Thursday, September 17, 2009

The worst of the financial crisis and the typhoon that threatened Sibos in Hong Kong may have passed, but guest blogger, Andy Schmidt of TowerGroup, says considerable uncertainty surrounding certain aspects of the financial services industry remains.


And so we find ourselves at the end of another successful Sibos. One year (and one typhoon!) after the fall of Lehman, despite being humbled, the financial services industry is peering out at the world with an air of cautious optimism. 

Of course, there’s a lot of work still to do to recover. Significant challenges with respect to transparency and liquidity can still wreak havoc in the marketplace. Financial market harmonisation remains more a dream than reality, and regulations like SEPA are still without a final implementation date. Therefore, uncertainty of all kinds will continue to challenge the financial services community for the foreseeable future. 

Therein lays the point. The financial services industry is a community whose members rely on one another for survival and success, now more than ever. We’ve survived — especially in the payments sector — because of our ability to work together. And as a community, we’re looking at ways to work together that we would never have considered before the crisis, considering approaches like collaboration, competition, and joint ventures that were “unnatural acts” a short 12 months ago.

Broader standards adoption will certainly ease the transition toward shared infrastructures, and innovation will uncover new ways to achieve greater efficiencies in serving our clients and partners. 

However, it’s the ability, opportunity, and (dare I say) responsibility of the financial services community to speak to the regulators in simple language that will provide us the greatest opportunity to shape our collective future. Remember, the regulators need our input to better understand where the risks truly are, and engagement with the regulators provides us a voice in the direction our industry heads.

So when we reconvene, I expect we’ll have stories (and perhaps even case studies) to share on how the market has evolved and improved in 12 months’ time, showing how, together, we can create a stronger, better industry. See you in Amsterdam!

Another Sibos is over and the big debate is not the fallout from the GFC (global financial crisis) or whether SWIFT can truly trim EUR 30 million off its bottom line (although if the sliver of a sandwich the journalists were fed in the press room is anything to go by, the McKinsey consultants have certainly been cutting a swathe through SWIFT's balance sheet).

The bigger story, other than the typhoon that wasn't really a typhoon, was whether there really was 5,000 delegates in attendance. At the opening plenary, SWIFT claimed that more than 5,000 people were attending Sibos in Hong kong, yet the exhibition floor looked thin on the ground most days (particularly the one on the third floor which saw less foot traffic than those lucky exhibitiors with first floor stands. 

However, today, suddenly from out of nowhere hundreds (not thousands) of bankers converged on the closing plenary. Where had they been all week? Well with a convention centre so spread out you needed to run a marathon to get from one room to the next, looks may be deceiving. Maybe there really were 5,000 registered delegates (there also seemed to be an awful lot of people employed to wipe drops of water off air conditioning systems with long mops - presumably they were not counted as delegates).

Anyway, jokes aside, keeping with the innovation theme SWIFT introduced at Sibos last year in Vienna, the closing guest speaker was Guy Kawasaki, ex-Apple and now running his own technology venture company. He boasted about how the "egomaniacs" at Apple flew first class (on flights longer than two hours), drank fresh orange juice and had a Bodendorf piano. Those were the days and perhaps there were a few bankers in the audience also lamenting the loss of first class travel and fresh orange juice.

Kawasaki trawled through his 10 ways for companies to be innovative - none of the corporate names he mentioned however were banks. Funny that. Despite all the Innotribe sessions in the world, I doubt there will be many bannks at Sibos next year with all their apps hosted in the cloud or providing financial services linked into social networking sites.

The sheer weight of the legacy infrastructure banks (particularly those large global networked banks) have to live with, makes innovation of the Apple and Guy Kawasaki kind difficult for banks, even if they did have fresh orange juice or Bodendorf pianos in their office.

People spoke about social networking and collaborative technologies but I saw very few real-world examples of banks using these technologies in the B2B space. I cannot see it getting past most boards, although Citi's Banking Evolution platform, announced at Sibos, was an example of one bold move in that direction. But then Citi is a technology start-up more than it is a bank.

Yes it handles transactions and enables customers to send and receive money from around the world, but it differentiates itself in terms of technology, and if it has its way, all the smaller and medium-sized banks will be white labelling its technology.

The Citi view of banking is that you don't need to manufacture the parts in order to be a transaction bank. You can insource them and assemble them and still call yourself a transaction bank, although I do expect that transaction banking in the future will be less about owning the payment or moving money, and more about what you do with the information associated with those payments and the customer making them.

The open account challenge

When the president of the United States and the UK chancellor, Alistair Darling, start mentioning trade finance you know that a subject most transaction banks took for granted has suddenly been elevated to a new level of importance.

