SEPA is stalling

Guest blogger, Paul Styles, business solutions manager, ACI Worldwide, comments on the increasing unrest amongst European banks regarding SEPA's slow progress.

The slow implementation of the SEPA project so far has culminated in a statement from the French Banking Federation (FBF), announcing that its members are ‘downing tools’ on preparation for the introduction of SEPA Direct Debits (SDDs) in November 2009.

As dramatic as this statement may sound, it actually reflects general and widespread stirrings of unrest from Europe’s banks regarding the SEPA project. In fact, as early as September 2008, the FBF warned that they would suspend their SEPA Direct Debit projects in reaction to the European Commission's unclear stance on interchange fees, which they believe threatens their current economic model.

The EC and the European Central Bank (ECB) have stated that banks can use interchange fees on Direct Debits only for an "interim period" and if it is justified. However, French banks point out that the interchange fee system is the "only tried and tested cooperative model" to achieve the financing of SEPA infrastructure investments and maintenance costs. If interchange fees are to be scrapped, then the ECB needs to come up with a long term solution, and quickly.

Nevertheless, whilst the French banks are unwilling to commit to the ECB’s provisional timetable, it seems unlikely that they will completely halt their work on SEPA projects as many have wider European operations. Yet, demand for SDDs in a cross-border context is yet to be proven, and with SDDs due to go live in November, this statement from the FBF speaks volumes that the French banks are not expecting a wholesale shift from their domestic Direct Debits processes to the new SEPA instruments.

While the statement from the FBF may have little impact on the overall roll-out of SDDs, it serves to highlight the fact that the SEPA project is stalling. Without strong customer demand, achieving SEPA through self-regulation will remain problematic. As such, appropriate levels of regulation would help the progress of SEPA implementation and help deliver the much-needed clarification of rules for the financial services industry and its corporate customers.

The FBF statement has served to put further pressure on the European banking industry to set an end-date for the retirement of the legacy payment instruments, which can be no bad thing. The ECB has acknowledged this requirement and has stated that it ‘will work on the modalities – self-regulation or regulation – as well as the end-date itself’. Without such a deadline achieved by some degree of consensus, the FBF refusal to commit to provisional timetables may be just the tip of the iceberg vis-à-vis SEPA challenges.

What credit crisis?

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

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

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

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

Marenzi contends that:

• Interbank lending reached its highest level ever in September 2008, and since the beginning of the credit crisis, it has increased approximately 22%. The cost of interbank lending also remains at low levels, he says.

• Contrary to the assertion that commercial paper markets had stopped functioning or become prohibitively expensive, Celent says outstanding volumes in the commercial paper market for non-financials are higher now than at any point since early 2004 and that the cost of borrowing in that market has dropped to at least 10-year lows for non-financials.

• Bank real estate lending also reached a record high in October 2008 and has grown consistently during and before the crisis

Marenzi proffers two possible explanations for the huge discrepancies between what Federal Reserve and government figures are saying and publicly available data. Perhaps Mr Paulson and Bernanke have additional data available to them that supports their assertion that credit markets are in trouble, although Celent is sceptical that such data is available.

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

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

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

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

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

Risk management in your Xmas stocking

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

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

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

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

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

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

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

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

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

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

Desperately seeking an "enterprise-wide" view of risk

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

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

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

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

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

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

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

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

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

Citi shareholders need reality check

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

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

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

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

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

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

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

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

Data management projects still a hard sell

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

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

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

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

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

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

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

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

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

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

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

Summit told Citi may not be profitable for several years

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

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

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

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

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

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

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

Who is holding SEPA back?

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

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

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

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

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

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

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

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

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

DTCC and LCH.Clearnet to merge

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

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

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

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

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

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

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

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

SWIFT misses open standards opportunity

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

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

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

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

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

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

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

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

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

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

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

PSD implementation likely to be pushed back

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

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

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

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

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

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

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.

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!

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.