on the back for the 'successful' launch of SEPA Credit Transfers (SCTs) on 28 January.

But the panel was not in a self-congratulatory mood. No surprises really because if one peeks under the bonnet of SCTs and SEPA in general, all is not as it seems. OK 4,300 banks may support SCTs, but they constitute less than 1% of total credit transfer volumes.

So to use the 'plane' analogy that was the theme for today's Sibos session, the 'plane' (SEPA or SCTs) has taken off, but its course is unclear, customers (corporates, SMEs) did not get to choose a seat, the flight is short on cabin crew and no one is sure who is actually piloting the plane.

Jean-Michel Godeffroy, director general, Payment Systems and Market Infrastructures, European Central Bank, appeared to be under the impression that the European Payments Council (EPC), the group of European banks led by Gerard Hartsink of ABN AMRO, were piloting the plane. While the SCT 'plane' has taken off, Godeffroy said that a clear flight plan for SEPA Direct Debits (SDD)was missing and that the European Commission and the ECB would come to the rescue by drafting a SEPA Action Plan, scheduled for completion by the end of 2008.

A bit bloody late isn't it? Shouldn't the ECB have stepped in sooner when the banks wanted them to and drafted an action plan for migration to SEPA with more definitive deadlines in sight?

Hartsink seemed somewhat miffed by Godeffroy's suggestion that the EPC was the only SEPA pilot. "Key bodies such as ECOFIN (Economic Affairs Council) and the [Eurosystem] Governing Council are not always aligned and change the rules during the flight," said Hartsink.

Hartsink seemed to be passing the buck, saying there were more pilots (the ECB, public authorities, corporates) that needed to influence the direction of SEPA. It is all good and well to say that now, but when it comes to corporates and SMEs, banks in general and the EPC have not done a good job of selling SEPA or communicating its benefits to potential end-users.

"There is no public sector participation [in SEPA]," Hartsink said, adding that the EPC was in the process of publishing information to better educate the different end users about SCTs and SDDs. But why didn't the EPC do this sooner, and more importantly, is publishing a few documents going to really change anything, given the banks' poor job of marketing SEPA?

The only corporate on the panel, Olivier Brissaud, chairman of the European Associations of Corporate Treasurers, could have been more scathing in his assessment of SEPA to date, but instead he said that SCTs were almost there (corporates still want more information such as bank statements to be included in the messages), and as for SDDs, well no one is quite sure where that plane is headed.

"The SEPA plane needs a co-pilot, a first officer and a cabin crew to service the clients," exclaimed Michael Steinbach, chairman of the board of directors of Dutch payments processor, Equens. "To be successful, it needs strong collaboration between all parties; the EC, the ECB, clients and banks; working together."

Hmmm. Well isn't that what should have happened from day one? In its bid to self-regulate the EPC, which drafted the SEPA rule books for credit transfers and direct debits, has ended up "serving coffee" to the regulators, but forgot about all the other customers on board the plane.

Will giant new banks emerge in the UK?

We live in unusual times, says guest blogger Carol Wheatcroft of TowerGroup commenting on the rapid consolidation that has kicked off in the UK mortgage lending market as a result of the subprime crisis.

Normally when Sibos takes place, the financial press is filled with the ins and outs of the day’s happenings, but external events seem to be taking center stage, given the huge and dramatic changes occurring in the world of global finance.

Today is the turn of HBOS in the United Kingdom. The share price of UK’s largest mortgage lender has come under considerable strain in recent days as a result of its perceived short-term liquidity problems, and the bank is now reported to be in advanced talks for a merger with LloydsTSB.

Assuming this will come to pass, and on top of other mergers and takeovers — Nationwide acquiring the Derbyshire and Cheshire Building Societies, Santander buying Alliance and Leicester — the number of players in the UK retail financial market is shrinking before our eyes.

In more normal circumstances, the UK Competition Commission would block a takeover such as that of HBOS because the deal will give LloydsTSB more than a 25% share of the UK mortgage lending market and a quarter of the market of bank and savings accounts.

But these are not normal times, and the need to instill trust, confidence, and stability in the financial system is paramount. Given the UK government’s choices as it watches HBOS struggle through another Northern Rock scenario in the form of nationalisation or finding safe harbor, regardless of the competition issues, the latter seems by far the better choice. At least no more taxpayers’ money will be involved.