"Everybody is talking about trade finance," says Kah Chye Tan, global head of trade finance, Standard Chartered Bank. Thanks to the financial crisis, trade finance, which has oiled the wheels of global trade for hundreds of years, is sexy again.

But despite what some banks are saying about traditional trade finance instruments such as Letters of Credit being on the uptick again, Tan says that is not the true picture.

Although the risk mitigation benefits of LCs were appreciated more during the crisis, in 2008 overall LC volumes declined by 13%, said Tan. "If you look at 2008 the dollar value of LCs shot through the roof as commodity prices increased. Because the dollar value went up people thought LCs were back in favour."

While LCs will always be a part of the trade finance business, open account trading is here to stay (Tan says it makes up approximately 95% of the $14 trillion a year in world trade). After all why would a company want to pay $1 million to mitigate risk against non-payment using an LC when an open account trade may only cost $30?

The challenge now for the banking industry, says Chan, is to  bring the same risk mitigant benefits the LC provides to open account trading. So far, however, he says banks have done a pretty poor job of that. "It will be another five to 10 years before banks come up with a solution that the market needs," says Tan.
The problem is that open account does not just mean one product. For example, it can encompass receivables discounting, supply chain financing and accounts payable financing. "Open account means different things to different banks," says Tan.

In the run up to the global financial crisis (now referred to as GFC, which is the three letter acronymn doing the rounds at Sibos this year), most of the transaction banks were eager to talk about supply chain financing. And two Siboses ago it was a fairly universal theme on exhibition stands.

Although supply chain is still topical at Sibos this year, Tan says some banks were talking the talk but not walking the walk because the provision of supply chain financing on a cross-border basis is problematic for them as they do not own the local relationship with SMEs or suppliers and feel more comfortable financing domestic transactions. "Banks may say they are a global network bank, but in reality there are a lot of silos in banks," said Tan. "A lot of banks are shying away from cross-border [supply chain financing] transactions."

SWIFT in the retail network space?

SWIFT would like banks and other financial intermediaries to use its IP network more, particularly when the banking co-operative has not had such a good year in terms of traffic. While SWIFT chairman Yawar Shah said in the opening plenary that SWIFT should focus on those areas where it is more likely to succeed, the banking-owned network is eyeing up opportunities in the retail network space.

It is kind of ironic that SWIFT feels it can be successful in the retail space, when on the face of it managing a closed network with just 8000 banks on it, hardly equates to a successful network business, particularly when your pricing is not necessarily as cost competitive with other IP-based networks that have substantially higher volumes and carry more transactions.

Francesco Lanza, marketing manager, network services for SIA-SSB was a little bemused to hear about SWIFT's plans to move into the retail space. SIA-SSB, which is owned by leading Italian banks such as UniCredit, has 550 banks on SIAnet, which handles wholesale, capital markets and retail traffic (payment cards) on its network, providing connectivity to STEP2 in Europe, to SWIFTNet for Italian banks and to multilateral trading facilities in Europe.

Lanza says that SWIFT could have its work cut out for it in the retail networking space. "Retail traffic is huge compared to wholesale and it requires a different service model." And unlike SWIFT, which saw network traffic decline in the wake of the crisis, SIA-SSB saw double percentage increases in network traffic across most months last year, largely because it carries not just wholesale traffic, but also retail.

According to Lanza, SWIFT's "central hub" network approach is unsuited to the retail environment where a peer-to-peer topology works better. SIAnet works on the basis of network nodes, which are able to reach out to other nodes not requiring a central hub, which means government agencies are unable to pry into information carried on its network, says Lanza.

SWIFT found itself in hot water with data privacy organisations a couple of years back after it allowed US intelligence agencies to look into messages carried on its network. In response to that SWIFT is looking at developing a mirrored data environment located in Europe for European traffic. However, Lanza says that means additional cost.

It raises the question yet again as to whether SWIFT should be in the network business. While it may have started out as a replacement for the telex, with the advent of the internet and global IP networks, is running a network (despite all the stuff about non-repudiation) really SWIFT's core business. Arguably in the retail space the same level of non-repudiation is not needed and SWIFT's network is likely to be perceived as being too closed.

How much more regulation can the industry take?

As regulators are about to unleash even more regulation on the financial services industry in the wake of the financial crisis, guest blogger, Gareth Lodge of TowerGroup,  says they should stop and think carefully about whether more regulation is going to have the desired effect?

