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%.