Wednesday, October 22, 2008

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.

1 comment:

Joergen Jensen said...

When you talk about ISO 20022 you have to be careful what you say. ISO 20022 covers four business domains within the financial industry and within this it covers many processes. It also being extended to cover even more.

Some of the messages are designed to cover new processes and other are designed to replace (or co-exist with) existing messages.

You can’t put all these messages in to the same bucket and generically talk about whether ISO 20022 is good or bad, worth it or not, and whether it is succeeding or not. You have to be more specific.

At SIBOS, SWIFT did lot of promotion around the new ISO formats, at least that was my impression. I was present in several sessions where the new ISO 20022 formats were the main subject or it was brought up during the session. Furthermore, I had meetings with SWIFT to work out how together – Wallstreet and Swift – we can better plan for new formats in the future, as well as to update SWIFT about our thoughts and strategy.

I agree with Financial Insights that ISO is a ’leading candidate for standardisation of corporate-to-bank messaging‘. I would add that it is the only candidate for global standardisation. All major banks today have experience with ISO 20022 format due to fact that SEPA payments have to use this in the bank-to-bank space. Therefore it should be easy for the banks to offer this format to corporates.

Banks are most likely rather ambivalent about the standardisation of corporate-to-bank interfaces. There are probably different voices and views within the same bank depending on which department you’re in. Standardisation gives the corporates lower costs when they want to change banks and therefore encourage them to change bank more often. On the other hand, it will lower the marginal cost of adding another bank, so they may simply initiate more bank relationships.

Daimler has been using SWIFT connectivity for several years with its major banks and plans to expand it to all banks. Volkmar Lorenz from Daimler said during SIBOS that since they have started their SWIFT connectivity project, Daimler has not stopped working with any of the banks they communicate with via SWIFT.

However, we should not expect a revolution. The ISO 20022 format will slowly be used more and more in the C2B space when corporates renew their interfaces to the banks because they change bank or upgrade the system. Few companies will change to the new format for the sake of the new format, but will wait until they have to test the interface anyway.

Finally, switching to SWIFTNet connectivity for C2B communication will accelerate the usage of the format. We will see European companies being front runners, but the usage will spread to other parts of the world over the years.

Joergen Jensen
Director, Corporate Solutions
Wall Street Systems