I’ve just been enjoying the Big Issues debate on transaction banking, chaired by TowerGroup CEO Karen Cone. I may be somewhat biased when I say how interesting it was!
What continues to strike me is how transaction banking has emerged successfully from the financial crisis. There are some good reasons for that success. Bankers and other observers sometimes forget that global transaction banking isn’t one “thing” but actually comprises multiple businesses. As a whole, however, transaction banking emerged as one of the few areas of the bank to have grown in the last year. Transaction banking is all about helping the banks’ customers manage risk. The help may be as straightforward as a letter of credit designed to take the risk out of international trade or as highly sophisticated as the systems and processes that flawlessly move billions of transactions and trillions in currency value. The recent market uncertainty has therefore been good for the transaction banking business in many ways.
At least in some parts of the bank such as global transaction banking, banks have managed risk extremely well, I think. The policies and processes put in place meant that no payment system failed, which is why many are surprised about the threat of increased regulation. This concern stems from the open question as to whether existing regulations — and regulators — are effective. Many banks, particularly in Europe, have come to see regulation as unavoidable and in effect simply an increasingly large cost of doing business. What has always been a concern, and is becoming of even greater one, is the perceived lack of benefit and value in the regulations. The proportional cost of IT spend related in some way to regulation is already large and is rising. 
The cost is starting to have a material impact on some banks, with results contrary to what the regulator wished. In essence, much of the regulation addressing competition and risk levels the playing field. One consequence seems to be that some banks suffering from the burden of spending on regulatory compliance are outsourcing to larger banks, with the converse and unintended consequence of reducing competition and concentrating risk. 
Of course, not all will agree with this view, each “group” having a different opinion as to the view’s truth and merits. Although there is no easy solution, it would seem beneficial to all to provide greater clarity and governance of regulation before embarking on yet more. Defining and agreeing what is required and how success should be measured surely should be the basis on which any project should be undertaken.

Wednesday, September 16, 2009

Can banks move beyond the limitations of legacy?

Coming to Sibos for the last 10 years it tends to feel like Groundhog Day (weren't banks debating the same issues three or four Siboses ago?), but one good aspect of that is that you are able to pick up on how far the industry and therefore the debate has really moved on.

A good example of that was at this afternoon's corporates forum, where an old Sibos attendee, David Blair, former corporate treasurer at Nokia and now vice president, treasury, Huawei, appeared to adopt a less aggressive stance with the banks than he had at previous Siboses.

The forum's moderator kindly reminded Blair of what he had asked for from banks at Sibos in Singapore six years ago: an 18 character Universal Remittance Identifier (URI) that enabled corporates in the high-tech industry to reconcile an invoice with a payment. Sounds like a simple request, but having become somewhat of a Sibos mainstay myself, I know only too well how slowly banks move when corporates ask them for something.

Blair and other high-tech corporates went on to develop RosettaNet, the 18-character URI themselves, and perhaps if they had waited for the banks to come up with it they would still be debating the nuances of it at Sibos in Hong Kong.

Blair reminded the banks that sometimes their defensive stance means they can misinterpret what corporates are actually asking for and he said contrary to what banks thought, RosettaNet was not trying to replace SWIFT or compete with banks.

Another interesting attendee on the corporate panel was no other than Vipul Shah, senior director and head of financial services at PayPal/eBay; that company that banks spent many a Sibos accusing of stealing their business. Now PayPal is attending Sibos and talking about using SWIFT.

PayPal at Sibos? Well given that SWIFT chairman Yawar Shah said at the opening plenary that companies need to use SWIFT more, the Brussels-based banking co-operative eager to reverse the trend of declining wholesale volumes on its network is contemplating entering the retail space (more on that later).

As a global online payment provider, PayPal has its challenges when it comes to working with multiple clearing systems and banks. "Clearing systems are not able to accommodate a unique remittance identifier," said Shah.

It is not only the clearing systems that have their challenges. I left the corporate forum with the overarching impression that although corporates may demand a lot from their banks, the pace of change is significantly hampered by bank legacy infrastructure and inertia.

Not only are banks still trying to leverage next generation apps on legacy infrastructures that are at least 30 years old, but banks are also failing to uniformly apply standards that exist, which means the experience for the corporate customer is inconsistent from one banking provider to the next.

While we heard that there are opportunities for banks, for example in the cash flow forecasting space, to organise themselves and deliver a range of capabilities in an integrated way, the banks conceded it was not easy; not easy because of their legacy infrastructure which is "disaggregated."

Picking up on the theme that banks' payments and transaction banking infrastructure is outmoded and siloed, a number of software providers at Sibos are touting payment hub solutions or the next generation of payment platforms that integrate both wholesale and retail payments and aim to help banks overcome the limitations of their legacy siloed infrastructure by providing a "unified platform" whereby banks can deploy payments functionality (whether it is credit cards, ACH, cheques, mobile payments, real-time payments) as a service on a single platform using service-oriented architecture.