So assuming LloydsTSB acquires HBOS — an event that can probably be expected to happen overnight — where does the outcome take us? The socio-political ramifications of this deal on top of all the other deals will mean that the considerable impact on jobs following massive branch closures and consolidation of call centers that might be expected may not occur, or at least not at their normal speed. Arrangements will have to be worked out if a significant increase in unemployment or strike action by disgruntled employees is to be avoided.

With such a consolidated industry, too much power will move to the banks at the expense of consumers. The UK market suddenly more than ever needs competition from foreign banks offering the consumer greater choice. This need offers a glimmer of hope for the UK financial technology industry now that it suddenly has far fewer customers.

Direct banks entering the UK market could create new opportunities. The UK consumer will be looking for new homes for deposits now that there is greater consumer awareness of the need to keep deposits below £35,000, the deposit insurance limit, in any one bank. Despite the consolidated banking market, the UK has a solid depositor base that foreign banks could seek to help shore up their own balance sheets.

Welcome them with open arms!

Tuesday, September 16, 2008

Tectonic shifts in international power

Guest blogger, Guillermo Kopp, executive director and global research fellow, TowerGroup, says the banking industry has yet to wake up to the challenges of globalisation.

Is the global financial services industry plummeting in a tailspin dive? Or will a stubbornly resilient global economy survive the ripple effects of the financial crunch? The start of Sibos 2008 coincided with the casualties of Merrill Lynch, Lehman Brothers and Washington Mutual.

As international markets become increasingly interconnected, financial risks — especially shortfalls in liquidity — must be managed systemically and globally. The intrinsic vibrancy in European markets and emerging regions has challenged the role of the United States as a dominant financial centre.

A forum eliciting discussion by industry leaders from Europe, the Gulf, Singapore, India, and Russia moderated by Juan Senor pondered whether the end of the US dominance has begun, and what level of influence a whopping $3 trillion in sovereign wealth funds will have on the balance of power.

Globalisation has been picking up speed. The world's economies and financial systems are increasingly interconnected. But the growth in international economies and their interdependent roles has still to dawn on many players in mainstream markets.

Rather than expanding a domestic business model abroad or aggregating a collection of disparate local product and services offerings, internationally minded financial services institutions (FSIs) need to adopt a genuinely multi-directional global approach.

Too much leverage, concentrated risk, optimistic valuations of distressed assets, and over reliance on opaque hedge fund investments have rocked the stability of many FSIs. With due consideration to avoid stifling innovation, regulators must orchestrate a disciplined and consistent framework of sound principles and practical rules across the financial services industry.

For example, the Financial Stability Forum has been championing risk management and reporting standards that will extend to hedge funds. A broader challenge is to minimise the lag by local jurisdictions and the reluctance by some FSIs to implement global guidelines.

The US financial woes have raised doubts about global leadership, control, and manageability. Adequate transparency with timely disclosure of a vital set of common risk and liquidity indicators by all participants will be key to finding a balance between multiple and increasingly interdependent financial centres.

ACHs - Who will buy?

"Don't write off ACHs," said Marion King, CEO of UK ACH VocaLink, which has its advertising plastered all over the exit of the U-bahn station that leads to the Messe Wien convention centre in Austria where the annual Sibos conference is being held.

VocaLink is obviously touting for business, particularly among the banks that are contemplating whether to maintain or outsource their payments processing business and SEPA compliance to a third party like VocaLink. We also understand that it has been seeking non-bank shareholders or investment, as in this climate banks want to see consolidation among domestic ACHs, and have threatened not to continue to invest in them.

VocaLink has also been instrumental in the launch of UK Faster Payments, a technology it is trying to sell to other banks outside the UK, with so we hear, mixed success. After all banks have other things to be worried about (SEPA Direct Debits, the Payment Services Directive, and the credit crunch that just won't go away).

Will Faster Payments be VocaLink's salvation? Well, according to King, even without dedicated marketing, the UK ACH has processed 30 million faster payments. Giving it the hard sell, King says Faster Payments takes away the need for exceptions management, which is a major headache for banks (however, it also adds the need for real-time fraud management, and let's be honest there were some delays in UK banks getting their systems ready for UK Faster Payments.

