The global banking crisis has meant that, for many banks, the strategic focus has moved to cost control, corporate restructuring, and divestment. Inevitably, the compliance burden will increase and there is now greater emphasis on cost reduction and risk mitigation rather than rapid expansion. But banks cannot survive by cost cutting alone – to emerge from the crisis, let us not forget where the money comes from. Without a loyal and active customer base, or a strong acquisition tool, a bank’s future is limited.
One method for reducing costs is to adapt a bank’s business to only focus on core activities. The results of this initial separation from non-core will undoubtedly vary between banks and across different geographies, but many banks have already begun the process of identifying and isolating non-core activities. At least one major UK bank has established a non-core division specifically to manage assets that it intends to run off or divest.
However, the situation becomes more complex when an activity is a constituent part of a core banking function but is not deemed a core competence of the bank, or when it is not an obvious contributor to the bank’s value proposition. Consider the case of payments – all banks must provide payment services, as they constitute a fundamental banking function, but many now collaborate to share the costs, risk and expertise necessary to build robust payments solutions that meet immediate and strategic needs. Collaboration to support payments processing is well established as a way of improving overall market efficiency without compromising individual competitive advantage.
And yet, this type of collaboration is not commonly witnessed when it comes to payment channels. A number of banks still continue to manage their SWIFT payment infrastructure in-house, despite the associated high maintenance costs, required dedicated resources and dependency that this creates.
A Risky Business? Not Necessarily…
The decision to maintain SWIFT payment infrastructure in-house may ultimately come down to control. The advent of the banking crisis has ultimately led to a greater focus on control and risk management. Outsourcing a core function can initially trigger alarm bells, but with the right bureau provider it should have the opposite effect.
Having an effective operational system is a prerequisite when connecting to SWIFT, as it requires specialist knowledge and experience to manage. This requirement is usually expensive to source and difficult to replace, yet this dependency and the associated risks are removed with the right external specialist. In addition, working with a supplier which not only delivers SWIFT bureau services but also offers a range of other payment services across Europe offers the bank the advantage of a single point of contact for all outsourced services.
Risk reduction isn’t limited to just resource management through an external provider. Thorough disaster recovery planning is essential and, from a SWIFT perspective, this can often be overlooked, particularly in the case of failover procedures. Banks can ensure that their customers are protected from any associated risk when they outsource to a partner that guarantees system availability and business continuity by maintaining data in an active/active environment.
The economic crisis has demonstrated that stability needs to be a major focus when selecting a partner. The past few years have seen even some of the largest (and most highly regarded) banks suffer severely and therefore it may be worthbanks considering those bureaus that are not directly linked to single institutions. Of course, it goes without saying that a partner should be able to demonstrate financial viability and strong cash flow. Evidence of a healthy client base should provide additional reassurance, as well as the obvious economy of scale benefits.
So outsourcing your SWIFT infrastructure can actually support risk reduction and maintain control, but is there really a need to partner?
Align Expenditure with Revenue
Enlisting specialist help can offer a single, streamlined alternative to an in-house solution. All existing routing rules, links to applications and SWIFT interfaces can be migrated to a service bureau environment. Middleware functionality (such as integration, routing and reformatting) can also be migrated, which reduces the complexity of the bank’s technical infrastructure. In practice, this may reduce the number of routing rules by as much as 50%, which can then lead to recurrent savings of 30% on operational costs.
How can this be achieved? Investment costs are transferred to the service provider and the bank (or other financial institution) substitutes smooth revenue expenditure for capital expenditure. Working with partners also helps financial institutions accelerate the adoption of new, richer messages, which generates a continuous cycle of savings and improvements.
In addition, resilience when handling high volumes may be a requirement – is a bank’s SWIFT operation set up to address any volume increases that may occur over time or during a period of change such as a merger situation?
The Burden and Benefit of Compliance
And what about the challenge of continuous upgrades and the associated costs? Next year, SWIFT Alliance 7.0 will be rolled out, which is a welcome enhancement, but with it goes the associated costs, considerations and resources required to implement the solution. A service bureau enables banks to keep up with the latest changes at no additional cost, without the need for IT scheduled amends. Instant and ongoing compliance is guaranteed so banks can relax in the knowledge that all services are designed and built with compliance in mind.
Generally, banks can align costs with their business strategy: a SWIFT bureau will sometimes offer usage-based pricing so there is no need to undertake regular capital outlay.
Global Markets Require Global Connectivity
The agreement, design and implementation of message standards requires dialogue and close collaboration between all market participants. SWIFT messages have been universally accepted and adopted within the global banking industry but the number of interbank message formats is still large and continually changing, resulting in regular time consuming technology upgrades and planning to support the associated costs.
The situation is further complicated by new message standards such as ISO 20022. Although this new standard has the worthy goal of enabling communications operability between all financial market participants, in practice, fulfilling this goal is time-consuming and expensive for banks and other financial institutions. ISO 20022 is not a message standard in the traditional sense, but is more akin to a methodology or framework by which new standards and formats can be created. The current syntax is XML but this will inevitably evolve over time.
Although banks must achieve global connectivity, this is of little interest to bank customers. From a bank perspective, standardised messaging has the inherent benefit of improving automation, straight-through processing (STP) and overall efficiency. These are internal benefits that reduce costs and risk but they are of little intrinsic interest to any bank customers. Banks have come to regard messaging as a ‘necessary evil’ or cost of doing business: there is little credit given to banks for getting messaging right, but there’s a lot at stake when messaging goes wrong.
Many banks now realise that, while routing and reformatting of messages is essential, it is often a drain on vital resource. Apart from the ongoing challenge of continual technical upgrades, routing and reformatting messages requires manpower and expertise. Many banks and financial institutions now realise that more can be achieved by enlisting specialist help to implement and integrate a strategic messaging solution that offers improvements in STP and systems integration. This may take the form of outsourcing all or part of routing and reformatting. Specialist payment bureaus are uniquely qualified to receive through a broad range of input channels, transform between most common formats and route to multiple destinations across Europe and beyond.
On the face of it, virtually all financial institutions must connect through SWIFT in order to transact in global markets. However, there is no advantage in owning the technical infrastructure. For most banks and financial institutions, messaging is only a small component of transaction banking; in practice it is a specialist function and enlisting the help of an expert partner meets several bank challenges simultaneously, including reducing costs and aligning these with revenue, achieving instant and ongoing regulatory compliance, and managing risk. However, the real commercial benefits of a SWIFT bureau partnership lie in the resources that can be released to focus on developing and maintaining new customer propositions that add value and that bank customers are willing to pay for.
Shared Challenges, Shared Solution
A partnership approach to messaging offers a solution reducing complexity around routing and reformatting. Just as importantly, all participants share the financial benefit of reduced costs and compliance management. The past five years have seen unprecedented changes from both a regulatory and competitive perspective and these changes are likely to continue. With challenges to banks and their corporate customers limiting business agility, focusing on core infrastructure and partnering with the right provider for non-core and channel management may be one of the simplest solutions to one of many complex problems.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
Despite all the automation and improvements that digital banking has the potential to achieve, customers and their needs still form the very core of the banking sector.
Banks might feel justified in victim blaming when fraud occurs, but it does little for customer confidence.
Politicians have united in urging the Reserve Bank of Australia to lend its backing to the digital currency by officially recognising it.