Trade finance - A "rude awakening" for banks as they seek to innovate

A show of hands for those corporates that have lost trust in their banks post-financial crisis. At this morning's conference session at Sibos in Hong Kong on the shortage of trade credit, the vote was fairly overwhelming with a show of red cards from those corporates in the audience.

The leading trade finance bankers on the panel had no choice but to acknowledge that they have some work to do to restore corporates' trust. "Corporates believe trust has been damaged," said Kah Chye Tan, global head of trade finance, Standard Chartered Bank. However, he added that banks also had a responsibility to be prudent.                             

"Trust has dissipated," said Lawrence Webb, global head of trade and supply chain, HSBC. "However, I don't think clients distrust banks at the transaction level. But we have some way to go to rebuilding trust at an industry level."

John Ahearn, managing director, supply chain managment, structured trade and asset optimisation, Citi, was more inclined to apportion the blame equally between banks and corporates, saying that corporates are largely sophisticated buyers that should have understood what they were buying. "We [still] have clients coming to us asking to borrow enormous amounts of money [based on] thin prices." When it comes to apportioning blame, Ahearn says "we (banks and corporates) all got drunk together, but now the party is over.

While it may not be the best time for new clients to approach banks asking for credit, Webb said that HSBC's trade weighted index indicated that Hong Kong companies were expecting increased access to trade finance in the months ahead. But what about those banks that now have substantial government stakeholdings? Will they be extending credit in the wake of the financial crisis? Tan of Standard Chartered seems to think that they will be forced to withdraw to their home market and therefore reduce lending.

Ahearn, representing Citi, which the US government has a more than 3o% stake in (apparently the US government has announced it wants to sell its stake) asked whether the UK government would be happy with RBS lending money in Singapore? The same could be asked of Citi, although the US government's stakeholding in Citi is much less than the UK's 70% shareholding in RBS. Tan ventured that the money governments pumped into banks to prop them up during the crisis equated to a form of protectionism or a form of subsidy.

In an effort to plug the gap in the secondary trade finance markets, The International Finance Corporation with the support of the G20 group of countries set up the Global Liquidity Program, yet it is unclear whether the millions pledged to that program have filtered through to those banks or companies that actually need it. There also appears to be an enlarged role for Export Credit Agencies to play, however, they appear to be playing catch up.

 "We need to make sure these [IFC] initiatives are in place on a long-term basis," said Webb of HSBC, "as opposed to being reactive." The challenge for the banks in the trade finance space is not only restoring credit but also being able to move with companies as their supply chains evolve.

Tan said banks needed to move with companies as they expanded their global supply chains and not just provide domestic solutions. However, Ahearn cautioned that banks should not underestimate the risks in terms of tax and financing issues in cross-border supply chain or trade finance. "They may be in for a rude awakening if the regulators look at this," he said.

Tuesday, September 15, 2009

The Prime Brokerage Business: One Year Out, Where Are We?

Dushyant Shahrawat, senior research director, securities and investments, TowerGroup, examines the fall out for the prime brokerage business one year after the collapse of Lehman Brothers.
It has been one year since the collapse of Lehman Brothers, the fall of Bear Stearns and the hectic sale of Merrill Lynch to Bank of America.  One can argue that the biggest impact of this string of events within the financial industry has been on the prime brokerage business. What has changed? The prime brokerage business has been impacted and has changed in the following ways:
1) The demise of two major prime brokers (in Lehman Brothers and Bear Stearns) has shaken hedge funds’ confidence in their prime brokerage providers
2) The events of just a few months have dramatically changed the relationship between hedge funds and their prime brokers for a long time to come. Cosy relationships have been questioned, and both hedge firms and prime brokers are re-evaluating their mutual association.
3) The competitive dynamic of this business has changed, with Goldman Sachs and Morgan Stanley dropping in market share from an estimated 52% of the global prime brokerage business in 2007 to under 35% in 2009. New players such as Fidelity Investments are entering, and several other firms are waiting on the sidelines.
4) Large Wall Street brokers have been deprived of a major and steady stream of revenue from the prime brokerage business. The estimated $12.5 billion that US brokerage firms make from the prime brokerage business may well see a 20% cut in the next few years.
5) Client perceptions and attitudes about their prime brokers have changed drastically during the crisis. Hedge funds have become more sensitive to the stability of their prime brokers and are demanding their prime brokers segregate client assets so that they are not overly exposed to the prime broker. 
6) Finally, a major trend that has emerged is the shift to a "multiprime broker" model. That is, hedge funds that used to rely overwhelmingly on one or two prime brokers are now hiring multiple prime brokers to spread the risk of doing too much with particular firms. Is the trend towards multiprime brokers a flash in the pan, or is it here to stay? We think this is a longer-term trend and will not reverse itself anytime in the future.