"Faster payments is a real-time payment mechanism that is 24 x 7 and will support debit card, ATM, Point of Sale, mobile and online banking," said King. "That is VocaLink's vision, however, to get there we will need global standards and interoperability."

Yet, King's pitch failed to convince Paul Inglis, head, payments risk & industry, ANZ Bank, who said no ACH was needed Down Under thank you very much as the banks had bilateral links with multilateral settlement, which worked very nicely, although modifications are likely to be made in response to regulatory demands and customer requests for richer data content and innovation.

John Chaplin, European Payments Advisor for card processing company First Data also gave ACHs the thumbs down saying that card processors already operated sophisticated real-time processing environments and could do ACH processing if they really wanted too.

Innovation "just in time"

"If we fail to innovate, the risk is that we will lose business to third parties," said one panellist at today's panel session on "Payments at a tipping point". Here we go again, I thought.

How many Siboses does it take for banks to contemplate the competitive threat from non-banks (PayPal, Google, telco companies, internet portals) before they actually do something innovative in the payments space themselves.

It is abundantly clear that PayPal has been successful where banks could never have been - for one thing banks could never have thrown capital at such a project to get it off the ground, and in today's illiquid climate are banks any better placed to truly innovate?

SEPA and the Payment Services Directive (PSD), or "mandatory spend" may force change in the payments space, although it has to be said SEPA has not resulted in the innovations regulators and corporates hoped for. In fact a number of banks have not significantly invested in re-engineering their platforms for SEPA as they believe there is not enough market traction for the new SEPA payment instruments.

Banks are now talking about pan-European e-invoicing standards in the context of SEPA, but can that really be classed as innovation?

The Payment Services Directive provides the framework for the emergence of payment institutions that are non-banks, but is the threat of a Google or Yahoo offering payment solutions going to be enough for banks to stop talking about innovation and actually do some innovating themselves?

It is only now that mobile payments are starting to gain traction with the banks. Panel members also spoke about "just in time liquidity management", but these are services that have evolved slowly over time and it is only now that banks' legacy payments infrastructure is in a position to leverage these new technologies to deliver payment solutions in the peer-to-peer space.

My bet, howevever, is that lumbered with their legacy systems, a risk averse appetite and regulation, banks will not be able to innovate at the same pace as the Google's Yahoo's and telcos. There is another PayPal-like nemesis on the horizon , and guess what, it is highly unlikely that it will be developed by the banks.

Banks only hope now is to try and partner with the Google's and Yahoo's of the world in the hope that they can be part of the next wave of innovation in payments.

Lasagne or spaghetti?

At previous Siboses Target2-Securities (T2S) the settlement platform in central bank money for euro denominated securities proposed by the Eurosystem has been a subject of much debate and consternation.

This year T2S is still on the agenda, but CSDs can no longer brush it off as something that may or may not happen. Like it or not T2S is here to say with the Eurosystem's Governing Council giving it the green light back in July. It is time now for a bit of serious navel gazing as custodian banks and CSDs reflect upon what it means for their existing business models.

If that was not enough change for the poor CSDs and the custodians to digest, there is also the Code of Conduct for Clearing and Settlement which calls for unbundling of services and greater price transparency, and last but not least, the Link Up Markets initiative for interoperability between seven European CSDs.

A dizzying array of change in Europe's settlement landscape beckons. However, while European CSDs may have given a non legally binding commitment that they would use
T2S when it goes live, there was considerable postulating at today's panel discussion aptly titled, European Custodians and CSDs: adapt or perish?, about the impact T2S is likely to have on CSDs.

Participants agreed that T2S was a "wake up call" for CSDs in terms of their existing business models.

With T2S looking to commoditise securities settlement, at least for euro denominated securities, CSDs in Europe, which have traditionally focused on settlement of domestic securities, will have to look for new ways of doing business, including the provision of cross-border asset servicing, something most do not offer today.

"Will CSDs become fully fledged custodians?" remarked Sveinung Dyrdal, executive vice president, head of securities services for the Norwegian CSD, Verdipapirsentralen. "I am not sure that is our strategy as we would need to make large investments and we may not have the balance sheet to do that."