SWIFT TSU passes the all-important 100 mark

SWIFT's Trade Services Utility (TSU), which is a central matching utility designed to standardise the process between banks for matching purchase order and invoice information, was first announced at Sibos in Atlanta.

It was initially designed to help banks become more relevant in the open account trading space, which makes up more than 80% of cross-border trade. While the TSU attracted some early adopters, until recently it looked set to become a non-starter as few banks signed up to the utility. But oh what a difference a financial crisis and changes in the trade finance market make. 

Today SWIFT announced that the TSU passed the all-important 100 mark in terms of bank membership with recent signings including Barclays Commercial Bank, Yapi Kredi Bankasi, Banco de Crédito del Peru, Bank of China Hong Kong, Shin Kong Bank and Taishin Bank.

Those banks that recently signed up to the TSU are hoping it will be one of the key lynchpins for developing the next generation of trade finance solutions. However, the TSU still has its sceptics, with corporates saying it offers little in terms of direct value to them.

And although trade finance is sexy again given that most banks have witnessed increased trade finance activity as buyers and suppliers look to mitigate counterparty risk, working out how they can successfully re-integrate themselves into corporates' supply chains is still challenging for most banks.

Euroclear and Link Up Markets continue dialogue

Twelve months ago at Sibos in Vienna when Tomas Kindler, managing director of Link Up Markets, the joint venture between eight European CSDs, said that it would go live in early 2009 with its central mapping engine to foster interoperability between different CSDs, most people probably thought he was mad.

Kindler himself even admits that there were some doubters, however, in March this year, Link Up Markets officially went live. The main benefit it will deliver for participating CSDs is that it fosters interoperabilty by converting domestic messaging formats used by national CSDs into a common ISO-compliant standard.

Although the joint CSD initiative started out with a largely European focus, it is has since expanded beyond Europe with South African CSD, Strate, becoming the ninth CSD to join Link Up Markets. "Strate want to extend their business model and position themselves as a hub in the region," said Kindler, and he says we could see some of the Asian CSDs doing the same.

Kindler says the Asian Development Bank (ADB) and a group of experts comprising regional CSDs and custodians are looking at a Giovannini-type exercise for the ASEAN markets. China, Korea and Japan are believed to be looking at a regional settlement solution or an Asian ICSD.

However, unlike Europe which benefits from having a single currency, Asia's securities settlement infrastructure is even more highly fragmented and is characterised by varying levels of sophistication. "The ADB is not the European Central Bank in terms of influence and policy making, so I think its ambitions are more of a long-term initiative," said Kindler.

The pressure [for CSD] to change is also more prounounced in Europe, given the requirements of the Code of Conduct for Clearing & Settlement which calls for interoperability and the launch of the European Central Bank's TARGET2-Securities (T2S) initiative which will consolidate settlement of eurozone securities in central bank money on a single platform.

Closer to home Link Up Markets is also in discussions with Brussels ICSD Euroclear. If Euroclear were to join it would be a major coup for Link Up Markets given that Euroclear incorporates seven markets and has substantial volumes. Pierre Francotte, CEO of Euroclear, says Link Up Markets would be considered on its merits and that the real value for SWIFT in joining would be to link into markets not covered by its seven CSDs.

For CSDs in Europe faced with the prospect of having to outsource securities settlement to T2S when it goes live in 2013, there are essentially only two games in town: join Link Up Markets or become part of the Euroclear Group Monte Titoli in Italyis the exception in that it developed a joint partnership with a global custodian, but Kindler says he hasn't seen a lot of developmen around that. "The options for [European] CSDs are limited," he says, "however, there is no right or wrong approach."

The next phase for Link Up Markets is to leverage its joint-CSD infrastructure to develop additional services such as pooling collateral across participating CSDs. Kindler also hopes that it will become an attractive proposition for CSDs looking to connect to T2S, which will require an element of conversion.

Citi looks to social networking and YouTube in new banking platform launch

In the aftermath of the current financial crisis it would be easy to write off any innovation coming from transaction banks as most of them for the last few months have been hoarding capital to appease regulators and hunkering down as banking "goes back to basics".

A number of consultant studies also suggest that innovation, at least in the payments space, is more likely to come from companies like Google, Microsoft and WalMart. However, some of the transaction banks exhibiting at Sibos this year are eager to stress that the banks should not be written off yet when it comes to innovation.

One of those banks is Citi, which launched its "next generation collaborative online banking platform", CitiDirect BE (Banking Evolution) at Sibos in Hong Kong today. With Francesco Vanni d'Archirafi, CEO of Citi Global Transaction Services (GTS) describing the bank as a $9 billion technology start-up, Citi has a strong track record of producing award-winning technologies such as its online banking plaftorm CitiDirect, which back in 1999 when it was launched set the benchmark for the many online banking platforms from other providers that followed.

In 2005 Citi also launched its TreasuryVision portal, which combined information with analytics to enable corporate treasurers to gain greater visibility over their cash, risk and global liquidity positions. Despite the well publicised financial difficulties Citi has had in the last 18 months, Gary Greenwald, chief innovation officer, Citi GTS, said that the bank spends more than $1 billion on technology annually and that this year's IT budget was marginally higher than last year's.

Recognising that some aspects of its CitiDirect platform had become commoditised as other transaction banks developed online banking platforms that benefited from subsequent developments in technology, CitiDirect BE is the next incarnation of where Citi believes treasury and payments functionality is headed.

Interestingly, while Citi has historically targeted its solutions at top-tier corporates and other banks, CitiDirect BE will be initially rolled out to the SME market in Poland.It will also be sold as a white-labelled solution to other banks.

CitiDirect BE builds on lessons learned from developing TreasuryVision and embraces the latest in social networking, collaborative and Web 2.0 technologies to provide treasurers of both large companies and SMEs with a more intuitive, customisable interface for doing a whole bunch of things, above and beyond initiating payments, trade finance and FX transactions. CitiDirect BE is built on Microsoft .Net and Microsoft Office SharePoint Server 2007 Enterprise Edition. "SharePoint is a portal which allows us to deliver a new web services architecture," Greenwald explains. "Within the portal, we have a modular platform that allows different back-end technologies to come together at the front end."

Recognising that banks have been sitting on a lot of transaction-related information that they were unable to harness before in a meaninful way and push out to customers, Greenwald said CitiDirect BE builds on the analytics and information contained within its TreasuryVision platform to provide treasurers with data that can help them achieve greater insight into their accounts receivable and collections, as well as data that supports activities such as supply chain financing.

Pushing more data out to treasurers, says Greenwald, is not so much about having a "pretty dashboard" but about normalising and cleansing data from multiple back-ends to provide treasurers with quality and timely data. "We have taken the analytical processing and slice and dice capabilities within TreasuryVision and combined it with different sets of data around payment transactions and account openings," Greenwald explains. "So, for example, if you are running a large shared service centre you can look at the efficiency of your payment processes over time."

CitiDirect BE also incorporates the work Citi has done with major multinationals around Electronic Bank Account Management, combining digital signature technology with the ability to automate the currently manually-intensive process many corporate treasurers with multiple banking relationships face when it comes to changing account signatories and bank mandate management.

But perhaps one of the more unusual features of CitiDirect BE is the degree to which it embraces social networking and collaborative online technologies including a media channel, which Greenwald compares to YouTube, as it allows Citi execs in any country to develop a video library harnessing their expertise. Treasurers can search the video library and pre-register topics of interest. "If you look at social networking sites such as Twitter it took us some time work out how that makes sense in a B2B world," said Greenwald. To take a look at how CitiDirect BE's media channel and other functionlaith within the next generation banking platform works, click here.

Commenting on the launch of CitiDirect BE Jerry Norton, director of strategy, global financial services, Logica, said it was an exciting development, however it masks the complexities that still exist on the back-end in terms of the different interbank market infrastructures for processing cheques, card payments, high value and low value payments.

Monday, September 14, 2009

The need to innovate

Guest blogger, Gareth Lodge of TowerGroup, says the financial industry appears to be turning a corner and that innovation or the art of doing things differently will be key to recovery.
It's true, SIBOS is here — two parties already and a looming happy hour are testament to that! But as I sit waiting for the opening plenary session to begin, I reflect on the year that has passed. I suspect many in the industry wondered at least once in the last year whether they or even the industry would survive. It has certainly changed the focus of the banks since that point.

When I first saw the agenda for Sibos, I was slightly surprised to see the Innotribe track. I should say, that having previously worked at an innovations consultancy, that I believe in both innovation and its benefits. But innovation has certainly suffered in the last year, as budgets are frozen or cut across the bank, making its inclusion on the agenda a bold move. 

There is a general feeling over the past few months and certainly heard in the conversations I've had today, that we're turning a corner. Banks are planning for 2010, for at least a form of business as usual. That's why innovation is important. Innovation is synonymous with cutting-edge technology. 

In reality, innovation can be considered to be the art of doing something differently. Technology may play a part but isn't the answer. Technology without an application is just technology. Why do I raise this point? Because the world has changed. Don't banks therefore need to change as a result? If clients' demands have changed, banks need to respond. Now more than ever is the time that banks need to innovate. What is needed is a much a cultural change as any other kind of change. 