Some of the panellists, which included CSDs and custodian banks, said that domestic investors may suffer as a result of T2S as increased competition between CSDs and custodian banks on the asset servicing side could be passed on to investors in the form of increased fees.

Just to confuse the issue, Euroclear, has stated that it supports a "user choice" approach, which gives its clients a choice of settling securities in central bank money on T2S or on its own platform.

"[Euroclear's user choice approach] does make it difficult to determine what volumes [will be settled] in T2S," said one of the panellists. Others said that Euroclear's user choice model would at least put pressure on the Eurosystem to ensure that T2S was low cost.

How much change can one market absorb? Obviously quite a lot as running in parallel to T2S and Euroclear's Single Platform initiative covering seven European markets, is Link Up Markets, which will see seven CSDs (more could join) interoperating around standards and formats. "Is it the spaghetti model" made up of bilateral links between CSDs, quipped panel moderator, Dominic Hobson, Editor-in-chief of Global Custodian.

The audience's vote was too close to call, but Dyrdal of the Norwegian CSD, which is a member of Link Up Markets, preferred to describe the interoperability initiative as "lasagne" rather than spaghetti.

'Spaghetti' is the colourful term often used to describe Europe's fragmented clearing and settlement landscape, but with so many initiatives running in parallel, albeit ones that seek to standardise and harmonise market practices, I am not so sure the 'spaghetti' analogy can be dispensed with quite yet.

Data management not on the agenda

There may be a few bank or vendor exhibition booths missing this year at Sibos in Vienna thanks to the credit crunch and good old-fashioned consolidation. However, one noticeable absence is data management vendor, Asset Control.

Phil Lynch, CEO of Asset Control is attending the Sibos conference, but this year they decided not to have a booth at Sibos as they felt that when it came to the conference programming, there was not enough attention being paid to data management.

Arguably, he is right, there are no real conference sessions on data management per se, which is surprising given that poor data governance and data quality were at the heart of the subprime crisis.

Lynch alluded to the fact there seemed to be a lot of focus on payments at Sibos this year, which he said was important. Neverthless, managing counterparties and instrument risk is also important,he said. "There is a strong undercurrent of risk and data management, but it is not a distinct track at Sibos," said Lynch.

There is certainly plenty of work to be done when it comes to data quality and governance given that a lot of data is stored in disparate systems or on spreadsheets, where it is unclear who owns the data and what changes if any have been made to it.

Lynch says transparency of data is also important in terms of the inter-relationships between data, data sources and determining who owns the data. "Firms cannot outsource that work," says Lynch. "They need to do that themselves and form a unique view as opposed to a market view."

Monday, September 15, 2008

Missing in action

Guest blogger Gareth Lodge, research director, European payments, TowerGroup, acknowledges those banks that are no longer with us as the credit crunch continues to bite, despite the healthy turnout at Sibos in Vienna.

It’s official – Sibos is upon us again. At first glance, the stands are bigger and better than ever, and the exhibit halls seem bigger and busier than ever. There is an air of determination to get business done.

Yet, the proverbial elephant in the room is still there – the credit crunch. It’s been an explicit topic in some of the conversations at TowerGroup's party last night, but it has also been an implicit undertone to them all. A few friendly faces are “missing in action”.

After last year's Sibos in Boston, I forecast that the shape of the European payments industry would start to change dramatically as we saw the consolidation of both the banks and their suppliers as the goals of SEPA started to be achieved.

I was spot on in many ways – no ABN AMRO stand is an obvious example. TowerGroup originally believed that the bigger players – whether bank or supplier - would try to gain both market share and a broader range of offerings. There have been some eye-opening mergers in the last 12 months which I’m sure no-one could have seen coming – HP buying EDS anyone? However I suspect that the economic conditions will start fuelling the changes further, but perhaps in a subtly different way.

It will be interesting to see during the course of the week who announces what deals. The party gossip suggests some significant deals, though banks seem reluctant to allow their vendors to announce details. However, if a vendor or a bank isn’t doing something, then both parties should probably be worried.