Innovation begins in the thinking and approach of an individual, not in a piece of technology. The key objective has to become how to deliver value to the customer. Innovation for innovations sake is a luxury. Retaining customers is essential for survival of the firm or institution. I encourage you all to attend the Innotribe stream today. To respond to the world tomorrow, you need to start today.

The new lean and mean SWIFT

A more sombre tone characterised the opening plenary at Sibos in Hong Kong. Last year in Vienna, the opening plenary coincided with the collapse of Lehman Brothers. This year the only bad news delegates had to face was the threat of a typhoon level eight warning, which meant we may be bunkered down at the Hong Kong Convention Centre for longer than expected.

Also this year there was not the usual announcement by SWIFT of a rebate to its members. With year-to-date volumes on SWIFTNet down by 2.5% and SWIFT 11% off its budget target in view of the banking network's first ever volume decrease, the rhetoric of previous years where one gained the impression that SWIFT was trying to be everything to everybody, was usurped by a more pragmatic realisation that SWIFT needs to focus on those things it is good at.

"What is new [this year]?" asked SWIFT chairman, Yawar Shah. "Not much. It is about making sure SWIFT works. We don't expect SWIFT to sizzle in banks' boadrooms. We are just getting on with things, which should give us peace of mind."      

Like its banking members, it appears SWIFT is going back to basics, and like some financial services companies and even media outlets, in these troubled times where everyone is trying  to get more bang for their buck, SWIFT has called in McKinsey to see where it can make further cost savings and efficiencies. SWIFT's CEO Lázaro Campos expanded on "Lean@SWIFT", which he said is a two-year project overseen by SWIFT's CFO, Francis Vanbever in conjunction with McKinsey.

SWIFT hopes to make targeted efficiency gains of 30% without downgrading its service. Campos said SWIFT remained committed to price reductions for members and innovation, yet, given that SWIFT's pricing model is geared more favorably towards increased traffic, when volumes are down, the banking co-operative is unable to deliver on its cost-savings promise. However, using other means such as offshoring and vendor re-negotiation, Campos said SWIFT had already saved EUR 30 million.

In future, Shah said there would be no "hobbies" for SWIFT (one only has to think of SWIFT's failed epaymentsPLUS initiative during the boom). I got the impression that there had been some refocusing at SWIFT with Shah saying that 500 corporates on SWIFTNet, while encouraging, was still a dip in the ocean.

Shah also alluded to the potential for SWIFT in the securities space; namely its recent activity in the area of corporate actions. Yet at Sibos last year, and in previous years, the attendance by securities  market participants has always been dismally low, which seems to suggest that gaining traction in that space is still challenging for the Brussels-based co-operative - it is probably hoping that the renewed focus on standards, STP and automation will change that.

Shah also alluded to the role for SWIFT in reinsurance and managed identity services stressing the need for SWIFT to "go beyond messaging services". "SWIFT should be the shared service infrastructure as it is bank owned and governed," he said.

Does SWIFT really need to look that far to realise why banks and other financial market participants are not using it more? SWIFT has always been deemed as expensive when compared with other IP networks and it has to get its own house, in terms of internal cost savings and efficiencies in order, before it can expect banks, corporates and other financial intermediaries to start using it more.

Don't gear regulation towards attracting "top shop" names

CCPs or central clearing counterparts cannot save the world from another financial crisis, we heard earlier today, although they can do a darn good job of trying at least for those instruments that are more standardised. Keeping with that theme, Joseph Yam, chief executive of the Hong Kong Monetary Authority (HKMA) who delivered the welcoming address on the first day of Sibos at the Hong Kong Convention and Exhibition Centre, said that the regulators could not save the markets from another financial crisis.

"It is difficult to find a text-book perfect market," said Yam. "We [the regulators] are not perfect. Markets do fail; market intermediation is always controversial. We learned that in 1998 [following the Asian financial crisis]."
In the wake of the current financial crisis and the billions that went towards bailing out the banks, Yam had a slight dig at his Western counterparts who he said appeared to be moving from an Anglo-Saxon model to a socialist model. He was also critical of those emerging markets that promoted regulatory rules that were "unsustainable" for domestic circumstances (in other words too accommodating of foreign investors).  He said such markets bred "unethical behaviour" .

The secret it seems is to get the degree of financial openness right without causing financial instability. "The financial system's primary focus is financial intermediation that supports the economy," said Yam. And not financial openness that is geared towards attracting the "top shop" names in your own backyard because those so-called "top shops" may also bring with them financial innovations, which are toxic.

Eager to point out Hong Kong  redeeming features, Yam said that the HKMA had introduced RTGS for the Hong Kong dollar, euro, US dollar and renminbi with payment-versus-payment settlement which was linked to its debt clearing system. He invited market participants to become either direct or indirect participants or to link into Hong Kong's clearing and settlement systems.