Banks may not have all the answers yet to SEPA Direct Debits compliance, but they should be on a path to getting there. Those banks yet to make a decision may find that the vendors who could have helped them are already engaged with their rivals.

Conversely, those banks with stronger balance sheets may also strike while the prices are low. Indeed, it could be said this is exactly what is happening in the German market. This of course has an impact on the ecosystem that supports that market.

Suddenly, some vendors may find that the main client that underpinned their business is gone. We believe that the vendors who exhibit in Hong Kong next year could be missing a few well known names. We certainly do live in interesting times.

SWIFT on a stick

"SWIFT on the offensive" at Sibos in Vienna took the form of SWIFT CEO Lazaro Campos holding up a USB stick, heralding the official launch of Alliance Lite, a new means of connecting to SWIFTNet, which "is as easy as logging onto a web site".

Having addressed the total cost of ownership issues for large volume SWIFT users last year at Sibos in Boston with the announcement of fixed pricing schemes, which 55% (32 banks) of FIN traffic now uses, Campos said Alliance Lite was aimed at "low volume" users and would get them "up and running [on SWIFT] in days."

Alliance Lite will be initially rolled out to banks and corporates from 27 October, but Campos hinted at offering it as yet another channel for all SWIFT customers and partners.

Looking pretty pleased with himself, Campos then rolled off a host of other initiatives SWIFT had instigated to reduce total cost of ownership. Alliance Integrator will help banks map SWIFT standards to their back office formats. According to Campos vendors on the Sibos exhibition floor are already touting alternatives to Alliance Integrator, which is what SWIFT wanted to see. "Multiple middleware options" all the way, says Campos.

SWIFT is also looking at "fast tracking" standards implementation by developing a data dictionary and structured schemas, as well as guidance on target syntax (ISO standards)to help reduce the cost of deploying SWIFT ISO standards.

It has to be said, these are significant announcements that go beyond SWIFT's annual rebate announcement, which usually results in a resounding, 'whoopee' from most banks as it does not deliver any real cost savings to them. Finally, SWIFT appears to get it that most banks do not care about annual rebates, but are more concerned with reducing the total cost of ownership of SWIFT.

Although rebates (20% in 2008) were of course on the agenda again, with SWIFT chairman Yawar Shah saying he had pushed the SWIFT Board to achieve an overall 50% reduction in SWIFT pricing ahead of schedule by the end of 2009, instead of 2011. "We need to make this co-operative more competitive," said Shah.

A 50% reduction however will not be enough if SWIFT is to seriously compete with the commercial telcos that claim they can offer cost reductions up to 90% less than SWIFT. And in the current economic climate where banks are continuing to be impacted by the credit crunch, one has to ask is a 50% reduction in the cost of SWIFT really going to have that much of an impact?

Campos boasted that the SWIFT network now carries 16 million messages a day, and has 360 corporate users interacting with 900 banks on SWIFTNet. However, that took 20 years to achieve. Is it going to take another 20 years to have all SWIFT member banks interacting with thousands of corporates on SWIFT?

Furthermore, SWIFT traffic stats pale into insignificance when you think of the traffic that is carried over the internet and on commercial telco networks every second. In that respect SWIFT is a small fish in a rather large pond.

Shah made a cryptic reference to SWIFT competing with third party vendors around shared services, saying that it presented an opportunity for everybody. There are those, i.e. the major telcos, that believe SWIFT should not be in the network space, as it can never come close to the economies of scale and cost savings large global telcos can provide simply through the sheer numbers of customers they connect.

"We [SWIFT] need to be seen as lean and mean as you are," said Campos, although it has to be said SWIFT's idea of "lean and mean" is far removed from the commercial realities of banking, where consolidation and rationalisation appears to be the order of the day

How can SWIFT reach more users?

Ahead of SWIFT's official launch of its new low-cost internet-based solution for connecting to SWIFTNet, aimed at those banks, corporates and investment managers that habitually complain about the high cost attached to building a dedicated SWIFT connection, BT Global Services is stoking the competitive embers, saying SWIFT could reach more end users if it put its applications on other telco networks (BT, Orange, COLT).

Describing SWIFT Alliance Lite as "security on a stick", Chris Pickles, head of marketing, Investment Banking & Global Accounts, BT Global Financial Services, said if it brings down the cost of SWIFT that is great. However, he said it would not be a universal solution for bank or corporate connectivity.