With all these developments occurring in the Hong Kong market, Yam queried why it had taken SWIFT so long to restage Sibos here. "It has taken you [Sibos] 18 years to come back. What took you so long? A lot has happened here to interest you enough to have come back earlier."

No CCPs can't save the world

With the financial markets in recovery mode, following last year's annus horribilus, the question everyone, particularly the regulators are asking, is can CCPs save the world?

That was the title of one of the morning sessions on the opening day of the Sibos conference in Hong Kong and by the time I managed to find my way to the conference hall where the debate was taking place, it appeared that most of the panellists were saying what most people at the coalface already knew, that CCPs can only reduce risk for those instruments that are standardised.
"The ability to determine price is important to the central clearing function," said Kim Taylor, president of Chicago-based CME Clearing. "We want to be able to determine price, have a good knowledge of the forward looking risk and be able to set standards in terms of who can participate. Given these three elements CCPs in standardised markets do provide enhanced efficiency."
Yet with so many CCPs popping up as multilateral trading facilities continue to multiply, some maintain that the multitude of emerging CCPs could create even more risk. "I don't think any of us take lightly our obligation to reduce systemic risk," Taylor riposted, adding that there was a danger of heightened risk if the markets tried to push every instrument into a clearing house. "We need to focus on the more standardised end of the curve."

Alberto Pravettoni, managing director, group corporate strategy for LCH.Clearnet, said that it had sufficient mechanisms in place to ensure it did not take excessive risk. But while CCPs may want to differentiate on what is standardised and what is not when it comes to central clearing, the regulators may have a different idea. Some see central clearing as a panacea for the market's current woes. And as academic Craig Pirrong, from the University of Houston pointed out during the panel debate, it may be difficult to distinguish between what you can and what you cannot clear.

Pravettoni believes there is an opportunity to put more products (namely, some equity and fixed income instruments) through clearing houses. But for the end users of clearing houses there is an increasingly confusing array of CCPs to choose from.

The question is how many clearing houses should there be? In the FX markets, Rob Close, president & CEO of CLS Bank, said there probably should only be two or three. However, markets like Korea and Singapore have mooted the idea of setting up local clearing houses for OTC derivatives. The latter did not appear to go down too well with Monday's panellists who all pretty much agreed that given the global nature of the markets, global clearing solutions, not local market-specific solutions, were needed. "Trying to force these products to go through local clearing routes would be counterproductive from a risk management standpoint," said Pravettoni.

SEPA back on the menu again for banks looking to grab market share

Two hours into the first day of the Sibos conference in Hong Kong and already I am inspired to blog about something, which is pretty unusual. My first meeting of the day was with Sentenial, a direct debit solutions provider to leading European banks looking to prepare for SEPA.

I know the Single Euro Payments Area (SEPA) is so yesterday's news but Sentential believes that some life is being breathed back into the flagging project by those banks that see SEPA and the looming introduction of SEPA Direct Debits (SDDs) as a means of winning new business. At Sibos last year in Vienna, just before the financial crisis claimed some of its more high profile victims, SEPA moved to the bottom of the agenda as banks focused on shoring up their capital reserves.

This year, the guys at Sentenial claim that the focus is back on SEPA with leading banks like Deutsche setting the standard for others to follow. Brian Hanrahan, executive vice president, sales & product management, Sentenial, said leading banks like Deutsche see SEPA and SDDs as core to its payments business and are not just treating it as a compliance issue."Other banks are playing catch up [with Deutsche]," says Hanrahan, "but they don't necessarily understand the mechanisms they can use to catch up." 

Sean Fitzgerald, CEO, Sentenial, says the aggressive "land grab" by leading cash management banks is forcing Tier 2 and Tier 3 banks to start thinking about SEPA and their SDD strategy. "The more aggressive players see SDDs as an opportunity to gain market share," says Fitzgerald. "Payments makes up a significant portion of their operating profits and the refocus [post-financial crisis] is back on payments."

Although the binding date for reachability for SDDs has been pushed back to November 2010, with the French banks saying they are not going to be ready until then, Sentenial says the leading banks are already well on the way in terms of their preparations and see it as an opportunity to differentiate themselves. These "SEPA pioneers", says Fitzgerald, are likely to force further consolidation in the payments space and are likely to dominate SDD flows once corporate appetite for the new instrument takes hold, which is not likely to happen until after November 2010.

While SEPA Credit Transfers were a new way of doing something that already existed, SDDs or pan-European direct debits are a completely new instrument for corporates and Hanrahan says they are looking for banks that demonstrate leadership on this issue, particularly around direct debit mandate management, which is particularly challenging in terms of moving existing mandates over to the new SEPA standards.