Although SWIFT Alliance Lite could be viewed as SWIFT entering the competitive space of IT network connectivity which is dominated by the telcos, Pickles said SWIFT's Alliance Lite was still a niche solution and that the telcos would still be able to provide IP connectivity for considerably less cost (upwards of 70%)than SWIFT.

He said if SWIFT wanted to reach the vast majority of banks and corporates, why didn't it make applications such as SWIFT Alliance Lite available on the telco's networks? "On a revenue sharing basis, SWIFT could increase their user community and the market perception that it is the central standard for financial security, but they have to do it quickly because the market won't wait."

Tuesday, September 09, 2008

SEPA - no mass adoption

The usual suspects (Gerard Hartsink - European Payments Council; Jean-Michel Godeffroy - ECB) will be lining up at Sibos in Vienna this year to debate the "root causes of the limited momentum in the SEPA (Single Euro Payments Area) migration."

SEPA Credit Transfers went live at the end of January, but so far uptake of the new SEPA instruments has been less than encouraging - not surprising given that banks did a poor job of selling SEPA to other FIs and corporates.

Given that the EPC (European Payments Council) has pretty much dominated the banks' response to SEPA and the development of the SEPA rule books, are they really the best group of people to drive the SEPA momentum forward and sell SEPA to corporates and public sector bodies?

After all the EPC is largely a conservative European banking organisation, which has focused solely on formulating the banks' response to SEPA without engaging in any meaningful collaboration or consultation with corporate users.

Also it has to be said that the EPC's SEPA vision is not necessarily the one promulgated by the European Commission or the European Central Bank, nor is it what corporates really want from SEPA. So will Jean-Michel Godeffroy be taking the banks to task at Sibos for failing to establish enough momentum behind SEPA?

There is enough evidence to suggest he should be wielding the stick. It appears the banks want clear deadlines for full migration to SEPA as the current environment where SEPA instruments and the existing national payment systems co-exist is likely to persist for some time unless there is a clear end in sight.

I doubt that the average bank (except for those that have made a strategic decision to invest in SEPA) is going to do much more to drive SEPA forward unless they are absolutely forced to.

We keep hearing a lot about the non-STP (straight-through processing) of cross-border payments in Europe, years after BIC and IBAN were introduced to try and enable banks to process these payments straight-through with no manual repairs at lower cost.

One has to wonder whether it is in the banks' interest to maintain a high number of non-STP payments as they can charge more for that, which could help make up some of the revenues lost through implementing SEPA in its entirety.

At a pre-Sibos press briefing, Deutsche Bank, which classes itself as the leading SEPA bank in Europe, said that banks could save billions by moving to full STP of cross-border payments.

Deutsche Bank anticipates its SEPA Credit Transfer volumes will triple by the end of this year, but that is coming from a low base and most of the current volumes are from financial institutions, not corporates or public sector organisations.

While Deutsche may have invested millions in building its SEPA payments engine, Michael Mueller, head of Wholesale Solutions, Deutsche Bank, said that many banks had just taken their existing payment systems and made some modifications to them for SEPA. "That approach will come to an end as soon as SEPA transactions ramp up in terms of volumes as legacy systems won't be able to process these types of transactions," he said.

Having obviously invested considerable sums in its own SEPA payments infrastructure, Deutsche Bank is keen to white label its SEPA solution to other banks to help recoup some of the money it has invested. But even the SEPA white labeling market has been slow to take hold as a number of banks are only now beginning to realise that they do not need to own and build everything themselves.

Yet, given that a number of banks still have not made a strategic decision regarding their SEPA payments infrastructure and that national clearing systems still exist, it could be some time before the economic benefits for corporates to move to SEPA are clear.

The lack of corporate appetite for SEPA was borne out recently by the findings of a VocaLink survey of corporate treasurers, which found that 35% had had no experience of SEPA and only 28% of respondents expect to use SEPA Direct Debits (SDD) by the end of 2009.

Financial software providers like Fundtech have launched a new Software as a Service (SaaS) platform which packages its payments platform PAYplus FTS with its SWIFT Service Bureau offering to provide banks with a low-cost option for upgrading their payments platform for SEPA and SWIFT payments.

That may help banks develop payment services that corporates want, but one has to ask why these kinds of platforms were not available sooner and why banks are really holding off on seizing the so-called opportunities that SEPA provides to offer new value-added payment services to their corporate customers?

Friday, September 05, 2008

Can Sibos restore confidence in banks?

Guest blogger, Bob McDowall, research director, TowerGroup, asks have banks, technology and service vendors attending Sibos 2008 in Vienna, and even SWIFT itself, heeded the significance of events in the last 12 months in global credit markets?

From a business perspective Sibos 2008 will be a more sober affair than 2007, when the conventional view was that the credit crunch was a brief, albeit disruptive, episode in the life of the global financial system.

The challenge for all exhibitors, technology vendors, service providers and financial institutions, is how to contribute effectively to re-engendering trust and confidence in the financial institutions and global financial system while benefiting their clients and themselves.

The challenge should not be underestimated. In the western hemisphere, financial institutions individually and collectively have suffered a downturn in revenues. The liquidity famine in the wake of the credit crunch has led to disenchantment by investors and their loss of trust and confidence in financial institutions and the financial system.

Financial institutions have experienced reduction in revenues. Expectations and timing of growth are at best uncertain. In other geographic regions, financial institutions have not been as badly affected to date, but they anticipate lower growth and more modest increase in earnings.

Demonstrable, improved risk management will contribute to restoration of trust and confidence. Financial institutions have to implement permanent improvements in their risk management systems. Regulators have to make improvements in two of their roles; oversight of conduct of risk management by financial institutions and oversight of risk management in market clearing and settlement systems.

The central challenge to SWIFT, its membership, technology vendors, and service providers is delivering meaningful services that will contribute to these objectives.
SWIFT conveys transactions and data that support confirmation and settlement of transactions in banking and securities markets globally.

SWIFT’s financial institutional members, in concert with technology and services providers, deliver the information on which informed risk management decisions can be taken. They formulate, implement and control the timeliness, form efficiency, and cost of delivery of that information.

Sibos 2008 provides the premier venue for exhibitors to showcase their own competitive contributions to improved services to support quantitative and qualitative risk management by financial institutions and financial regulators.

Technology and service providers that fail to encapsulate the underlying message of restoration of trust and confidence in financial institutions and the global financial systems in their offerings signify that they have not appreciated the significance of the changes and the events of the past year.

Investors' and customers' confidence in financial institutions and global financial markets and systems has diminished. It has to be restored before financial institutions can restore their own fortunes. Successful exhibitors will embed the importance of restoration of trust and confidence in financial institutions and the global financial systems in their technology and service offerings.

SWIFT - All you can eat

“For the first time, SWIFT ... has finally realised that it has competition.” Those were the words of FinancialTech Insider guest blogger, Ted Iacobuzio, managing director and practice leader, payments, TowerGroup, at Sibos in Boston last year. At last year’s event, new SWIFT CEO, Lazaro Campos, announced that from the 1 January 2008, high-volume customers of SWIFT could opt for a three-year fixed fee contract and that they could increase their messaging usage by 50% at no additional cost.

Building up to Sibos in Vienna this year, reducing the cost of ownership of SWIFT is likely to be a dominant theme. There will probably be the usual user rebate announcements, but this year will see the official launch of the new SWIFT “Lite” interface that Campos alluded to last year. “A SWIFT button on the fax machine,” he stated. “Beautiful simplicity. Simply SWIFT.”

As a network provider, SWIFT faces significant competition from commercial IP network providers (BT, Savvis et al) who claim that they can provide similar if not better levels of speed, reliability and value-added services for half the cost of SWIFT. “The threat to SWIFT is that people are rethinking flows that go over SWIFT and we have to be quick as an industry to respond to that,” said Gottfried Liebbrandt, head of markets, SWIFT, in the run up to Sibos in Vienna.

SWIFT’s weapon in its battle to remain the network of choice for banks and their customers is Alliance Lite, which is being piloted by more than 20 SWIFT customers. The first official release of Alliance Lite is scheduled for October.

Instead of having to install “SWIFT-specific connectivity” at their premises, Alliance Lite allows firms to connect to SWIFT via the internet at lower cost using a hardware security token. The jury is still out on whether this will be enough to stop network providers like BT Global Services crowing that it can offer connectivity to banks for half the price of SWIFT.

Liebbrandt said cost remained an issue, not just for emerging markets where SWIFT is focused on gaining greater traction, but for all users of SWIFT. “Total cost of ownership of SWIFT has come down,” he said, adding that he anticipates investment managers, some corporates and smaller banks will use Lite.

The good news for corporates is that SWIFT is looking at reducing the strict criteria for joining its SCOR (Standardised Corporate Environment) model, which enables corporates to interface with multiple banks via a single, standardised CUG (Closed User Group).

There are currently more than 30 corporates on SCORE, and more than 150 banks. However, at Sibos last year mid-sized corporates such as Virgin Atlantic stated that SWIFT was only viable for large corporates with “deep pockets” and the rest had no real choice in how they connected.

“We are looking at relaxing the criteria to join SCOR, which currently is tightly-defined (companies have to be listed on an exchange in FATF countries),” said Liebbrandt, adding that SWIFT had posted a discussion paper to obtain feedback as to who should be eligible for SCOR.

Yet, of the 8000 or so banks that are members of SWIFT, only 250 offer SWIFT corporate connectivity. Liebbrandt said the number of banks offering SWIFT corporate connectivity had doubled over the past two years, but that at the end of the day it was something SWIFT could not control. “We are seeing a lot of interest from UK banks,” said one SWIFT spokesman. “If they think they are losing business they will do it .”

Of SWIFT’s more than 8,400 customers, Liebbrandt said an increasing number were investment managers, stock exchanges, corporates and clearing and settlement providers. While half of the traffic on SWIFT is still payments, securities now comprise 40% and FX, 7%.

The largest growth in SWIFT volumes in the past year was in the area of treasury which grew by 29.4% as at April 2008. The next biggest area of growth was securities, which increased by 24.8%. Payments traffic grew by 12.4%.

Tuesday, June 24, 2008

Better risk management "is a cultural thing"

With the theme of "Complexity, Compliance & Cost," SunGard Europa, the annual customer conference of financial software provider, SunGard, conducted a rather rigorous post-mortem of what had gone wrong in the lead up to the subprime crisis.

The guest speaker at SunGard Europa, which was held in Prague, was former Czech president Vaclav Havel, who spoke about the complexities of spearheading the "Velvet Revolution" in 1989, which eventually brought multi-party democracy to the country.

While the complexities Havel encountered seem far removed from those that investment banks now find themselves in as new and more complex instruments test risk models, one thing both events share is the need for clear and transparent information as to what is going on.

In the case of the recent sub-prime crisis, however, that information seems to have been compromised by an overemphasis on profits and growth.

Eager to deflect the blame from the automated risk management systems themselves, Value at Risk(VAR) as a measure of risk exposure and ratings agencies' modeling techniques, received a lot of flak from risk specialists for the sub-prime meltdown.

Commenting on the ratings agencies' models for structured investments, one leading chief credit officer said that, "you begin to wonder what they smoked". "How good is the work that ratings agencies do?" he asked.

With so much focus on growth and profitability, it appears risk management discipline within banks went out the window. "The risk function may have measured these risks, but at CEO level, you have to question whether these risks were accepted," said the credit officer.

The banks were also criticised for their overemphasis on VaR, which speakers concluded did not seem to tell us much, particularly when it comes to more complex instruments, such as derivatives.

Risk specialists at the conference stressed the need for more regular stress testing of risk models. "You can re-run the stock market crash of 1997," said a SunGard spokesman, "but the next catastrophe is not the same as the previous one. Firms need to look at their investment portfolios and say what is the worst that could happen, and take a view as to whether that is reasonable or not."

While a number of firms have broken down traditional silos between market and credit risk, the SunGard spokesman said that credit risk departments tended to say 'no' more often to the business than market risk. "Market risk says no less often to a trade. It is a cultural thing," which may have something to do with the fact that trading, historically, has been one of the most profitable parts of a banks' business.

Complex risk modeling techniques aside, it seems that managing risk sometimes can be as simple as just saying 'no'.